Commercial awareness: think like a professional about... Comet

Our banker, lawyer, accountant and consultant give their verdict on a UK electricals retailer in crisis

Long-term British high street resident Comet looks likely to be the latest UK retailer to fall victim to the ongoing challenging economic climate. The electricals specialist has recently filed for administration and administrators for the company will be officially appointed shortly. They'll work with the company's management to attempt to keep some of the business functioning, which has 240 UK stores and employs approximately 6,500 people across the country.

Comet is owned by private equity firm and specialist in troubled companies OpCapita, which took control of the company, formerly owned by multinational electricals firm Kesa Electricals plc (now Darty plc), at the beginning of 2012. Comet, which had suffered several years of poor financial results at that point, was sold to OpCapita for only £2. To sweeten the deal, Kesa also agreed to retain Comet's considerable pension deficit, which stood at over £39 million, and even threw in a £50 million "dowry."

But, OpCapita appears to have been unable to turn Comet around, despite appointing John Clare, the former chief executive of rival high street electricals retailer Dixons, as chairman of Comet's board, who had some success in cutting costs and stemming a fall in sales.

It's thought to be unlikely that a buyer will be found for the whole business, but OpCapita has reportedly received a number of unsolicited offers for parts of Comet in recent weeks and it's possible that some of the more successful elements may be sold at a good price as part of the administration process.

Should it cease to exist, Comet's name will be added to a long list of British high street retailers that have disappeared over the past year, including department store Allders and sports chain JJB Sports.

Thinking like a banker

Looking on the bright side

These developments are certainly bad news for Comet, their shareholders and investors, staff and customers, but we bankers have ways to make money even when a company is doing badly. For instance, shares in competitors Dixons Retail and Argos have recently jumped in value, suggesting traders are hoping their businesses will profit from the elimination of a competitor. Comet isn't a plc, but if it were I'd expect to see traders "shorting it" - borrowing its shares and selling them, in the assumption that they'll fall considerably in value before they have to buy them back and return them, thereby producing a tidy trading profit.

Thinking like a lawyer

In the small print

You can tell a lot about a company's fortunes by the terms in its commercial contracts as these reflect how other parties in the business world see its prospects. So how have things been looking for Comet? Not good, its lawyers would tell you - the company's suppliers have been demanding upfront payment for its Christmas stock. And for a while now Comet's suppliers haven't been able to obtain credit insurance in relation to it, which is an insurance product that protects a company's suppliers in the event that the company is unable to pay them, also suggesting a lack of market confidence.

Thinking like an accountant

Doing the admin

What is administration, and isn't that something accountants get involved in? Administration is intended to be a rescue mechanism for companies in severe financial difficulty. Court-appointed administrators act on behalf of all creditors to rescue the company as a going concern if they can. If they can't, the administrators have a duty to ensure that the creditor group as a whole recovers as much money as possible from the failed company. Because of our expertise in understanding how businesses work and valuing assets, professional services firms are often appointed as administrators. In the case of Comet, I hear that Big Four giant Deloitte has been chosen.

Thinking like a consultant

Logged out

I've been thinking about Comet's business strategy and why it failed. Of course, it's partly down to external factors like reduced consumer spending and ongoing stiff competition from its rivals, but I think Comet has fared worse than other UK retailers in this area because of its failure to understand the importance of online sales and develop effective online retail platforms. And the rise of tablet computers and smartphones may also be a big factor behind its demise, as the popularity of these will have hit its desktop computer and TV sales.