Sports Direct deal was House of Fraser’s only option, says EY

Documents released today by EY to House of Fraser creditors reveal that six parties made formal offers for the department store group, but Sports Direct’s best met the criteria, “including value, timing and deliverability”.

The document also said that most trade creditors are with House of Fraser (Stores) Limited (HOFS) and that “it is currently estimated that the Prescribed Part available to unsecured creditors in HOFS will be at its maximum level of £0.6m (before costs of distribution), and that secured lenders will suffer a shortfall against their debt at the date of appointment with no surplus for unsecured creditors”.

EY set out in detail the six offers it had received in House of Fraser. It said: “Two of these offers were discounted as they did not provide a complete solution and the conditions attaching to them would have been difficult to achieve, particularly in the timescales available.

“A third offer was also discounted due to the time period required to conduct due diligence being too long.

“During the course of 9 August 2018 a fourth offer, which involved acquiring the secured debt, was discounted as it became apparent that there were considerable risks to it being concluded before the Group had to file for insolvency protection. It was also not clear what additional funding this would provide to the Group to avoid formal insolvency.

“All of the above offers were evaluated and assessed as generating lower a recovery for creditors than from the various offers made by the remaining two parties […].

“One of the two parties had made an offer to acquire the Group on a solvent basis for £1. However, this was conditional upon reaching an agreement with the Group’s secured lenders to write off the vast majority of their loans, allow their priority ranking to be diluted and with the repayment of the remaining balance of their loans to be on deferred terms.

“Negotiations on the terms continued between this party and the secured lenders during the course of week commencing 6 August 2018, with the terms and structure of the offer changing to allow for some immediate cash payment but this was to be at the expense of writing off additional amounts of the first ranking secured loans with a substantial proportion of any repayment being conditional upon future trading performance improving significantly beyond the current levels, and thus was inherently uncertain.

“As a result, the offer was asking the secured creditors to write off their loans beyond the value of the assets the loans were secured on.

“As these discussions continued this party also proposed an offer to acquire the business and assets from an insolvency sale at a price of £100m. As a result an Asset Purchase Agreement was issued to this party on Thursday 9 August 2018 on the basis of acquiring the business and assets on an insolvent basis.

“However, during the evening of the 9 August 2018 the party communicated that they could not justify the transaction commercially and they were withdrawing their interest.

“This then left the Sports Direct group offer as the best and only offer capable of being completed.”

• The full letter can be read below.