Alexon’s restructuring breaks new ground

The Company Voluntary Arrangement worked for retailers like JJB and Focus, but Alexon’s restructuring breaks new ground.

“The process was so successful we ended up with over 90% of Alexon’s landlords on board,”

We’ve looked a number of times recently at the challenges of managing a portfolio of retail stores through an economic downturn. Recent issues of What’s in Store? have considered the shift in the balance of power between landlords and tenants, and the concessions some owners are prepared to make to keep their stores occupied, whether that’s rent cuts, rent-free periods, or rent deferrals.  But many retailers are still having to cope with upwards-only rent reviews, which have accelerated difficulties at under-performing stores. A small number of these businesses have even more systemic problems with their retail estates, and have resorted to using Company Voluntary Agreements, or CVAs, to help solve them.

In the last year Focus DIY, Blacks Leisure, Suits You, and - most famously - JJB Sports have all used CVAs as a way of making swift and radical changes to an ailing business. The basic premise of these agreements is simple: the retailer offers its landlords an upfront payment (typically six months’ rent) in exchange for their agreement to cancel the leases on their stores. 75% of the landlords have to agree, and if this proportion is reached, all the others are bound by the same terms. JJB used this process to close 140 of its 390 stores, and Blacks closed around 90 by the same means. It sounds ideal - quick, effective, and (relatively) painless. But is it really? The CVA does have its drawbacks, and some of the companies who’ve taken this route have certainly encountered them.

It has to be remembered that a CVA is an insolvency procedure, and brings with it all the legal and practical consequences associated with that.  Any form of insolvency or compromise with creditors can trigger termination clauses in certain business and supply contracts. Suppliers are also likely to become concerned about the viability of the company, which could lead to a drastic reduction in credit terms, with the resultant pressure on working capital. And then there’s the wider stigma associated with insolvency, which can damage the brand in the eyes of consumers, stakeholders, and media alike. As Ed Macnamara, a Director in PwC’s Business Recovery Services team, says, “Whilst CVAs are a useful restructuring tool, they shouldn’t be seen as the sole remedy for struggling retailers.  With CVAs, besides the risks to the underlying business and the increased working capital pressures, there’s also the not inconsiderable issue of cost: in addition to professional fees, JJB needed £10m to fund its store closure programme; Blacks needed £7.25m. By definition, retailers who are struggling are unlikely to have that sort of free cash and therefore need a clear turnaround story to gain support and raise the necessary funds.”

Alexon was one of Ed Macnamara’s clients, and was facing exactly that problem.  The group is a listed company and the owner of well-known brands like Ann Harvey, Kaliko, Dash, and Minuet, which it was selling through around 100 of its own shops, and over 1,000 concessions in department stores. Last year it made annual sales of £150m, but generated a loss of £6m.  As this suggests, the headline figures weren’t good, but there was also a more fundamental underlying issue with the make-up of the store portfolio. Alexon’s best known brand, Ann Harvey, caters for a niche market, and as such effectively functions as a ‘destination’ outlet. This means that it doesn’t necessarily require prime High Street locations, and there’s certainly no need for more than one Ann Harvey in the same town or shopping centre. Unfortunately this was exactly the situation Alexon found itself in, largely as a result of two insolvencies by former subsidiaries, Bay Trading and Dolcis. The leases on a number of their stores reverted back to Alexon, as the original parent, but many of these were in the wrong place, at the wrong price, and with too long a period remaining. In some extreme cases it was actually cheaper to board the shop up, than open it for business. The company needed to achieve many of the same things that a CVA could offer, but it wanted to avoid the disadvantages we’ve already discussed. This was where Ed Macnamara’s team came in.

The PwC team devised what was effectively an ‘informal CVA’. They separately approached all landlords of the problematic stores, offering them the same deal. The company would pay the next quarter’s rent, and spend that period trading down the store. The landlord would then receive 12 months’ rent, rather than six (as had been common in  recent CVAs), to exit the lease. Each of the agreements was separate and standalone, but each was also, in effect, an option that Alexon could exercise if it wished to. This was vital because the company needed a rights issue to raise the money required for the upfront payments, and could not, therefore, commit in advance to every single agreement. PwC’s strategy was specially designed to give the company maximum flexibility, whatever the outcome of the rights issue, and avoided almost all the negative consequences associated with a CVA.

“The process was so successful we ended up with over 90% of Alexon’s landlords on board,” says Ed Macnamara. “Even more important, these were the stores that were generating all of the company’s £6m loss, so we were effectively turning the business around in one fell swoop. This gave us a very strong recovery story to support the rights issue. So much so, in fact, that while we’d hoped to raise £15m - £10m for the scheme and £5m for brand and IT development - we actually ended up with more than £20m. This allowed the company to deal with all 50 of its problem stores, and start building the business for the future on a solid foundation. 

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