• KCL M&A Society

Boohoo rescues Debenhams out of administration for £55 million

By Melvin Ng, Law Writer at the KCL Mergers & Acquisitions Society

The deal shows how traditional UK high street brands remain an attractive acquisition for online retailers, despite poor financial performance and prospects in recent years.

Deal Background

Online fashion retailer Boohoo was founded in Manchester in 2006. Most of its products are aimed at customers aged 16 to 30, offering the latest on-trend styles and fashion in the market. Having started as one brand, Boohoo has grown significantly over the past ten years, expanding into multiple brands such as BoohooMAN, PrettyLittleThing, Nasty Gal, MissPap, Karen Millen and Coast.[1] One can attribute the company's strong domestic and international growth to its strong supply chain network to produce new clothing styles in small amounts. If these products became popular, the company would mass-produce those products quickly to meet its growing demand.[2] Although its supply chain has come under strong criticism over its poor treatment of factory workers in the past year, the brand still amassed an incredible 45% increase in year-on-year revenue in the five months up to 31 August 2020. Additionally, its pre-tax profit surged by 51%, despite claims that Boohoo was facing some of its most challenging times in recent months.[3]

Debenhams is an iconic British retailer which has operated in London since 1778. Over the past decade, the brand has expanded significantly across the UK and other countries in the Middle East, Eastern Europe and South East Asia. It is widely known for being a multi-channel departmental store with notably British heritage, investing significantly in British design over the past 20 years.[4] Despite being one of the UK high street's most known brands over the years, it faced financial difficulties, leading to the retail department store entering into administration twice — in 2019 and 2020. One could trace Debenhams' decline back to the acquisition of private equity houses back in 2003. Poor financial management and the inability to compete with online retailers soon followed over the next decade, leaving the business with declining revenue and crippling debts. The COVID-19 pandemic accelerated the downfall as the retail giant failed to adapt to online shopping to recoup its losses due to its high operating costs.

The Deal

In the £55 million deal, Boohoo will acquire the online business of Debenhams which include its intellectual property, customer data and also its business information. The decision not to include the physical stores in this deal will see its remaining 118 retail stores shut for good, potentially leaving tens of thousands of workers jobless. John Lyttle, Boohoo's Chief Executive, spoke confidently about prospects to transform the brand into an e-commerce business: "We'll be revisiting which brands we want to sell, and we'll be putting existing Boohoo brands into the [Debenhams] marketplace".[5] This deal could further bolster Boohoo's online presence while establishing the brand in other categories such as beauty, sportswear and homeware.

Assets Acquisition

An asset acquisition takes place when one company acquires another company through buying its assets, as opposed to a traditional acquisition strategy which involves the purchase of stock.[6] Businesses often adopt this strategy to achieve inorganic growth. The deal usually allows them to expand their existing products in the market or gain access to new markets. However, asset acquisition can be difficult to execute, as the acquirer often has to renegotiate contracts or seek consent from third parties to proceed with the acquisition.[7]

This strategy provided Boohoo with much flexibility as well as its financial upsides. In choosing not to acquire the company via a stock purchase, Boohoo will not be acquiring Debenhams' liabilities, consisting mostly of employees' salaries, pension obligations, and long and expensive leases on the high street. This deal also allows Boohoo to pick and choose specific assets to purchase, which can be aligned with their growth and expansion strategies. The move to purchase its intellectual property will allow Boohoo to use the rights, particularly its trademarks. This allows Boohoo to leverage Debenhams' existing trademark, which could significantly grow its online brand significantly as building a household brand with strong customer loyalty can take years to establish. The business reputation and customer confidence it acquired will continue to convince traditional shoppers to purchase from Debenhams.

Furthermore, having access to new customer data could help Boohoo substantially develop its online beauty sector. Debenhams has 6 million beauty product customers and 1.4 million members of its Beauty Club loyalty scheme, generating about £80m annually in online revenues.[8] Having an extensive customer base will also allow Boohoo to easily analyse different purchasing patterns, which could increase sales by offering the right products to the right kind of customers.

Death of UK high street?

The decline of UK high street was one that many industry experts have been anticipating over the years. According to the Centre for Retail Research, there are around 50,000 fewer shops on the UK High Streets than just over a decade ago,[9] which has seen big names such as Thomas Cook, Banana Republic, Toys R Us and many more gone bust.

Asos, Boohoo's competitor, went through a similar move to purchase Arcadia Group, the owner of brands like Topshop, Topman and Miss Selfridge, and excluded any of its physical stores. Associate dean of Warwick Business School, Professor John Colley, has described the deal as 'another nail in the High Street's coffin'.[10] With strict lockdown measures being imposed at the moment, it could be very difficult to predict when life could actually return to normal. These high street retailers will continue to 'burn through their cash reserves' while sitting on a huge pile of debts. Shifting their operations to adapt to online shopping in the midst of the pandemic may not be enough, as these retailers are not well equipped to compete with large e-commerce brands which can capitalise on their existing databases. Perhaps, the UK government should intervene and provide larger cash handouts to bail these companies out of their dire financial situation. The high street remains an iconic British heritage, after all.

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Reference list: [1] <https://www.Boohooplc.com/group> accessed 4 February 2021 [2] <https://blog.freetrade.io/the-story-of-Boohoo-d9d8b1504f82> accessed 4 February 2021 [3] James Coker, ‘Boohoo records half-year revenue growth of 45%’ (2020) <https://www.essentialretail.com/news/Boohoo-half-year-revenue-growth/> accessed 4 February 2021 [4] <https://ir.debenhams.com/about-debenhams-0#:~:text=Debenhams%20is%20a%20leading%20international,brands%2C%20international%20brands%20and%20concessions> accessed 4 February 2021 [5] Jonathan Eley, ‘Boohoo snaps up Debenhams brand for £55m as Asos targets Topshop’ <https://www.ft.com/content/c81e7266-984f-4c38-8543-83e6449eb79a> accessed 5th February 2021 [6] <https://www.investopedia.com/terms/a/asset-acquisition-strategy.asp#:~:text=An%20asset%20acquisition%20strategy%20is,involves%20the%20purchase%20of%20stock> accessed 12 February 2021 [7] Jaysen Sutton, ‘Mergers and Acquisitions Case Studies and Interviews | A Guide for Future Lawyers’ <https://www.thecorporatelawacademy.com/mergers-and-acquisitions-case-study/> accessed 12th February 2021 [8] Richard Bell, ‘Boohoo, Debenhams, and Intellectual Property Assets – What Businesses Should Know’, <https://www.farleys.com/Boohoo-debenhams-and-intellectual-property-assets-what-businesses-should-know/#:~:text=Boohoo%20Group%20PLC%20have%20today,business%20information%20and%20selected%20contracts> accessed 5th February 2021 [9] Adam Shaw, ‘How to save the UK's crisis-hit High Streets’ <https://www.bbc.com/news/business-51094109> accessed 5th February 2021 [10] Dominic O’Connell, ‘Thousands of jobs at risk as Asos strikes Arcadia deal’, <https://www.bbc.com/news/business-55884596#:~:text=Thousands%20of%20jobs%20remain%20at,from%20failed%20retail%20group%20Arcadia.&text=Asos%20is%20paying%20%C2%A3265m,%C2%A330m%20for%20the%20stock> accessed 5th February 2021