The High Court judge who approved TG Jones’ restructuring has warned that the former WHSmith high street business faces “very considerable” risks as it attempts to deliver its turnaround.
Mr Justice Hildyard sanctioned TG Jones’ rescue plan on 1 July, preventing an immediate collapse into administration and clearing the way for the closure of around 150 stores.
However, in his full judgment published yesterday, the judge expressed significant doubts about the long-term prospects of the business and described owner Modella Capital’s strategy as an “adventurous equity play”.
TG Jones is expected to operate from a reduced estate of 302 stores under the restructuring. Its business plan forecasts turnover of £238m in the first year, remaining at the same level in year two before rising to £257m in year three.
The company also plans to invest £32.4m in its remaining estate, including store refurbishments, new tills and self-checkouts, IT systems, security upgrades and work on its Post Office concessions.
The court heard that the investment was needed to address years of underinvestment across the former WHSmith shops, many of which require significant refurbishment.
Despite approving the rescue, Mr Justice Hildyard said the turnaround proposals could appear closer to “generic aspirations than concrete grounds for confidence”, adding that the risk involved in executing the plan remained substantial.
He ultimately concluded that Modella’s willingness to put further capital into the retailer indicated that its owner and management had enough confidence in the strategy to continue backing the business.
Hossein Dabiri, head of EMEA court reporting at Debtwire, said: “Justice Hildyard’s judgment recognises the fine line UK courts must walk with restructuring plans involving cross-class cram-downs, scrutinising them carefully to avoid them becoming an ‘engine of abuse’ or ‘private equity power play’, while weighing the very real danger of an imminent collapse from one of the few remaining national high-street businesses.
“Looking ahead, the rescued business will run from a reduced footprint of 302 stores, with turnover forecast to rise from £238m to £257m over three years and £32.4m of capital expenditure to fix long-neglected shops.
“However, its future prospects still remain unclear. It was notable that Mr Justice Hildyard was somewhat sceptical about the ongoing sustainability of the business, but ultimately Modella Capital’s willingness to inject further capital was enough to gain the court’s approval.”
Landlords’ challenge may have proved decisive
The full judgment also revealed the extent to which objections raised by a group of British Land-associated landlords influenced the final rescue deal.
The BL Landlords initially opposed the restructuring, arguing that property owners were being asked to finance much of the turnaround through steep rent reductions while receiving a disproportionately small share of any future recovery compared with Modella.
Negotiations resulted in several substantial changes to the proposals, including the deferral rather than cancellation of some first-year rent reductions and additional security for landlords owed those sums.
Creditors were also granted a larger share of any future upside, entitling eligible parties to 50 per cent of cumulative earnings above £40m between 2027 and 2029.
TG Jones additionally agreed to reinvest an amount equivalent to £9.1m of first-year rent reductions into the business and removed licence fees that would otherwise have been paid to a Modella-linked company during the three-year rent concession period.
Mr Justice Hildyard said some features of the original proposal appeared to show a lack of objectivity and shareholder self-interest.
He found that the negotiations had produced fairer and better-balanced plans, and said the withdrawal of the landlords’ objections provided substantial comfort when deciding whether to approve the restructuring.
The judge added that, without the changes secured by the BL Landlords, their objections might have tipped the balance against sanctioning the plans.
Dabiri said the case demonstrated that retailers and their owners should not expect courts simply to rubber-stamp restructuring plans affecting large leasehold estates.
“The recent judgment strongly suggests that the TG Jones plans may not have been sanctioned in their original form,” he said.
“The negotiations between the company and the BL Landlords produced materially fairer plans, eliminated features suggestive of shareholder self-interest, improved returns for landlords and other creditors, and introduced meaningful protections around reinvestment and value sharing.”
Court criticises rushed timetable
Mr Justice Hildyard also criticised the urgency surrounding the case, after the court was placed under pressure to deliver a rapid decision because TG Jones was at risk of running out of cash.
He said companies pursuing complex restructuring plans must give judges sufficient time to examine proposals involving cross-class cram-downs, under which a court can impose a deal on classes of creditors that voted against it.
The judge suggested that a formal Practice Statement “may be required” to prevent businesses and their advisers from leaving courts too little time to assess complex restructuring plans.
The BL Landlords had also argued that some future rent concessions should be treated as the economic equivalent of new money, as landlords that chose not to terminate their leases were effectively contributing to TG Jones’ cash flow.
However, Mr Justice Hildyard rejected the argument, finding that the compromise or deferral of an existing rent obligation could not be equated with an injection of fresh funding on market terms.
Modella agreed to make a £15m new-money loan available following approval of the restructuring, alongside £10m advanced earlier to keep the retailer trading during the court process.
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