Description
Early in 2005 the Woolworths Group resolved to abandon its 15 year quest to build a profitable stand-alone chain of record/entertainment product stores in MVC Entertainment Ltd (“MVC”)..
MVC managed to build turnover rapidly in the late 1990s and through into 2003 and at its peak had around 90 shops. It also generated operating profits between 1998 and 2002, though did not pay interest on the bulk of its rising group debt. However the 2003 to 2005 financial years showed evidence of increasing trading problems in a very difficult marketplace. A number of new initiatives were launched such as the “More” discount card, a trial with trade-ins and more direct mail activity but these were insufficient to revitalise results. Woolworths concluded that their best option was to divest the business and they were successful in finding a buyer for the chain, receiving cash consideration of £5.5m. The official comment on the transaction in the Woolworths Group annual report to January 2006 was that the “group had disposed of its interest in MVC for £5.5m to a group of retail investors, generating a loss on disposal of £25.6m. This removed a loss-making business that faced many strategic challenges”. It was also noted that in the period up to disposal, the company had generated trading losses before taxation of £5.6m on turnover of £41.4m and incurred exceptional losses of £2.7m associated with the closures of the “worst loss-making stores”.
The company which purchased the shares in MVC was a newly established company Dowhills Investments part of the Argyll Group. MVC’s life under new ownership was brief and unsuccessful. Less than five months after the sale, on 21st December 2005, administrators were appointed. Their report highlights in some detail some of the reasons why the company’s position deteriorated so quickly.
At the centre of its problems were disagreements with Entertainment UK (“EUK”), the Woolworths Group company which had concluded a supply agreement with the company. MVC was critically dependent for its product on EUK’s £10m credit facility, but the parties were soon at loggerheads over the returns provisions of the supply contract. MVC had projected a significant cash lump receipt in respect of returns in February 2006. However EUK had a completely different interpretation of the agreement which was much less favourable for MVC’s cash flows.
This ongoing dispute coincided with the failure of campaigns to clear some £7m of obsolete and overstock product, falling margins and increasingly difficult market conditions, with as the administrators noted “increased competition/under-pricing from supermarkets and online retailers”, a “general decline in the sector” and the delayed onset of the traditional period of Christmas peak trading.
The directors engineered a rather extreme solution to their difficulties, which was the sale of the business and assets of forty stores to Music Zone Services Ltd (“Music Zone”), a competitor, (see separate entry). The announcement of this deal led to a very firm response from EUK, which sought clarification concerning MVC’s solvency and reassurances about its ability to honour its commitments under the supply agreement. This effectively blocked the sale.
Given the mounting problems and a realisation that the company would be unable to pay its debts as they fell due after January 2006, the directors appointed administrators on 21st December 2005. At this point the principal assets of the company were 64 stores, and stock with a value of approximately £11m. The main elements of the administration were:
| a) |
The completion on 3rd January 2006 of the sale of 41 stores with associated business intellectual property to Music Zone. They acquired a further two stores in February. |
| b) |
The sale of 13 stores to a newly registered company, EA Music Ltd. |
| c) |
The surrender of the leases of two stores, and the assignment of a further three to Sainsbury’s. |
| d) |
The settlement by way of cash payments and the return of stock of around £8m of retention of title claims. The administrators noted that one claim, from EUK, had been in excess of £9.7m. |
An initial statement of affairs on 13th January indicated that the total assets of the company at that date were expected to realise £16.2m against which there were total creditors’ claims estimated at £21.4m. The most significant of these were from EUK of £8.8m and Ghia Finance Ltd, (in respect of inter-group financing) of £6.5m
A subsequent outcome statement on 3rd February showed an estimated surplus from uncharged assets available to unsecured creditors of £7.2m. At this point creditors were estimated as follows.
| | Inter-Company Creditors | £7.4m |
| | Additional Landlords' Claims | £44.3m |
| | Others | £5.5m |
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| | Total | £57.1m |
The landlords’ claims, which were not included in the earlier statement, represented twelve months’ potential rent and service charges.
It appeared that the principal losers in the administration were the investors, Dowhill Investments and their related group companies, who lost all of their investment and the vast majority of their group funding, other general creditors and some landlords, whose obligations were not taken over by purchasers of the stores. It appeared initially that EUK might have managed to avoid significant losses by exercising the retention of title provisions of its supply agreement. However its accounts to January 2006 included an exceptional provision of £8,217K for “stock obsolescence relating to the return of stock as a result of the discontinued operation of a fellow group subsidiary” also the collapse of MVC represented the loss of a significant customer.
It appeared at the time that the biggest potential winner from the situation was Music Zone , which at a stroke was able to increase the size of its chain by more than fifty per cent and extend its geographical coverage beyond its northern base to cover the whole country. Things did not however work out as planned for Music Zone and in January 2007 it went into administration itself, after poor pre-Christmas trading. The business and the majority of the retail outlets were sold this time to a company linked with FOPP Ltd, some of which thus found their fourth corporate owner in less than three years. It is now a real challenge for Fopp to find a formula to make the business acquired profitable after Woolworths, Dowhill Investments and Music Zone had all failed in the same task, albeit with different portfolios of stores.
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