McColl's Collapse and Rescue​

By Jake Rickman​
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What do you need to know this week?

McColl’s Retail Group — a British convenience shop and newsagent — finally succumbed to its long struggle with solvency when the British high street convenience shop and newsagent was placed into administration last Friday.

But, before the ink was dry on the court application, two high-profile bids on the distressed company were announced in short succession: first by petrol station and food retailer EG Group, and second by supermarket giant WM Morrisons.

On Monday, WM Morrisons announced that its bid was successful: it would acquire McColl’s through a “pre-pack” in administration.

Why is this important for your interviews?

Like the collapse of Debenhams before it, McColl’s has been closely watched by investors, creditors, and key stakeholders such as its 16,000 employees, whose pension liabilities in the company are valued at more than £15m. Studying McColl’s collapse and subsequent rescue is a great way to demonstrate to your interviewer a foundational understanding of insolvency and distressed acquisitions.

To start, an administration is one of a few ways a company unable to meet its obligations initiates formal insolvency proceedings. Upon successful application to the court, the directors cease to run the company. An insolvency professional called an 'administrator' is appointed to manage the company on behalf of lenders, employees, and other key stakeholders. In McColl’s case, the administrator was PwC.

Provided there is no outside rescue, the administrator will work with creditors to sell off the company’s assets. The proceeds will then be distributed to creditors according to the order of priority.

However, in McColl’s case, Morrisons had been eyeing McColl’s long before its administration was announced. Morrisons had been working in partnership with McColl’s, licensing its brand and inventory to McColl’s to allow it to sell its products as if it were a Morrisons outlet in 270 outlets. Though there were early signs of success, McColl's was unable to reach an agreement with its lenders to refinance £145m worth of bank debt.

Morrisons was McColl’s biggest unsecured creditor at the time of its administration, with the bulk of its debt tied up in food and grocery inventory. The fact that Morrisons was an unsecured creditor meant that it was unlikely to recover most of its money after the secured lenders were repaid

While the full details of the pre-pack have not yet been released, the law exists to encourage pre-packs so that stakeholders can avoid a costly administration. Morrisons likely acquired McColl’s at a discount relative to the underlying value. Proceeds of the sale will go pay off the secured bank lenders.

How is this topic relevant to law firms?

From a legal perspective, pre-packs usually involve restructuring, M&A, and financial sponsors/private equity practice groups. Employment and tax lawyers will also advise on the pension and employment contract aspects of the deal, which in this will be significant.

Ashurst is advising Morrisons on its acquisition. McColl’s and the various bank lenders including Barclays and HSBC will each be advised by their legal team.