Issa brothers set to buy McColl’s after retailer collapses

McColl’s board turned against its lenders, owed £170m, accusing them of blocking a deal with Morrisons.

The company said: “The lenders have made it clear that they are not confident such discussions will reach an outcome acceptable to them.

“In order to protect the creditors, to preserve the future of the company and to protect the interests of the employees, the board of directors therefore unfortunately had no choice but to place the company in receivership.”

Morrisons, a grocery supplier to McColls, issued a chilling response criticizing the decision. A spokesperson said: “We have put forward a proposal that would have averted today’s announcement of McColl’s going into administration, ensured the security of the vast majority of jobs and stores, and the complete protection retirees and lenders.

“For thousands of hard-working and retired people, this is a very disappointing, damaging and unnecessary outcome.”

Some 200 McColl’s stores also sell under the Morrisons Daily brand. Whether the Issas would tear up venue agreements and insert smaller Asda outlets in their place remains to be seen.

Depending on the shape of a final deal, McColl’s could become one of the biggest retail insolvencies from Debenhams and Sir Philip Green’s fashion chains including Topshop have gone bankrupt.

The company, which started as a cigarette vending machine business, has been hit by supply chain issues and rising inflation. He raised £30million from shareholders in a cash call just eight months ago.

Trustees of McColl’s pension plan have called on future owners ‘to make it clear that they will honor the pension promises made to 2,000 members by McColl’s’ before it collapses.

A spokesperson added: “Severing the link between the schemes and the sponsoring company, through a pre-pack administration, would represent a serious breach of pension promises made to staff who have served the company loyally for many years, and risks causing schemes to enter the Pension Protection Fund with a consequent reduction in benefits.

“A hodgepodge of stores that no one else wanted”

Laura Onita

When McColl’s bought nearly 300 stores from the co-op in 2016, James Lancaster, then president and co-founder of the corner store chain, wrote to investors to welcome the deal.

It was a “rare and exciting opportunity” that would bring “financial and strategic benefits” to McColl’s.

Seven years later, the retailer suffered the same fate as Debenhams and collapsed into administration after pressure from lenders to pay its debts.

The purchase of Co-op stores was intended to make McColl’s a serious player in the convenience store business – a lucrative part of the grocery industry – by gaining market share from large supermarkets.

It was also an attempt to move away from his pure newsagent roots as the demand for cigarettes waned. Alcohol and tobacco sales fell by three-quarters between 1989 and 2021, according to the Office for National Statistics.

While it was arguably a strategically sound move to focus on convenience, the deal also burdened him with around £100million in debt. Insiders say this was a big contributor to his demise as it dramatically increased interest charges on his loans.

McColl’s owed £97million at last count, although some reports put the total at £170million. And that’s not the only sore point.

A year after buying the Co-op stores, the convenience chain faced “one of the toughest times” in its 49-year history following the collapse of supplier Palmer & Harvey.

It supplied items to approximately 700 McColl’s small stores and newsagents. The collapse forced the retailer to put in place emergency supply arrangements, including a short-term deal with rival Nisa.

The company was “at its peak at the time”, worth around £250m. McColl’s never fully recovered from the collapse of Palmer & Harvey despite Morrisons stepping in to supply its stores, industry observers say.

He then began converting hundreds of McColl’s stores to Morrisons Daily formats, a lucrative but costly change as these sites proved the most profitable.

The pandemic has put a temporary wind in its sails. The company reported a 3.2 per cent rise in sales to £1.26 billion for the year to November 29, 2020, but the Covid boost was not enough to offset the challenges that followed.

“Convenience worked very well during the first lockdown, when people were really home, and when you walk around you have your essentials,” says Clive Black, retail analyst at Shore Capital. “That particular moment dissipated as things normalized.”

Supply chain disruption due to the pandemic and a chronic shortage of drivers compounded its problems, leading to a series of profit warnings and subsequently a $30 million cash call. sterling from investors.

It would use the funds, he said, to convert more of its stores to Morrisons Daily. At the time, he said the stores would deliver a return on investment within two to three years.

“Unfortunately, the most affected lines are higher [profit] margins such as snacks and beer, wine and spirits,” Peel Hunt analysts wrote in November. “The problems lie in the branded items, which simply do not come out of the manufacturers in sufficient quantities.”

McColl’s worked with Morrisons to resolve the issues and eventually Walkers crisps, the core of its meal offering, returned to its shelves.

The company started life in 1973 as a cigarette vending machine business and later bought a chain of newsagents and convenience stores.

It was listed on the London Stock Exchange in 2015 at 191p and opened its 1,000th store in 2016. The shares plunged to just 1.6p before being suspended on Friday.

Black believes some of McColl’s setbacks were self-induced. “McColl’s is a complex business that is not easy to manage. It’s a hodgepodge of stores that have been acquired, often stores no one else wanted, with weird and wonderful locations and layouts,” he says.

“If McColl’s is where it is, it’s because it’s been mismanaged. If you compare it to other convenience store groups, Booker, Spar, Bestway, it is clearly a laggard, reflecting a lack of management.

Others are more optimistic about the channel’s future.

Paul McLoughlin, partner at law firm Mishcon de Reya, said: “The decision to file for administration will be troubling for creditors and employees. It does, however, represent an opportunity for the business to reappear under new ownership with the ability to recapitalize the balance sheet as we have seen in many other retail insolvencies.

“Trustees are adept at keeping businesses going for a period of time to allow them to quickly realize the value of the estate, most often through an expedited sales process that is often completed within weeks or even a few weeks. days.”

It will be up to its new owners to determine if the brand will survive.

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