After weeks of phony war between the British retail tycoon Philip Green and his landlords, the Topshop owner has finally announced plans for a company voluntary arrangement, a mechanism that’s being used more and more by struggling store chains to cut their rents and offload property.
The plan looks sensible but it faces some steep hurdles. It might not be enough to stem the slide into irrelevance of Green’s Arcadia group, whose U.K. outlets also include Burton and Dorothy Perkins.
Arcadia has proposed closing 23 of its 566 U.K. and Irish trading locations, and is seeking rent cuts on another 194. Green is eager to get the landlords onside, so he’s also proposed giving them a 20% share of the proceeds of any future sale of Arcadia. But there’s a question over the value of the business and who might buy it. What’s more, landlords may be unwilling to take a stake in a business with hefty pension obligations.
Taveta Investments, Green’s family holding company for Arcadia, had a 300 million pound ($378.3 million) pension deficit in August 2017, according to the last available accounts. However, it would have to pay an insurance company closer to 1 billion pounds to take on its future liabilities.
Arcadia has proposed halving its annual contribution into the pension scheme, from 50 million pounds to 25 million pounds for three years. But Green’s wife Christina – the ultimate owner of the business – will make up the difference over that period to keep the annual payments at 50 million pounds, plus she’ll put in another 25 million pounds for good measure. According to pension industry consultant John Ralfe, this yearly contribution compares well with other U.K. companies.
It looks like Green has learned his lesson from the collapse of BHS in 2016. Green would have done better to have sold the BHS business with a dowry to meet the pensions obligations, or retained the liability. He ended up contributing 360 million pounds to the BHS schemes after the administration anyway.
Even so, the Pensions Regulator has said the yearly contributions to the Arcadia pension isn’t enough. Perhaps it is using the CVA as an opportunity to force Green to strengthen the schemes while it has the chance, particularly if there are doubts about whether the business can recover after the restructuring.
Still, the biggest block to Green reviving the fortunes of Arcadia isn’t the landlords or the regulator; it is his willingness to invest in the business. His wife plans to pump 50 million pounds of equity into the group, but other ailing British retailers are making bigger financial commitments. Asos, the online clothes seller, will invest 200 million pounds in its current financial year. While Arcadia can access more money through secured debt, it may not be enough.
A CVA is not a panacea. It is a way to deal with property. But no store estate ever decided the fate of a retailer. That is determined by having the right products at prices that customers are willing to pay. Increasingly, whether a business prospers or not depends on having an effective online offering. The recent history of retail is littered with companies that agreed CVAs, but continued to suffer. That includes BHS, which collapsed shortly after landlords approved its restructuring.
One exception is New Look, another British fashion chain. It accompanied its CVA a year ago with a comprehensive plan to turn around the business, and executed it effectively. This included revamping its product line, a debt-for-equity swap to tackle its borrowing burden, and the hiring of new talent.
These actions appear to be paying off. According to data from YouGov BrandIndex, the number of customers buying from the New Look brand has increased over the past year. To stand any chance of reviving Acadia, Green must take a leaf out of that book and pull on all the levers available; not just property.
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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