House of Fraser fighting to avoid becoming fourth founder member of FTSE 100 to go bust

Friday, August 10, 2018 - 11:13

“Three founder members of the FTSE 100 in 1984 went broke and it is to be hoped that House of Fraser – a private company since 2006 – does not become a fourth, not least for the sake of the company’s staff and suppliers,” says Russ Mould, Investment Director at AJ Bell.

“The retailer is being placed in administration but this is quite different from insolvency, as it enables the company to keep trading and ideally gives the administrator time to come up with a credible restructuring plan that keeps the firm alive and gives it chance to reach an agreement with its creditors and lenders.

“One rescue attempt, the planned £70 million cash injection from Hong Kong’s C banner, has already failed but House of Fraser is today making it clear that talks are under way with potential buyers. Quite why they would not wait until the firm goes into administration, rather than buy it now and inherit all of its liabilities, remains an open question but management and staff will be hoping that a white knight can be found.

“House of Fraser’s financial and trading woes mean that 2018 has been a busy year for the FTSE 100’s founding crop 34 years ago.

“GKN (then known as Guest, Keen and Nettefold, has been acquired by Melrose Industries while bookmaker Ladbrokes (or Ladbrokes-Coral after a 2016 merger) was snapped up by GVC. Both acquirers are themselves now members of the FTSE 100 benchmark stock index.

“Only three members of the class of 1984 actually went bust, wiping out shareholders in the process – British & Commonwealth in 1990, Ferranti in 1993 and MFI Furniture in 2008 and none were still in the index at the time.

“Yet only 28 of the original 100-strong line-up are still in the index, 16 under the same name and 12 more under a different one. A further 14 are now part of a FTSE 100 firm following their acquisition and two more members of the index resulted from spin-outs from founding firms (namely Diageo, from Grand Metropolitan, and Vodafone, from Racal)

Source: London Stock Exchange, Company accounts, FTSE Russell.

“What this attrition rate over the last 34 years shows is how hard it is to stay at the top once companies have got there.

“They have to keep customers happy, fend off competition and (in some cases) keep the regulator sweet, a balancing act which has proved beyond the majority of the FTSE 100’s founders in 1984.

“This is something that investors should ponder if they like to pick individual stocks themselves. While many will focus on what sounds like a good story or near-term earnings and share price momentum, the real secret to long-term investing success is to find companies which have a strong competitive advantage, which they nurture, so they can keep customers happy and keep would-be rivals at bay.

“The most successful companies, over the long term, are those who provide a product or service which is so valuable to the buyer than the firm can charge the price at which it has to sell, not settle for the price that the customer is prepared to pay. That lies at the heart of a company’s competitive advantage and why any investor – or acquirer – may want to buy a firm’s shares or even become its overall owner.

“Potential buyers of House of Fraser will indeed be asking themselves this very question now (or at least they should be).

“What makes House of Fraser special? Why do customers go there rather than somewhere else?

“If they cannot think of a satisfactory answer, then the retailer’s future could unfortunately still look bleak.”

Did you know? The difference between administration, bankruptcy, insolvency and liquidation

  • Administration sees a company owner hand over control and ownership to an independent third-party, the administrator, who then tries to find a buyer, or at least develop a restructuring plan that satisfies banks and creditors, to enable the firm to continue to trade. Creditors must then decide whether the administrator’s proposals will leave them better off than a liquidation, where the company is shut down and its assets sold off.
  • Bankruptcy. This term applies to individual people, not companies, who have debts that they cannot pay back. Their assets are sold and the proceeds shared between lenders, although this can at least give the person a fresh start, with some conditions applied.
  • Insolvency. This occurs when a company cannot pay all of its bills in full on time, be they a tax bill, interest on a bond or loan or even rent or business rates. The firm must then either try to reach an agreement with those organisations or individuals to whom it owes money, enter a “company voluntary arrangement” (CVA) and reach a deal with at least 75% of creditors to pay some or all of what is due over an agreed period, or enter administration.
  • Liquidation is the worst case in an insolvency, when a firm’s assets are sold to pay off its liabilities and it ceases to trade. The liquidator will sell the assets, repay its debts as best it can and then, in the unlikely event that anything is left, distribute the remaining cash to shareholders.

These articles are for information purposes only and are not a personal recommendation or advice

The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.