Suppliers, landlords and hundreds of shop workers are set to lose out after Royal Bank of Scotland (LSE: RBS.L - news) and private equity group Exponent (NasdaqGS: EXPO - news) sold bed retailer Dreams.
The retailer has been bought by Sun Capital Partners, the owner of ScS Sofas, through a pre-pack administration deal that allows the private equity firm to shed leases and trade debts connected to Dreams.
Dreams was placed into administration on Tuesday night but most of the business and its assets were then sold to a new company controlled by Sun Capital Partners for £35m.
The deal includes 171 Dream stores and 1,600 jobs, but will result in the closure of 95 stores and the loss of 400 jobs.
It also means that Dreams will shed debts that amounted to £279m according to the 2010 results for its parent company, which are most recent figures available. This debt includes £191.5m of loan notes and £28.7m of preference shares linked to Exponent, but is also made up of £59.3m of bank debt and £23m of debt to trade creditors.
Ernst & Young, which handled the sale process, said Dreams has suffered from the “unprecedented” conditions in retailing and the deal with Sun Capital Partners has “safeguarded” its future on the high street.
Alan Hudson, joint administrator, said: “Whilst recent performance has improved, it has seen a decline in like for like sales across its store portfolio as well as its operating margins being squeezed. This has resulted in the business being unable to continue to operate outside of administration.”
However, Mike Clare, the founder of Dreams, expressed his “disappointment and sadness” that the deal had been completed through a pre-pack administration.
Mr Clare launched a rival bid to buy the retailer and is now working on a plan to buy the Dreams stores earmarked for closure to launch a new bed retailing business. He said: “I already have plans in an advanced stage to rescue as many of the stores in the Dreams portfolio, and with it as many of the jobs within the company’s skilled workforce, as possible.”
Nick Hood, analyst for Company Watch, which monitors the financial health of businesses, said: “After this latest debacle, which follows hard on the heels of the La Senza, Comet and Republic failures, questions will quite rightly be asked about why the dubious alchemy of private equity keeps turning UK retail gold into expensive dross for landlords and suppliers.”
However, sources close to the lenders behind Dreams that led the sale process, including Royal Bank of Scotland and Barclays (LSE: BARC.L - news) , said they were was “no option that didn’t require a pre-pack somewhere along the line”.
They added: "Sun's bid offered the most certainity and meant immediate new investment, securing the future of the majority of the stores and jobs."
Nick Worthington, chief executive of Dreams, said: "This was the right deal for Dreams, its customers, its suppliers and its people. It is sad that some stores are going to have to close but Sun European Partners has secured the future of the vast majority of them."