Why Baugur's bust is bad news for retail stocks
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Associate Editor
David Stevenson Feb 06, 2009
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Skint shoppers, banks that loathe lending, the plunging pound pushing up input prices – who'd be a shopkeeper in today's Britain?
But now there's another big problem. The bloke who owned – note the past tense – huge chunks of the retail sector has just gone bust.
So the biggest-ever high street fire sale is about to start. Which means even more long-term woe for the sector's share prices...
Why it matters that Baugur's gone bust
It's tough on the high street right now. To earn just a thin crust, the UK's battered retail businesses are desperately trying to persuade hugely over-indebted consumers, who've already maxed out their credit cards, to keep buying things they can't afford. Meanwhile the banks won't advance credit and the cost of stock is soaring as the sterling slump drives up import prices.
Consumer confidence is shot to bits and the future's looking worse. This week's Nationwide consumer confidence gauge hit another record low, with the measure of shoppers' "expectations" nose-diving within the last three months. And while there's been yet another Bank of England base rate cut, as we said yesterday (Why the Bank of England's latest rate cut is a big mistake), that'll probably do much more harm than good.
So what the high street needs like a hole in the head at the moment is another whopping dose of the unknown. But as the worst retail downturn for over 50 years gathers pace, that's exactly what's just being served up.
The Icelandic company Baugur has just filed for protection from its creditors. In other words, it's effectively gone bust.
Why does that matter? Because at the top of the boom, Baugur was happily building up big share stakes in a long list of Britain's stock market-quoted retailers.
How did an Icelandic company get so many stakes in UK stores?
Yet how on earth, you may ask, could an Icelandic company that no one had heard of a few years before manage to build up an investment portfolio that reads like a Who's Who of UK stores? Baugur had stakes in House of Fraser, Hamleys, Debenhams, Oasis, Principles, French Connection, Mothercare, Karen Millen - you get the picture.
The answer – as you probably won't be surprised to hear – was lots of borrowed money – including £1bn owed to the nationalised Icelandic bank Landsbanki. Sure, in these days of bank write-offs and bailouts running into trillions, that doesn't seem too terrifying, but when the collateral against which the money has been borrowed has plunged in value, it means big trouble. And of course, Baugur's not a bank – so no state bail-outs for them.
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"Baugur was an accident waiting to happen", says Jeremy Warner in The Independent, "it was from the start one of those totally incredible bull market phenomena which could only stay upright as long as the music kept playing".
The party's now well and truly over, leaving us with the hangover. The FTSE All-Share retail index has lost some 60% of its value over the last eighteen months, and in some cases the Icelandic group's losses will be much bigger. Baugur's holdings in Whittards, which went into pre-pack administration and Woolworths, which went bust, are now worth nothing. Learn more about pre-pack here: 'Pre-pack' insolvency: lifeline or loophole?)
Rather like Baugur itself, in fact. "People who have seen Baugur's books say there is little or no equity in the business", say Tom Braithwaite and Sarah O'Connor in the FT, "as its balance sheet is weighed down by the pile of debt".
What'll happen to Baugur's portfolio and what this means for yours
So there's now a massive question mark about what'll happen to Baugur's portfolio. The Icelandic group was the owner of minority stakes, i.e. not the main owner, in all these business, and wasn't involved in the day-to-day management. But no one wants a big backer to go to the wall – particularly when times are as bad as they are just now.
The bottom line is that the high street fire sale of the century is about to kick off. Jon Asgeir Johannesson, Baugur's chairman, thinks that "British vultures" are circling to pick through the remains of his former empire. He reckons British retail billionaire Sir Philip Green is waiting in the wings to snap up some of those stakes at knockdown prices.
Yet – like most other retailers – Green's "fighting the worst business conditions he's ever seen", says Chris Blackhurst in the Evening Standard. "The last thing he wants to do right now is to add more labels".
Further, while there'll probably be a few cashed-up private equity funds sniffing around to see if they can make a turn, don't get your hopes up that as a private shareholder you'll be able to cash in. With a lot more stock soon to be swilling around the market, share values will eventually be driven down even more. Even if the private equity mob do want to take a punt on retail, they'll wait until prices have hit rock bottom – or indeed until their target folds completely when they can pick up the bits they want for almost nothing.
It all means that if you've still got investments in general retail stocks, and you see any share price bounces, take advantage and sell out while the going's good. It won't stay that way. There are bound to be a lot more closures and insolvencies before retailing can sound the all-clear.
Baugur "was by no means the only example of the genre in the British retail scene", says Warner, "I'd better not mention the others for fear of a writ, but they'll be exposed soon enough". Don't get caught out when that happens.
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