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Debenhams, Dorothy Perkins Distress Could Be Frasers Group’s Gold Mine

Michael Ashley is in an enviable position—his Frasers Group posted an interim profit in spite of lower sales and he has the wherewithal to add some good brands to his portfolio at distressed (read: attractive) prices.

In a Nutshell: Executives at Frasers Group have been busy weighing multiple acquisition targets that would augment their brand portfolio.

In addition to rescue talks with Debenhams, which is slated for liquidation, the company has been in talks with Edinburgh Woollen Mill Group to acquire insolvent Jaeger. Ashley is also said to have broadened his sights to possibly include similarly insolvent value chain Peacocks. And with the once-mighty Arcadia Group now in administration, Frasers Group could also make bids for brands like Topshop, Topman and Dorothy Perkins, the biggest operator of concession shops inside Debenhams.

Other potential players for Arcadia’s assets include Next, Marks & Spencer and Boohoo, which is said to be interested in Topshop. All, including Frasers Group, are among the strategics who typically kick the tires of possible brands and store locations for opportunistic buys to add to their existing portfolios.

Arcadia’s administrators are believed to be seeking bids up to 200 million pounds ($261.4 million), but that doesn’t mean bidders would pony up to meet the asking price.

Debenham’s administrators were looking for bids at 300 million pounds ($396.1 million), but failed to get any takers. Ashley is best known for his Sports Direct ownership, which became part of the Frasers Group conglomerate when he purchased House of Fraser. He offered 150 million pounds ($198.1 million) for Debenhams, after raising his initial bid, and then walked away when administrators rejected the offer. With liquidation on the agenda, Ashley is back to deal making for a brand he once owned a 30 percent stake in before it was taken over by lenders in its first insolvency last year. This time, if successful, Ashley potentially could take over the department store at a deeply discounted price.

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A bid for Dorothy Perkins seems most likely, given his talks for Debenhams and the brand’s presence in the retailer. But Ashley is known as a tough negotiator, and could end up also adding Jaeger and another Arcadia brand or two to his portfolio. He’s also shown an ability to walk away from a deal if he can’t buy an asset at the value price that he thinks it’s worth.

Net Sales: Frasers said on Thursday that for the six months ended Oct. 25, group revenue fell 7.4 percent to 1.89 billion pounds ($2.50 billion) from 2.04 billion pounds ($2.69 billion) a year ago.

Frasers Group said its U.K. Sports Retail revenue fell by 9.8 percent, mostly due to store closures as a result of the Covid-19 pandemic. The premium lifestyle revenue rose 4.8 percent, due to new Flannels stores, increased web sales and a full reporting period from the 2019 acquisitions of Jack Wills and European revenue declined by 3.7 percent, also mostly due to coronavirus store closures.

Earnings: The company reported a 17.6 percent gain in pre-tax profit to 106.1 million pounds ($140.1 million) from 90.2 million pounds ($119.1 million) in the year-ago period.

Frasers Group said the increase in profits were driven by strong reopening of stores after lockdown, growth in online, new Flannels stores, and continued operating efficiencies, among other benefits.

CEO’s Take: “Fortunately the Frasers Group is a strong business built on solid foundations. We can weather most of the storms faced this calendar year, however much of the U.K. High Street, which was already suffering before Covid-19, won’t survive unless the Government addresses the out of date business rates regime which is due to return come April 2021,” said David Daly, nonexecutive chairman.

Daly also emphasized that the company continues to strengthen its relationship with key suppliers, and that the company continues to make significant investments in its businesses, whether digital operations or elevating stores to bring new customer experiences.

Separately, the company also has been pushing store rents based on percentage of sales versus a pre-determined fixed rate. And the out-of-date business rates Daly noted refer to taxes on commercial premises based on pre-Covid property valuations. The U.K. government put off a revaluation of the rates until 2022. Currently, protections are in place to prevent U.K. high-street businesses from aggressive rent collection, and stores are being asked to pay what they can afford during the pandemic.