Debenhams rejects Sports Direct offer to underwrite rights issue

(Sharecast News) - Debenhams was on course to be put into administration within 24 hours as it rejected an offer from Sports Direct boss Mike Ashley to underwrite a £150m rights issue.Unless an alternative agreement is found by 1700 BST on Monday, the department store group is due to be put into a pre-pack administration as part of a rescue refinancing by its lenders, which will swap their debts for equity and therefore wipe out existing shareholders.The administrators could be called in as soon as Tuesday, with lenders taking control of stores and aiming to complete a company voluntary arrangement in coming weeks to close dozens of shops and lower rents in others.Earlier on Monday, Sports Direct, which owns a near 30% stake, confirmed an offer made over the weekend to underwrite a rights issue if Debenhams made Ashley its chief executive and its lenders agreed to write-off £148m of Debenhams' debt.But just after 1500 BST, the FTSE 250 retailer said it had received a letter from Debenhams rejecting the proposal."Sports Direct believes that, in the continued absence of any such engagement from the board of Debenhams and Debenhams' lenders, there is a likely significant and negative impact on Debenhams' current shareholders and other stakeholders, including suppliers and employees. Sports Direct therefore calls upon the board of Debenhams and its lenders to actively engage in negotiations."It added that it continued to "actively evaluate all possible options to support Debenhams", including the possible 5p-per-share offer first mooted a week ago.LIE DETECTORS AND DENIALSOn Sunday night, following a week where Debenhams continued to refuse his advances and instead secured a £200m refinancing from its lenders, Ashley called for regulators to investigate how Debenhams has been run and said its shares should be suspended, accusing two directors of falsely inducing Sports Direct into signing a non-disclosure agreement that blocked it from trading in the retailer's debt or equity for a period of time.A statement from the sports retailer called for chairman Terry Duddy and non-executive director David Adams both take lie-detector tests after disputing the events of a previous meeting."For the avoidance of doubt, it is Sports Direct's contention that the board of Debenhams and its advisers have undertaken a sustained programme of falsehoods and denials. The fact that they can so openly lie in their recollection of joint meetings with Sports Direct is beyond the pale."Debenhams denied the claims of misrepresentation and declined to respond to the other comment.Sports Direct reiterated on Monday that it was still actively considering its possible offer for Debenhams of 5p per share, as mooted last week.Debenhams shares jumped 11% to 2.26p in early trading on Monday, while Sports Direct's were up 1% to 285.6p.While Ashley hasn't yet thrown in the towel, Laith Khalaf, senior analyst at Hargreaves Lansdown, he said the strings attached to the deal "look like they'll be too much for lenders to swallow" and having just injected over £100m into the company, with another £99m on the sidelines, they "aren't simply going to roll over"."In theory a deal could be struck, but relations seem far from cordial, and the Debenhams management look set on giving the lenders control of the high street chain."Khalaf said Debenhams board "haven't given a great deal of detail as to why Sports Direct's proposals have been kicked to the kerb, while lenders have been handed the keys to the company" and noted that Debenhams "has already agreed to terms which means lenders approach any negotiations from a position of strength" and so seems likely that its shares will soon cease to have any value, as lenders take full control.Russ Mould, investment director at AJ Bell, said Ashley could face a tricky decision if the Debenhams board continue to ignore him."The refinancing plan agreed with its lenders effectively has a deadline of close of play today. It looks like Ashley faces the unpleasant choice of backing down on demands such as being made chief executive of the group and ousting the current board or letting the lenders take charge and being wiped out entirely."Ashley's no-nonsense approach to business has likely been a significant factor in the creation of his retail empire. But Debenhams might have been a case where a more softly-softly approach would have yielded greater success."