Shoppers at WH Smith were once accustomed to being offered cheap chocolate stacked high at the counter while buying their morning newspaper. Now, the chain’s former high street stores have themselves become the subject of a cut-price deal – as the low-profile investment group that snapped them up appears set to pay less than half of the original cash price.
The paperclips to books chain had notched up 233 years on the British high street when it was bought by Modella Capital last summer.
In less than a year, the future looks very different for the chain, which was hastily rebranded to TG Jones. First established in Little Grosvenor Street in London by Henry Walton Smith and his wife, Anna, WH Smith grew rapidly in the 19th century, building a newspaper distribution business as the railway network expanded.
Last week proposals were announced for a swingeing restructure under which up to 150 of its remaining 450 stores could close and thousands of jobs cut. Documents sent to creditors, seen by the Guardian, reveal how the Mayfair firm Modella has simultaneously positioned itself as a key creditor, landlord and brand owner to the TG Jones operating company.
What’s more, Modella expects to have snapped up the former WH Smith high street business – including its stores and Swindon head office – for no more than £20m, plus taking on its debts. The WH Smith travel stores, in railway stations and airports, were not part of the deal and remain owned by its original stock market-listed parent company.
When the private equity group first announced it was buying the chain’s high street arm in March last year, the deal was valued at £76m, including £52m of cash.
By the time that deal was finalised in June, the equity – or cash – figure had been knocked down to about £40m, according to WH Smith. WH Smith’s parent company said it had accepted the lower price after “a period of softer trading”.
Only £10m of that was paid upfront. A further £30m to £32m was due later, based on trading performance and the realisation of “deferred tax assets” – understood to be related to accounting benefits from past losses at the business.
In the restructure documents sent to creditors, Modella said: “Based on current forecasts, and trading conditions to date, the only further sums to be paid to WH Smith in the near term are expected to be in relation to the realisation of relevant tax assets within the business.”
It is understood the tax assets are expected to be worth about £8m, meaning in all the takeover could involve no more than £18m going to WH Smith.
The documents also reveal that Modella has already taken control of some major assets in TG Jones’s corporate setup in the 11 months since it took charge.
Modella now directly owns TG Jones’s Swindon headquarters, having carved it out from the operating company, paying £7m to TG Jones, shortly after the acquisition.
The documents indicate the investment firm is now owed £2.1m in rent on the premises from TG Jones. This sum will be written off if the restructure plan is agreed by landlords. The plan is due to be finalised by the end of June.
If the restructure is approved, TG Jones will sign a new agreement under which it will be charged 25% of the rent on its headquarters for a year, in line with some other landlords of TG Jones stores. It is understood that this payment will be accrued as a debt on the books and there is, as of now, no intention by Modella of collecting it in cash.
Any cash payments out of TG Jones have to be approved by Aurelius, the one-time Body Shop owner that provided TG Jones with a rescue loan of up to £35m this month.
Modella also owns the rights to the fictitious “family” brand name TG Jones and is owed 1.03% of net revenue in royalties each month. While the £2.9m in royalties so far due since the takeover are set to be wiped out if the restructure is approved, the documents show that half the ongoing fees will then be due until the end of June 2029. They will then return to the full rate.
Modella has said the royalty fees are on a strictly no-cash basis and no fees are intended to be paid in the future, under the terms of its deal with Aurelius. However, if TG Jones should fall into administration, or return to profitability, the arrangement would enable any fees owed to be attributed to Modella.
Modella has lent £10m to help keep TG Jones trading through this year, charged at 12% interest, according to the documents seen by the Guardian. No cash payments on the loan have been paid so far. Any future cash payments will be limited to half the amount due until June 2029 if the restructure plan goes ahead and must be approved by Aurelius.
The Modella loan supplements the Aurelius rescue loan, which will be increased to £40m under the restructure plan.
The restructure documents show that Aurelius is the first creditor to be paid in any insolvency process after HMRC and employee pay. Modella’s debts fall immediately behind Aurelius and ahead of unsecured creditors such as suppliers and landlords. It is understood that, as a result, Modella is unlikely to realise any debts owed.
Retail insiders have long expected Modella to have to close about 100 of the former WH Smith stores, given the changing shape of UK high streets and shopping habits – with many of the goods it sells now available more readily online or at cut-price rivals such as The Works or Card Factory.
The chain has outlasted a string of high street stalwarts that have collapsed since the financial crisis, including Woolworths, BHS and Debenhams.
Its previous owner, WH Smith Group, may have responded to criticism about its flooring and shabby stores with a round of investment in recent years but many outlets still appear out of date after a long period of cost-cutting.
TG Jones has stopped paying business rates and delayed payments to suppliers as it attempts to conserve cash. It raised the prospect of bailiffs arriving at stores to demand business rates owed to local authorities.
It warned creditors this month that it feared running out of money if they do not approve the restructure, after sales slumped by 12% between September and March. It has blamed “weak consumer spending” and “the forced name change from WH Smith”.
The situation shines a further spotlight on the actions of Modella after the collapse of two other high street retailers under its ownership – Claire’s and The Original Factory Shop, with the loss of about 2,500 jobs.
The UK-based firm was set up by a group of restructuring professionals four years ago.
In its short existence, Modella has gained control over businesses totalling about 900 shops and employing about 10,000 staff.
It has also gained a reputation for rapid and hard-nosed restructuring, putting Hobbycraft, the arts and crafts retailer which it bought in 2024, and The Original Factory Shop through an insolvency procedure known as a company voluntary arrangement in order to reduce rents and close stores within months of taking them over.
The group relies on a mix of its own funding and backing from specialist funders including the Secure Trust Bank and Aurelius.
It is part of the Hay Wain Group, controlled by the former Touche Ross and RJP accountant and turnaround expert Jamie Constable, who co-founded the investment firm Rcapital in 2004. His group now includes the stock clearance advisory firm Retail Realisation, which has worked on clearing stock from some of Modella’s collapsed businesses, including The Original Factory Shop.
It is understood Modella won the bid for WH Smith’s high street chain partly because it had a compelling plan to develop and expand the business.
Expansion appears a long way off. One creditor says: “I think they genuinely believe they can make a good fist of it and are creating a national retailer.” But the source adds: “I wouldn’t give them more than a one in three chance.”
Vernon Dennis, the head of business advisory at the law firm Howard Kennedy, said: “This is a high-stakes test for Modella; if it can combine a restructuring of its balance sheet and consequent cost discipline with a genuine retail turnaround, TG Jones could stabilise; if not, it risks becoming a larger version of the failures we’ve already seen.”
Modella declined to comment.
