Morrisons is facing a bill worth tens of millions of pounds to offload its struggling convenience store business.
Britain’s fourth largest food retailer is in talks to sell its 150 M Local stores to the investment firm Greybull Capital.
However, it is understood that Morrisons will be lumbered with a liability of as much as £100m from any sale because there is a parent company guarantee on the rental agreement for the stores.
This guarantee means that Morrisons will remain on the hook for the leases on the stores even after selling them. If the new owner closes stores, the supermarket group will have to pay the outstanding rent.
Morrisons will have to recognise the liability by booking a writedown in its accounts. This writedown is likely to be worth tens of millions of pounds, which is lower than the £100m liability estimated by industry sources because the structure of the sale should partly offset the damage to the retailer.
Parent company guarantees are common on rental agreements, particularly for new businesses and ventures. For example, EMI, the record group, put in place parent company guarantees when it spun off entertainment retailer HMV in the 1980s, meaning it was liable for outstanding rent when the chain collapsed into administration in 2013.
However, the bill underlines the scale of the problems that Morrisons has faced in trying to launch a convenience store business.
Dalton Philips, the grocer’s former chief executive, opened the first M Local shop in 2011 after claiming that Morrisons was lagging behind its rivals because it did not have high street convenience stores or an online delivery service.
The expansion of M Local accelerated two years later when the company bought stores from Blockbuster and Jessops after the retailers collapsed into administration.
Philips pledged to open 100 M Local stores a year, but these plans were halted as the performance of the company’s main supermarket business worsened.
Philips was fired in January and the new management team of chairman Andy Higginson and chief executive David Potts put the convenience store business under review. In March, Higginson said that 23 M Local stores would be closed.
Greybull, which invested in airline Monarch last year and was a backer of electricals retailer Comet before it fell into administration, is now thought to be in advanced talks to buy the convenience stores. Its bid is being fronted by a collection of experienced industry executives.
The sale of the M Local stores will be another blow to the legacy of Philips. Morrisons was forced last year to book a £163m writedown on the baby equipment retailer Kiddicare after announcing it would sell the ailing business.
Morrisons could confirm the sale of the M Local stores in its interim results next month, the first to be presented by Potts as chief executive. He will use the results to outline his plan to get the supermarket chain back on track after a slump in sales and profits.
Morrisons has struggled to adapt to changes in shopping habits and the rise of Aldi and Lidl in its northern England heartland. In March, the Bradford-based company reported an annual pre-tax loss of £792m after it wrote off the value of its supermarkets by £1.3bn.
Clive Black, analyst at Shore Capital, said Morrisons had launched its convenience store business too late. “In addition to what we believed was conceptual naivety, Morrisons had to contend with what were in effect poorly acquired and inferior sites, which has already led management to close 23 outlets that were materially under-performing,” he said.
“Whilst relevant to a degree we were tearing our hair out under the prior regime when Morrisons blamed its poor relative performance on a lack of exposure to online and convenience stores. If Morrisons had over-worried about its superstores then we do notbelieve it would have blown hundreds of millions of pounds on Kiddicare, under-performing convenience stores or its tie-up with Ocado [to deliver online shopping], and its core would be in better shape.”
Morrisons declined to comment.
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