Arcadia’s Business and Recovery Plan forecasts that Arcadia will be making a full year profit of £117m by 2021/2022 (up from £30.2m this year). There’s widespread scepticism that this is achievable.
Much of this improvement assumes landlords accept lower rents – the CVA proposal is structured to cut Arcadia’s rent bill by circa £40m.
“The business plan isn’t viable,” another landlord, with a large portfolio of Arcadia stores, insists.
“There is a massive risk of failure post-restructuring. If Arcadia fails, Sir Philip will argue that he is not responsible. He went out [with the CVA] too early and without agreement and he’s not putting enough cash in the business to make it work.”
You can understand landlords’ concerns. The majority of CVAs end in failure. 70% of companies that go through such a restructuring end up flat on their faces a short time later.
The pension authorities also have issues with Arcadia’s turnaround proposals. Arcadia’s pension schemes support around 9,000 people. On a buyout basis, the schemes are running a deficit of £750m.
Sir Philip wants to reduce the annual pension contributions that the company makes over the next three years, making up the difference with £100m of his family’s money.
He’s also proposing to give the pension schemes a claim of £185m on 214 Oxford Street, which a recent valuation by CBRE suggested would raise £500m in the event of a sale – enough, in theory, to repay the banks and support any pension shortfall.
But a sticking point here is that Sir Philip has a claim on the business. In March, he had to stump up £50m at short notice to give to Lloyds Bank because Arcadia breached its lending covenants.
This is both a sign of how the business is struggling to pay its bills in a timely fashion and a potential problem for the CVA process. The money he put in was in the form of a secured loan. If Arcadia were to fall into administration at some later date, Sir Philip would be first in the queue of creditors.
The Pensions Regulator has already said it does not think the CVA proposal provides adequate protection for the members of Arcadia’s scheme.
The Pension Protection Fund (PPF) is Arcadia’s largest creditor. If it decides to vote against the CVA then it will almost certainly fail with dire consequences for the business, if the CVA proposals are to be believed.
Sir Philip can change the terms of his proposals at any time in the build-up to the vote on June 5. If he doesn’t, the CVA looks destined to be voted down.