Closer examination of the CVA documents reveals that the number is in fact 48.
The CVA proposal for Arcadia Group Ltd shows that an additional 25 Miss Selfridge and Evans units will shut “in the short term” as part of the company’s turnaround plan. A further 500 jobs are likely to go as a result.
Goodness only knows why Arcadia didn’t publicly disclose the true scale of the cuts it wants to make three days ago. It could prove an oversight that the company regrets. The lack of transparency, whether intended or not, undermines trust and Arcadia’s relationship with its creditors is already pretty strained.
- Video report by ITV News' Business Editor Joel Hills
Most companies launch CVAs only when and if they expect creditors to back it. It is now clear that Sir Philip Green’s Arcadia Group pushed the button on its CVA without having secured the approval of key stakeholders, despite months of negotiations.
On June 5, Arcadia’s suppliers, its lenders, its landlords and the guardians of its pension schemes will vote on whether to support the CVA.
Arcadia needs the endorsement of 75% of creditors. Anything less and the CVA proposals state that Arcadia “is highly likely, whether immediately or after a short period, to enter into insolvent administration or liquidation”.
The landlords I have spoken to acknowledge that Sir Philip has improved his CVA offer:
- The £50 million he is promising to put into Arcadia is now in in the form of cash not a loan.
- Landlords are now being offered a 20% cut of any future sale of the group, instead of 10%.
- There a block on future divided payments (Sir Philip received £1.2 billion from the business in 2005).
- He’s agreed to introduce management incentive plan.
But Sir Philip has a rebellion on his hands. As it stands, most landlords are telling me they intend to vote against the CVA.
The main concern appears to be that Sir Philip is not putting enough money into the business to be confident of its long term survival.
Cutting costs is all very necessary but all the landlords I have spoke to believe that Arcadia also requires significant investment if its fortunes are to be revived.
Of the £50m Sir Philip proposes to “gift” to the business, £40m goes into a compensation fund for landlords. That doesn’t leave much in the way of cash to kickstart a recovery.
“£10m isn’t enough to breathe life back into the clothing brands,” one landlord told me.
“And it’s certainty not enough to deal with the unexpected. If there are any bumps in the road ahead, this business will end up in administration”.
One potential “bump” is the £300m loan Arcadia has secured on it’s flagship Topshop store at 214 Oxford Street. The money is owed to HSBC, Barclays and RBS. The lenders have agreed to extended the facility until the end of the 2019 but no further.
One landlord asked me: “What happens if the banks decide they want some or all of that money back at the end of the year?”
“If you can’t refinance then you’ll need to top up the difference. Where’s that cash going to come from."
Arcadia’s Business and Recovery Plan forecasts that Arcadia will be making a full year profit of £117m by 2021/2022 (up from £30.2m this year). There’s widespread scepticism that this is achievable.
Much of this improvement assumes landlords accept lower rents - the CVA proposal is structured to cut Arcadia’s rent bill by circa £40m.
“The business plan isn’t viable,” another landlord, with a large portfolio of Arcadia stores, insists.
“There is a massive risk of failure post-restructuring. If Arcadia fails, Sir Philip will argue that he is not responsible. He went out [with the CVA] too early and without agreement and he’s not putting enough cash in the business to make it work."
You can understand landlords’ concerns. The majority of CVAs end in failure. 70% of companies that go through such a restructuring end up flat on their faces a short time later.
The pension authorities also have issues with Arcadia’s turnaround proposals. Arcadia’s pension schemes support around 9,000 people. On a buyout basis, the schemes are running a deficit of £750m.
Sir Philip wants to reduce the annual pension contributions that the company makes over the next three years, making up the difference with £100m of his family’s money.
He’s also proposing to give the pension schemes a claim of £185m on 214 Oxford Street, which a recent valuation by CBRE suggested would raise £500m in the event of a sale - enough, in theory, to repay the banks and support any pension shortfall.
But a sticking point here is that Sir Philip has a claim on the business. In March, he had to stump up £50m at short notice to give to Lloyds Bank because Arcadia breached its lending covenants.
This is both a sign of how the business is struggling to pay its bills in a timely fashion and a potential problem for the CVA process. The money he put in was in the form of a secured loan. If Arcadia were to fall into administration at some later date, Sir Philip would be first in the queue of creditors.
The Pensions Regulator has already said it does not think the CVA proposal provides adequate protection for the members of Arcadia’s scheme.
The Pension Protection Fund (PPF) is Arcadia’s largest creditor. If it decides to vote against the CVA then it will almost certainly fail with dire consequences for the business, if the CVA proposals are to be believed.
Sir Philip can change the terms of his proposals at any time in the build-up to the vote on June 5. If he doesn’t, the CVA looks destined to be voted down.