Modella Capital is allegedly charging TG Jones, the business behind the former WHSmith high street stores, millions of pounds in licence fees for the use of its new brand name, according to documents seen by The Guardian.
The investment firm, which acquired WHSmith’s 480-store high street business for £76m last year, is understood to be owed £2.9m in royalty fees linked to the TG Jones name.
The stores were rebranded following the sale to separate the high street business from WHSmith’s travel arm, which continues to operate stores in airports, railway stations and hospitals under the listed WHSmith group.
However, TG Jones has since warned that the “forced name change from WHSmith” has damaged consumer awareness, as the retailer battles falling sales and mounting liquidity pressure.
Under the current royalty arrangement, TG Jones pays 1.03 per cent of net revenues each month to Modella, which owns the licence. That rate could rise to as much as 15 per cent of net revenue if the retailer’s proposed restructuring plan is approved.
The fees are currently being held in an account controlled by finance group Aurelius, which stepped in earlier this month to provide TG Jones with a £25m loan.
The arrangement means Modella cannot access the payments without Aurelius’ approval while the loan remains outstanding. Once the debt is repaid, the licence payments would flow directly to Modella.
The £2.9m in accrued royalty fees, built up since last June, could reportedly be waived if creditors approve the restructuring plan. However, ongoing fees will remain payable, albeit at a temporarily reduced rate of 50 per cent until next March, before returning to the full amount.
The licensing arrangement emerged in documents outlining a major restructuring plan that could result in 150 of TG Jones’ remaining 450 stores closing.
The retailer has said it is facing “acute cashflow and liquidity pressures” following a sharp deterioration in trading. It cited the loss of customer loyalty associated with the WHSmith brand, inflationary pressures, higher employer national insurance contributions and increases to the national living wage.
Sales are said to have fallen 12 per cent between September and March as the business moved from the WHSmith name to TG Jones. The retailer posted an £18.6m loss over the same period.
TG Jones has also stopped paying business rates and delayed supplier payments as it seeks to conserve cash. It owes suppliers £4m, has deferred £3.4m in business rates and has agreed to delay £8.4m of payments to HMRC over six months.
The retailer warned creditors it could be forced into administration if the restructuring plan is not approved.
Under the proposals, eight stores will close immediately. Modella is also seeking full rent holidays on around 100 sites, which are expected to shut if the plan goes ahead in late June.
The company is additionally pushing for 75 per cent rent reductions across hundreds of other stores for a year, with further cuts of between 15 per cent and 75 per cent after that period.
Modella has described the restructuring as an “essential part” of TG Jones’ turnaround and said it would invest £35m into the business. It said the plan was designed to protect the core store estate and create a stronger, more sustainable retailer.
Creditors, including landlords, are due to vote on the proposals in late June, with final court approval targeted for 29 June.
TG Jones is expected to face resistance from landlords, particularly given recent difficulties at other Modella-owned retailers. Claire’s and The Original Factory Shop have both collapsed, resulting in the closure of all stores and the loss of around 2,500 jobs. Hobbycraft, also owned by Modella, has closed a number of stores under its own restructuring process.
WHSmith’s travel business was not included in last year’s sale and continues to trade unaffected.
Click here to sign up to Retail Gazette‘s free daily email newsletter
