Woolies to go for just £1 in new quid pro quo

IT IS one of the most familiar fixtures on Britain's high streets. Woolworths, the famous "pick'n' mix" retailer, has been a household name for almost 100 years.

But it is now set to become the industry's most high-profile casualty of the economic downturn after it emerged that its 815 stores could be sold off for just £1.

Woolworths, which has about £295 million worth of debts, has entered takeover talks which could see its retail division sold for a nominal sum to Hilco, a firm specialising in takeovers of distressed companies.

Retail industry sources say other household names, including MFI, BHS, JJB Sports and WH Smith could all be vulnerable to takeovers in the next few months. Experts believe that retailers hit by the dramatic downturn in the housing market are likely to be most vulnerable.

One analyst, who asked not to be identified, said: "Woolworths could only be the first name. Retailers who have not been performing well over the last year will really start to feel an impact over the next few months.

"Competition will be fierce and companies with large debts will be the most vulnerable to these kind of fire-sales."

The prospect of the sell-off of the retail icon, which employs more than 30,000 people across the UK, has highlighted how vulnerable even big-name chains are to sudden takeover.

Woolworths shares slumped by a third yesterday, leaving the company with a valuation of about £37 million, in the wake of the proposed deal emerging. The company's shares have plummeted by 83 per cent in the last year alone.

As major retailers BHS, Marks and Spencer and Debenhams launched pre-Christmas sales, household names were warned they should brace themselves for a "horrible time" ahead.

H&M, Next and Marks and Spencer have all reported steep falls in sales this month.

It emerged earlier this week that Scotland had suffered the biggest drop in non-food sales in eight years.

Financial analyst Freddie George, of Seymour Pierce, said the M&S sale was a "clear sign that sales are well behind budget" as retailers entered the crunch Christmas period.

He said that consumers appeared to be delaying their Christmas shopping, hoping to catch bargains as shops increased sales.

"Christmas 2008 has the feel of being the worst retailing Christmas for many years – more for the higher level of discount activity," he said.

Woolworths has increasingly struggled to cope with growing competition from high street music store rivals, supermarkets and the internet. The company, which saw off an earlier attempted takeover bid of £50 million in August, revealed last night that it was in talks.

A spokesman said: "The board of Woolworths can confirm it is in preliminary discussions regarding a possible offer for the retail business. There can be no assurance that any offer will be forthcoming."

Hilco is best known in the UK for buying up the debt of Allders before placing the department store chain into administration. It is thought to be eyeing a number of ailing UK retailers.

Paul McGowan, UK chief executive of Hilco, the US retail restructuring specialist, admitted the company was in "very early stage" talks with Woolworths, with reports claiming the proposed deal is centred on all of the firm's stores across the UK being sold for a nominal sum.

The deal is expected to focus on how much debt Hilco, which acquired the fashion chain MK One this year and subsequently placed it into administration, is prepared to take on. It will also have to negotiate responsibility for Woolworths' estimated £100 million pension fund deficit.

Financial analyst Bryan Johnston, of Bell Lawrie, said Woolworths had been vulnerable for some time.

"The main problem at the moment is the size of its retail operation and the amount of stock it is holding," he said.

Sanjay Vidyarthi, an analyst at Dresdner Kleinwort, said the talks suggested the position of Woolworths "must be critical", given the retailer was gearing up for its busiest trading period of the year.

Richard Perks, the director of retail at analysts Mintel, said: "I don't think there's any doubt the retail industry is heading for a horrible time. We are heading into a recession, people are beginning to spend less and many established names are beginning to feel squeezed by the downturn."

Tim Green, a retail expert at analysts Brewin Dolphin, said: "The real problem for anyone looking at taking over Woolworths is the size of its debt. That has to be factored into the equation, along with its pensions deficit. It's not quite as simple as saying it is facing being taken over for £1."

Only a few months ago, Woolworths rejected a takeover bid from Baugur, the Icelandic investment group, which already owns huge chunks of Britain's retail sector, but which has since run into its own financial troubles after the collapse of Iceland's banking system.

Store that was many people's cup of tea

AN AMERICAN, Frank W Woolworth, opened the first British Woolworths in Liverpool in November 1909.

He saw Liverpool as "the second city of the empire" and with its international port, it served as a good place to build the brand.

The first British store, which proudly claimed that nothing cost more than sixpence, was the start of Woolworths' reputation for cheap goods. It was an instant success, bringing in customers on a scale not seen before.

Mr Woolworth came from Pennsylvania, where the US wing was founded in 1878. He began offering American store managers the chance to open UK branches. By 1914 there were 40 stores, in most big cities in England and Ireland.

In the 1950s, stopping in for a cup of tea at the famed tearoom in the Princes Street Woolworths, opposite the Balmoral Hotel, was a quintessential Edinburgh activity.

Ben Bailey

Bill Jamieson: Morticians of the business world who can herald rebirth from ashes
HILCO is not a place where retail companies go to die. It is worse. It's a place where the barely palpitating corpse of a business is scrubbed down, chopped up and sold off in bits.

For Woolworth, it is an ignominious end for a retail brand that became a household name across the US and Britain.

It is now in talks with Hilco, a company that specialises in distressed retailers, selling off stores, slashing debt and realising what value it can. It is essentially an accountancy business specialising in cash and asset realisation.

Over the next few months, we are going to hear a lot more about companies like Hilco.

They thrive in the ghoulish depths of the business cycle, picking up businesses for a nominal sum and salvaging what they can from the wreckage.

Miserable and destructive and negative? No. They may act like corporate morticians. But they are a vital part of the next business upswing.

Out of the wreckage of many companies, new businesses will be borne and built up. Hilco trades in the space between old creditors and new venture capitalists wishing to acquire assets on the cheap.

Joseph Schumpeter, whose writings on the business cycle made him one of the world's best known economists alongside Keynes, popularised the word entrepreneur to describe the activities of those who drive the cycle forward into the next upswing.

But the word he used in the first edition of his treatise was unternehmer, a German word whose strict meaning is undertaker. Schumpeter insightfully grasped that the entrepreneur through innovation was both the destroyer of established business and the creator of new ones: the process he famously described as creative destruction.

Shares in Woolworth have plunged 83 per cent to just 2.6p over the past year as the economy turned sour.

First-half losses soared to £90.8 million. The dividend was chopped.

With a reputation for acquiring under-performing retail businesses or divisions, Hilco UK has been increasingly busy this year.

The group, under chief executive Paul McGowan, a former accountant with KPMG, drove through the sale or closure of the Focus DIY stores, was appointed by the administrators of Base Menswear to close stores and trade an additional 16 prior to sale, and helped in the restructuring of Elvi after the group's original investors made a hasty exit.

Among Hilco's biggest projects was department store group Allders, where it provided £15 million of capital to expand the lifespan of the administration and secure a more orderly disposal and assets than would otherwise have been the case.

This enabled 30 other Allders stores to be sold to other retailers including Debenhams, Bhs and Primark, while retaining more than 3,000 jobs within the business.

2009 will be the year of bounty for corporate insolvency specialists and the hyperactive Hilcos.