McColl's, Morrisons, and Creditor Dynamics in Restructurings​

By Jake Rickman​

What do you need to know this week?

On Tuesday, the Financial Times reported that WM Morrisons was not in fact the highest cash bidder in its successful pre-pack acquisition of McColl’s, which we examined in last week’s newsletter. Rival bidder EG Group, owned by private equity group TDR Capital, offered more in cash than Morrisons, but Morrisons’ bid won out.

Why is this important for your interviews?

To the uninitiated, the fact that Morrisons got away with offering less cash is rather unintuitive. In most asset or share acquisitions, as you might expect, the higher the cash (or cash-equivalent) offer, the better the deal. But distressed acquisitions often behave differently because the threat of insolvency triggers additional laws designed to protect key stakeholders other than shareholders, especially creditors.

Off the back of last week’s article, understanding why Morrisons’ bid was more compelling than EG Group offers us a wider opportunity to understand the complex dynamics between creditors, shareholders, and other key stakeholders inherent to many restructurings.

In addition to being a bidder, Morrisons was a creditor of McColl’s — and not just any creditor, but a creditor with one of the biggest claims against the company. This is because Morrisons had supplied McColl’s with £130m in food supplies and grocery items and had not yet been repaid, which makes Morrisons a trade creditor under insolvency law.

Importantly, trade suppliers are considered unsecured creditors. If McColl’s had not been rescued and no other deal could be reached, the likely outcome would be a liquidation, which is where the court appoints an official to sell off McColl’s assets and use the proceeds to pay back the creditors according to the order of their claim under insolvency law.

Secured creditors like bank lenders get their money back first, followed by preferential creditors like employees, followed by unsecured creditors, which usually only receive a fraction of their money back.

In McColl’s case, a liquidation was not on the table given there were at least two offers to buy the company. By the time the bid had been accepted, McColl’s was in administration, which is a process where the court appoints a court officer called an administrator to act in the best interest of the company and its creditors, including when it comes to accepting acquisition bids.

If the administrator had chosen EG Group’s bid, creditors would be repaid with the cash offering, which would not have been enough to go around, and the unsecured creditors would not recover all of their money.

But as part of Morrisons’ bid, it agreed to waive its claim against McColl’s, effectively writing off £130m of debt. From the perspective of the other creditors, Morrison’s offer was much better because there was now one less creditor with which the others had to divvy up the cash. The administrator, who is under a common law duty to look out for the interests of creditors as a whole, chose Morrison’s bid for this reason.

How is this topic relevant to law firms?

Travers Smith acted for McColl’s in this deal, while Ashurst represented Morrisons.