Is Debenhams doomed to be Mike Ashley’s latest conquest?

Mike Ashley’s ambitions to make the British high street a wholly owned subsidiary of Sports Direct have suffered a few blows of late.

He was in on the HMV fire sale but lost out to Canada’s Sunrise Records, to the delight of those who still buy physical music (especially vinyl). His bizarre interest in taking on Patisserie Valerie, the bust baker, didn’t last long.

Debenhams, however, is very much still in play.

This morning the ailing chain issued yet another profit warning, saying it won’t now hit the numbers it predicted in January.

The parlous decline in sales has moderated a bit. But, we are told, the high cost of a £40m emergency bridging loan agreed in January with the intention of keeping things ticking over while the group battles to finalise a rescue plan, weren’t in analysts’ forecasts.

Make of that what you will, but the lesson for city scribblers would appear to be this: when looking at Debs, you run the numbers, lower them and lower them again. Then nip round the corner to the local Starbucks, sit down with a coffee and a panini, then you go back to your desk and lower your numbers one last time in the expectation that you’ll still be told you didn’t cut them enough.

The profit warning came just a day after the Daily Mail revealed a piquant exchange of letters between Ashley, Debenhams, and parliament’s Housing, Communities and Local Government Committee concerning a £40m interest-free loan Ashley offered the company, in which he (via Sports Direct) is the biggest shareholder.

Debs spurned it in favour of paying through the nose for the bridging facility.

It says it did this because the Ashley offer came with strings attached. Its directors would have had to agree to let him increase his stake to the point where Sports Direct would have had effective control of the business.

He may get it anyway.

The company has more than half a billion in debt on its books, a sum that is nearly 14 times its market value, and more than 15 times last year’s adjusted profits. Goodness only knows what the multiple of this year’s earnings will be.

It needs to shut about 50 stores, and renegotiate rents on those that remain via a company voluntary arrangement, which is a form of insolvency that landlords are increasingly restive about because they usually end up getting stiffed.

Their fate may ultimately be shared by the holders of Debs’ debt.

Lenders are in a bind. If the company is allowed to fall into administration, Ashley could do what he did with House of Fraser, and buy it up on the cheap (Sports Direct, of which he is the majority owner, paid just £90m for the high street warhorse last year).

He said he wanted to make House of Fraser the “Harrods of the high street”. In reality? He’ll squeeze what he can from a dying format. Given the limited outlay, he could do quite well in that scenario.

Debs’ lenders don’t want a repeat and have made it clear they’re willing to battle for the business. They managed to get themselves the whip hand of secured status through the bridging loan, useful because it puts them first in line if the thing does go pop.

Were they so minded, they could launch an attempt to take control of the thing themselves.

But what then? Do they trust current CEO Sergio Bucher, whom Ashley had kicked off the Debenhams board, to turn around a smaller business with fewer stores and less debt if they swap it for equity?

His record to date doesn’t inspire a lot of confidence.

Do they find someone else? Is there anyone who can conceivably make what was once Britain’s biggest department store chain fly again in the internet retail era?

There wouldn’t appear to be that many good options, or that many good plans, out there for them.

Ashley, however, does have a plan, which would appear to involve him picking up the business on his terms (for which read “on the cheap”) at some point, then bolting it together with House of Fraser, then squeezing.

And absent a miracle, the smart money is on him winning in the end.