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The judge who approved a rescue plan for the former WH Smith high street business – now named TG Jones – cast doubt on the future prospects of the retailer, suggesting there were “very considerable” risks in achieving a turnaround.
“This has all the hallmarks of an adventurous equity play,” wrote Mr Justice Hildyard in his judgment published on Wednesday, after he last month approved the restructuring, which involves the closure of 150 of the books-to-paperclips retailer’s 450 stores.
He added that the group’s turnaround plans “might strike the sceptic as more in the nature of generic aspirations than concrete grounds for confidence in a successful outcome”.
“The execution risk is very considerable,” he said, indicating the £3m valuation of the company – compared with its acquisition value of about £40m only a year before – reflected the potential for high losses as well as high profits.
The retailer, which until recently employed about 5,000 staff, was bought last year by Modella Capital, the private equity firm which is also behind Hobbycraft and owned the UK arm of jewellery retailer Claire’s and The Original Factory Shop until they collapsed earlier this year. It recently bought Flying Tiger, the Danish retailer known for its cut-price homewares and craft kits, which operates about 1,000 stores worldwide.
The original owner of WH Smith continues to operate stores in airports, hospitals and railway stations, so Modella quickly rebranded the high street stores as TG Jones.
Sales quickly fell back after the deal, and Modella had warned it could have to call in administrators if the restructuring plan, which involves writing off debts to suppliers and cutting rent for many landlords, was not approved.
The judge approved the plan despite his scepticism about potential success, because Modella had put up new investment to turn it around.
Alex Willson, the chief executive of TG Jones, said last month that approval of the plan “allows us to move ahead with our turnaround strategy”.
“The plan protects the substantial core of the store estate and makes TG Jones a stronger, more sustainable business,” he said.
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Court approval was needed for what is known as a “cram down” scheme, as many classes of creditor who would lose money under the scheme rejected it. The model allows courts, in certain circumstances, to impose a restructuring on dissenting classes of creditors.
Fewer than a third of general creditors, who include card makers and pen brands, assented to the plan and no landlords owning unwanted stores – where rent will be cut to zero or closed – backed the plan.
Small suppliers, such as toy makers, were set to lose at least half the money owed to them by the former WH Smith high street chain under the restructure.
Hossein Dabiri, head of courtroom reporting in Europe for credit analysis firm Debtwire, said: “Justice Hildyard’s judgment recognises the fine line UK courts must walk with restructuring plans involving cross-class cram downs, scrutinising them carefully to avoid them becoming an ‘engine of abuse’ or ‘private equity power play’, while weighing the very real danger of an imminent collapse from one of the few remaining national high street businesses.”
