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Issa brothers set to buy McColl's after retailer collapses

Asda retail mccolls issa brothers - Jon Super/Alamy Stock Photo
Asda retail mccolls issa brothers - Jon Super/Alamy Stock Photo

The convenience store chain McColl’s is on the brink of being bought by the billionaire brothers behind Asda after crashing into administration with 16.000 jobs at risk.

The Issa brothers have emerged as clear frontrunners to snap up McColl's' 1,100 stores after a tumultuous 24 hours in which the failing corner shop retailer first appeared to be close to avoiding bankruptcy, before an eleventh-hour takeover by supermarket chain Morrisons fell apart.

Accountancy firm PwC has been appointed to oversee the administration of the business, which has become the biggest corporate retail collapse since Debenhams and Sir Philip Green's fashion chains including Topshop went bust.

The Issas, who acquired Asda last year with the support of private equity house TDR Capital, were last night thought to be finalising terms with PwC to take over the company.

An announcement is expected imminently, though any rescue deal could yet still fall through as the Issas and their advisers pore over the business's financial records.

City sources said that staff will get a pay rise under its new owners if the deal goes ahead, and McColl’s senior lenders would be repaid in full.

Earlier on Friday it appeared that Morrisons was in pole position to take control. Bosses at Britain’s fourth-biggest supermarket, itself subject to a takeover by US private equity firm Clayton Dubilier & Rice, worked through Thursday night to agree a solvent sale.

A McColl's shop in Cosham, Portsmouth
A McColl's shop in Cosham, Portsmouth

The McColl's board turned on its lenders, owed £170m, blaming them for blocking a deal with Morrisons.

The company said: “The lenders made clear that they were not satisfied that such discussions would reach an outcome acceptable to them.

“In order to protect creditors, preserve the future of the business and to protect the interests of employees, the board was regrettably therefore left with no choice other than to place the company in administration.”

Morrisons, a grocery supplier to McColls, issued an icy response criticising the decision. A spokesman said: "We put forward a proposal that would have avoided today's announcement that McColl's is being put into administration, kept the vast majority of jobs and stores safe, as well as fully protecting pensioners and lenders.

“For thousands of hardworking people and pensioners, this is a very disappointing, damaging and unnecessary outcome."

Some 200 of McColl's stores also trade under the Morrisons Daily brand. Is it yet to be seen if the Issas would rip up agreements relating to the sites and insert smaller Asda outlets in their place.

Depending on the shape of a final deal, McColl’s could become one of the largest retail insolvencies since Debenhams and Sir Philip Green's fashion chains including Topshop went bust.

The company, which began as a cigarette vending machine business, has been hit by supply chain issues and rising inflation. It raised £30m from shareholders in a cash call just eight months ago.

McColl’s pension trustees called on prospective owners “to make clear that they will respect the pension promises made to the 2,000 members by McColl’s” before it collapsed.

A spokesman added: “Breaking the link between the schemes and the sponsor company, by way of a pre-pack administration, would represent a serious breach of the pension promises made to staff who have served the business loyally over many years, and risks causing the schemes to enter the Pension Protection Fund with a resulting reduction in benefits.”

‘A mish-mash of stores that no one else wanted’

Laura Onita

When McColl’s bought almost 300 stores from the Co-op in 2016, the corner shop chain’s then-chairman and co-founder James Lancaster wrote to investors praising the deal.

It was a “rare and exciting opportunity” that would bring “financial and strategic benefits” to McColl’s.

Seven years on, the retailer has suffered a similar fate to Debenhams and collapsed into administration after pressure from lenders to repay its debts.

Buying the Co-op stores was meant to turn McColl’s into a serious player in the convenience arena – a lucrative part of the grocery industry - by winning market share from the large supermarkets.

It was also an attempt to move away from its roots as a pure newsagent as demand for cigarettes dwindled. Alcohol and tobacco sales declined by three quarters between 1989 and 2021, according to the Office for National Statistics.

While arguably a strategically sound decision to focus on convenience, the deal also lumbered it with about £100m of debt. Insiders say this has largely contributed to its demise because it significantly increased the interest costs on its loans.

McColl’s owed £97m at the last count, although some reports have put the total at £170m. And that is not the only pain point.

A year after it bought the Co-op stores, the convenience chain suffered “one of the most challenging” periods in its 49-year history following the collapse of supplier Palmer & Harvey.

It provided items for about 700 smaller McColl’s stores and newsagents. The collapse forced the retailer to put in place contingency supply arrangements including a short-term deal with rival Nisa.

The company was “at its peak at that point”, worth about £250m. McColl’s never fully recovered from the collapse of Palmer & Harvey despite Morrisons stepping in to supply its stores, industry observers believe.

It subsequently began converting hundreds of McColl’s shops to Morrisons Daily formats, a lucrative albeit costly change as these sites proved to be the most profitable.

The pandemic put a temporary wind in its sails. The company reported an increase in sales of 3.2pc to £1.26bn for the year to Nov 29 2020, but the Covid boost was not enough to offset the challenges that ensued.

“Convenience did really well in lockdown one, when people really were at home, and as you went out for a walk, you got your essentials,” says Clive Black, a retail analyst at Shore Capital. “That particular moment dissipated as things normalised.”

Supply chain disruption owing to the pandemic and a chronic shortage of drivers compounded its issues, which led to a string of profit warnings and subsequently a £30m cash call from investors.

It would use the funds, it said, to convert more of its shops to Morrisons Daily. At the time it said the stores would provide a return on investment within two to three years.

“Unfortunately the lines most affected are higher [profit] margin lines such as snacks and beer, wine and spirits,” analysts at Peel Hunt wrote in November. “The issues lie with branded items, which are simply not emerging from the manufacturers in sufficient volumes.”

McColl's worked with Morrisons on tackling the issues and eventually Walkers crisps, central to its meal deal offer, returned to its shelves.

The company started life in 1973 as a cigarette vending machine business and later purchased a chain of newsagents and convenience stores.

It listed on the London stock exchange in 2015 at 191p and opened its 1,000th store in 2016. The shares plunged to just 1.6p before being suspended on Friday.

Black believes that some of McColl’s travails were self-induced. “McColl’s is a complex business that isn’t easy to manage. It is a mish-mash of stores that have been acquired, often stores that no one else wanted, with weird and wonderful locations and configurations," he says.

“The way McColl’s is where it is, is because it has been badly managed. If you compare it to other convenience groups out there, Booker, Spar, Bestway, it’s clearly a laggard, reflecting a deficiency of management.”

Others are more optimistic about the chain’s future.

Paul McLoughlin, a partner at law firm Mishcon de Reya, says: “The decision to file for administration will be unsettling for creditors and employees. It does, however, represent an opportunity for the business to re-emerge under new ownership with the ability to recapitalise the balance sheet as we have seen in many other retail insolvencies.

“Administrators are adept at keeping businesses trading for a period of time to enable them to quickly realise value from the estate, most usually through an accelerated sale process which is often done in a matter of weeks, if not days.”

It will be up to its new owners to determine whether the brand survives.