It has been a tough few weeks for staff at Wilko, with the first round of potentially thousands of job cuts at the failed budget retailer due to start this week despite hopes remaining of a rescue deal for parts of the business.
However, the picture is rosier for its biggest creditor, the restructuring specialist Hilco Capital, which in recent years has made its name through dealings with some of the best-known British retailers, from Habitat to Homebase.
The fund lent £40m to Wilko in January and is now the chain’s biggest creditor after the pension fund. That puts it near the top of the queue of individuals and businesses, from staff to suppliers, awaiting their share of any cash that can be salvaged from a sale or breakup of the business.
The process is being run by administrators at PwC, who must exercise their duties for the benefit of creditors as a whole, giving due preference to those with security over Wilko’s assets, including Hilco. However, Hilco has a dual role in events: it is not only a creditor, but also a paid adviser to the administrators, helping them to value and sell the stock, a key factor in ensuring that the debt is paid off.
While there is no suggestion that PwC would favour one creditor any more than it is legally bound to, Hilco has secured a significant position in the process and the GMB union representing Wilko’s shop workers has raised concerns about a conflict of interest. Sources close to PwC told the Sunday Times that it worked with all liquidation firms and did not give Hilco preferential treatment.
The fund is also operating in the background at another distressed retailer, Superdry, which last month borrowed £25m from Hilco. The loan is expensive – the British fashion brand will pay 10.5% above the Bank of England base rate, currently 5.25%, giving a total rate of almost 16%, if it draws down any of the money.
Superdry’s problems were highlighted last week when it was forced to suspend its shares as auditors pored over its accounts. Results released on Friday revealed falling sales and profits. Shares were unsuspended on Monday and promptly fell more than 10% to a record low.
The loan is the latest in a run of retail deals that Hilco has been involved in over the past year, as the big high-street names struggle with the impact of Covid and years of attrition of online sales.
Hilco bought Cath Kidston in June last year before selling it on to Next in March; it provided funding for the tailor Gieves & Hawkes in June 2022, before the brand was sold to the Sports Direct founder, Mike Ashley, that November. It also handed a £15m lifeline in July 2020 to French Connection, which was sold the following year after its sales and share price plunged.
The Hilco model is effective. It offers retailers a helping hand by lending money when normal banks won’t – at a price – but it is also potentially benefits when companies fail, collecting fees from advising on and handling the sale of assets for administrators or taking control of a company and selling off the assets directly.
It cleared the stock for administrators to Debenhams, BHS and Woolworths, and owns the DIY chain Homebase and the Denby Pottery Company after snapping them up in tough times.
Hilco’s most recent full accounts published at Companies House show that it made a pre-tax profit of £3.1m for the year to December, down from £9.4m the year before. Despite that dive in profits, it dished out dividends of £7.1m, compared with £6.4m in the previous period, most of which will have gone to executive chair and main shareholder, Paul McGowan. He and former Harrods boss Paul Taylor set up Hilco Capital in 2000 as a London arm of the US restructuring firm of the same name.
Hilco initially specialised in valuing and selling off stock, but now offers a much wider range of services, and in some cases acts more like a private equity fund, acquiring and managing businesses. It bought Homebase for £1 in 2018 from Australia’s Bunnings and loaned it hundreds of millions to facilitate a turnaround.
Last year, Homebase paid off £132m of a parent company loan valued at £600m on its books and also handed more than £3m in consultancy fees and brand royalties to companies controlled by Hilco. That came after Homebase’s profits rose 18% to £55.6m, partly as a result of one-off benefits from property sales and government support, including more than £2m in Covid support grants.
While many businesses that accepted government support during the pandemic showed restraint on dividends, Hilco appears to have taken a different tack. In 2020, its owners paid themselves £25m in dividends on top of £12m related to advisory services and brand ownership fees, while its Bathstore business accepted £30m in business rates relief and another £10.6m in furlough payments and grants, according to accounts filed at Companies House.
Hilco also rejigged and sold on Habitat, selling its website and main stores in 2011 for £24m to the then owner of Argos and Homebase. Argos and Habitat have since been bought by Sainsbury’s.
The demise of Woolworths illustrates Hilco’s flexibility. The firm had struck a deal to buy its 800 stores for £1, taking on at least £265m of Woolworths’ £385m debts. However, the group’s creditors decided they would benefit more from a breakup, and Hilco was then hired by administrators to help manage the retailer’s exit from the high street.
The GMB, which represents thousands of workers at Wilko, has raised concerns about a potential conflict of interest in the chain’s administration process, with the union’s national secretary, Andy Prendergast, saying: “Hilco cannot be a neutral party if they are owed money.”
Richard Hyman, an independent retail analyst, suggests there are “inbuilt conflicts of interest”. He says buying the debt enables Hilco to get a handle on the details of how a business is faring and then work out how to profit from that. “If they put money in, they can put themselves in the driving seat and are at the top of creditors’ batting order when it goes into administration.”
Hyman thinks the arrangement puts staff at a disadvantage: “People are not taken into account. Suppliers can probably figure out what is happening at a company, but if you are one of the staff, you can’t, which makes staff more vulnerable.”
Nick Hood, an independent restructuring expert, says Hilco has a strong reputation in realising the value of stock and faces little competition from companies who could handle the same scale of operations. Given that administrators have a duty to get the best value for creditors, Hilco’s track record makes it the obvious choice.
“Hilco’s operating model,” says Hood, “is to insinuate themselves to the point where they become indispensable.”
Hilco declined to comment.
