Billionaire Ashley Might Postpone His Sainthood

(Bloomberg Opinion) -- For retail entrepreneur Mike Ashley, British department store chains are like buses outside their Oxford Street flagships. You wait for ages, and then two come along at once.

In the current climate, Ashley could have his pick of House of Fraser Ltd, in which his Sports Direct International Plc has an 11 percent stake, and Debenhams Plc, in which it holds 28 percent.

House of Fraser is teetering on the brink of collapse after C.Banner International Holding, the Chinese company that owns the Hamleys toy store, pulled out of a deal to inject a 70 million pound ($91.6 million) lifeline. Debenhams, which isn't nearly in as much of a pickle, has issued a series of profit warnings, and on Wednesday suffered a downgrade to its credit rating at Moody's Investors Service.

Ashley, chief executive and majority shareholder of Sports Direct, has a once-in-a-lifetime chance to acquire House of Fraser. The only question is whether he rides in as a white knight now, or waits to pick over the bones it if falls into administration.

Rescuing the business now would give Ashley some rare positive PR, transforming him from ogre of the warehouse to a savior of jobs and high streets across the country.

Though he would have to negotiate with landlords, and tackle House of Fraser's pension obligations, these are not insurmountable challenges. Ashley has a strong hand, having many other properties in retail parks and town centers. The retirement plans are also reasonably well funded.

An administration would be devastating for House of Fraser staff. But Ashley is better off biding his time.

Were a deal to happen, it could be structured either as a personal investment or, more likely, as an investment by Sports Direct. If the latter, shareholders would rightly question the merits of injecting cash into a faltering business.

Even they could get over that hurdle, there is no need to rush.

For a start, the pool of competitors is likely to be small. By coming in later, Ashley can pick up only the parts of the business he wants. Were the chain to fall into administration, these would be cheaper. And even though the pension plans are not in a dire state, waiting gives him a better chance of taking on the business without costly retirement obligations. 

This is not just penny-pinching – many of House of Fraser's stores are badly in need of repair, so it would be a costly venture anyway.

He also has other financial considerations. After all, Sports Direct took a one-time charge of 85 million pounds on its stake in Debenhams in its last financial year, while its borrowings have also gone up, crimping its financial flexibility.

Whether he moves now or waits, Ashley could finally get his hands on a department store chain.

House of Fraser has some decent locations, including the Bluewater shopping center in Kent. Ashley could use these as platforms for his upmarket Flannels designer shops. Some units elsewhere could be transformed into new-look Sports Directs, in line with the company's strategy of becoming the Selfridges of sportswear. 

There might even be scope to merge the House of Fraser business he does pick up with Debenhams. This would be no easy task. Currently, the two companies overlap in 31 locations, so any deal would involve big store closures.

But the greater scale would give the combined business more clout with suppliers and landlords, while investment would be channeled into one online operation, rather than two. It would also have more firepower to deal with both Amazon.com Inc. and rival department store John Lewis.

That's a long way off for now. Ashley has to strike a deal for House of Fraser first. Though for the stumbling department store, time is running out, Ashley can clinch his prize without the need for heroics.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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