Another high profile retail chain goes into Administration. At first sight, not an unusual story but it appears this one has not happened for the usual reasons. Normally we hear stories of falling sales, the impact of internet shopping, out of town retailers destroying the high street etc.
In this case the problem is the suppliers rather than the customers. All four of the large mobile phone networks have terminated or indicated they will shortly terminate their agreement to supply via Phones 4U and that just takes away their ability to do business. The problem appears exacerbated by the Private Equity owners having carried out a dividend recapitalisation last year. This is where they increase the borrowings of the business considerably and use the funds raised to pay the Private Equity owners a large dividend. In this case they recouped all the money they had spent acquiring the business.
So far we have heard the founder of Phones 4U complaining that there must have been collusion by the mobile carriers to drive them out of business. This is of course denied. The situation will also no doubt raise protests about the use of dividend recaps, especially when a business goes under so soon after the recap.
Who will lose out? Well certainly not the Private Equity owners. The lenders? Probably but it will depend on what security they have and what the assets realise. Ordinary trade creditors, landlords and HMRC, almost certainly. And last but not least a very large number of people, a significant proportion of over 5,500 employees, will likely lose their jobs.
There do seem to be some interesting questions. The Three network terminated their agreement in 2012. O2 apparently stopped accepting new customers in 2012 before not renewing their agreement in January this year. Surely some early warning signs? Management have said both Vodafone and EE had said they viewed Phones 4U as a long-term partner implying they had been misled.
It sounds like there were a number of alarm bells that should have been ringing. So why did the lenders agree to the dividend recap? Poor due diligence? Were the risks misrepresented to them? Who knows and no doubt all concerned will deny any blame. But it’s certainly little comfort to those who have lost their jobs and to the many unsecured creditors who will recover little or nothing of what they are owed.
With various threats of litigation flying around it will be interesting to see whether further light is eventually shone on this unusual situation.
David Bryan – Principal, BM&T
17th September 2014