Everyone will have heard about the well publicised tussle for the control of convenience store McColls.
Morrisons won that race over Asda via a pre-packaged administration and information is slowly dripping out. It now appears whilst a deal was near to being concluded with Asda, due to delays in placing McColls into administration, Morrisons made a better offer.
Asda wanted McColls to be placed into administration and be bought from Administrators via a ‘pre-pack’, whereas Morrisons initially tabled a solvent offer, offering to absorb the lenders’ debt into its own facilities.
A pre-pack is a deal to sell the assets of a business without the liabilities. Often a company with the same, or similar, name rises from the ashes free of the debts, sometimes with the same management. Since 2020 due to negative press there have been controls where assets are sold to connected parties designed to ensure some independent evaluation and scrutiny but allow pre-packs to continue saving the underlying business and jobs.
Had Morrisons acquired the stores solvently it would have picked up all the liabilities. Morrisons had a reason for this: it was financially exposed to McColls.
As a result of the tussle, almost a hybrid deal has been concluded with the parties competing over the weekend to sweeten the pill. Not a full pre-pack but not a solvent purchase either. The losers appear to be supply chain and trade creditors…and Morrisons.
Rather than acquiring McColl’s free of liabilities Morrisons has acquired its staff, will give them a pay rise and guarantee the McColls pension fund. And it seems the lenders will be paid in full as will preferential creditors (mainly Government and employee claims) with something ‘substantial’ also going to unsecured creditors.
On the face of it this seems a great outcome, but look deeper and it comes with a big price tag for Morrisons.
Morrisons has for some time provided logistics and supply support to McColls which was running and developing (profitably it seems) Morrison’s own convenience store chain, Morrison’s Daily. This would have left Morrisons with financial exposure if McColls failed. As a result, Morrisons faced a big loss of investment if Asda won the battle. But in order to secure the future of Morrison’s Daily, it has acquired a host of loss-making stores and assumed some chunky liabilities. It may also have to sweeten the pill for those creditors left out.
The benefit for the Administrators of all this is they can tell a story of paying lenders and preferential creditors in full and returning something to unsecured creditors. But this is where Morrisons come in: keeping all the staff will slash the preferential claims and as for unsecured creditors: Morrisons is the main creditor.
So, what does this all say?
McColl’s couldn’t have survived on its own and it is a relief that this merry dance has saved jobs and not thrown another pension fund into doubt. But you cannot help feeling that this was more a powerplay between vested interests. The lenders presumably are happy and Morrisons will probably be relieved not to crystallise any loss just now. Longer-term Morrisons will be left to address those McColls stores that aren’t freshly branded and Morrisons doesn’t really want as part of its fresh Daily brand. Yes, it is a great story, but we suspect Morrisons haven’t yet lifted the champagne bottles from the drinks aisle to celebrate, but at least they now have control and deserve some thanks for their weekend work. McColls is a vital store in some areas where access to supermarkets isn’t as easy.
And is there a moral to this story? If any it is probably that even where there is distress the various involved parties can often improve or mitigate their own outcome if well advised.
It is inevitable that rising prices and supply chain difficulties will result in increased lender pressure across the retail sector in the months to come.
We advise business leaders, lenders as well as the various stakeholders involved through the insolvency process. We’re here to help whatever your circumstances, get in touch Richardfergusson@schofieldsweeney.co.uk.