Takeover by JD Sports looks unlikely as troubled retailer makes second attempt to slash store rents
JJB Sports is to close up 95 stores as part of a last-ditch restructuring plan designed to stave off bankruptcy .
The troubled sportswear chain is trying to pull off its second company voluntary arrangement (CVA) – a legal agreement with landlords designed to slash store rent costs – in two years. At the same time it is asking investors to support a £31.5m emergency fundraising.
Wigan-based JJB, which is in takeover talks with rival JD Sports, admitted that it was fighting for its survival and that without fresh funds could run out of cash within two months. It underlined the gravity of the situation, warning that if its shareholders and landlords did not offer support the business would "no longer be able to trade as a going concern which would result in the appointment of receivers, liquidators or administrators". JJB employs more than 6,000 staff.
In 2009 JJB used a CVA to get rid of 140 stores and this time it wants to close 45 stores and potentially another 50 if their performance does not improve. A CVA lets troubled retailers negotiate to exit or change the rental terms of problem stores. Following a review JJB has identified just 150 of its 245 store estate as "core to the group's future".
JJB chairman Mike McTighe said the CVA was "one of the crucial steps" in its restructuring and talks with landlords, who represent 40% of its annual rent bill, were "constructive". Property sources, however, suggested the retailer would struggle to get landlords to rally behind it a second time. There was a wave of CVAs during the recession, including at Blacks Leisure and Focus DIY, as retailers tried to cut costs during the downturn. JJB's plan requires the backing of 75% of creditors.
"I think JJB will struggle to get support as it is probably just delaying the inevitable," said one source at a major property company. "The market is in better shape than in 2009, so why prop up someone who keeps coming back to you."
Property firms are awaiting full details of the CVA but the source added that the retailer would have to make a "compelling case" to have any chance of success.
Liz Peace, chief executive of the British Property Federation, added: "Given that this is the second CVA proposed by the company, it is unsurprising that landlords are expressing concern that they are being asked to agree to concessions again."
JJB never recovered from the heavy losses associated with the disastrous acquisition of two footwear chains by former chief executive Chris Ronnie, who was sacked after it emerged his 29% stake had been seized by the administrators to Icelandic bank Kaupthing.
The first CVA, which was followed up with a £100m fundraising, was supposed to place it on a firm financial footing, but weaker-than-expected sales coupled with mistakes by the previous management team saw it breach its banking covenants last year, putting it back at square one. Analysts doubt whether JD will make an offer, saying it may prefer to wait and see if JJB survives.
JJB had planned to spend £110m recasting the chain as a traditional sports shop for people who are "serious about sport", but it can no longer foot the bill and is now coming up with a "no frills" plan. The board wants to get rid of stores that are putting a drag on performance and is using the CVA to ask landlords to accept rent in monthly rather than the quarterly instalments that are the industry norm.
JJB has confirmed plans to raise £31.5m by issuing 630m new shares at 5p each. The move is being supported by its two biggest shareholders, Harris Associates and Crystal Amber – the activist investment group headed by Richard Bernstein – and by the Bill & Melinda Gates Foundation, which has a 5.5% stake. Even as it announced the details of its second fundraising, the company said a third one would be necessary as, after costs, the £30m injection would only see it through until the end of April. It warned: "The company could experience a funding shortfall as early as the last week of March."