ScS suspends shares as credit crunch bites

Jun 24 2008 by Karen Dent, The Journal

TROUBLED furniture chain ScS has suspended trading in its shares as its tries to strike a deal to save the Sunderland-based company from collapse.

The business, which has 1,300 staff in 95 stores nationwide – 10 of which are in the North East – has been hit hard by the fall-out from the credit crunch and had been attempting to raise working capital to keep the company afloat.

During discussions with potential investors, it received an approach from an unnamed party about buying the whole company.

“This approach would see the trading subsidiary being provided with substantial working capital facilities that would fully resolve the working capital issues and ensure all suppliers have a strong and ongoing relationship with the business,” ScS said in a statement to the Stock Exchange yesterday.

Earlier this month, an insurer refused to cover five ScS suppliers against the company being unable to pay them. At the same time, there were reports that accountant Ernst & Young was working on a restructuring of the business with KPMG lined up as administrator if the deal fell through.

ScS, which has a total of 14 suppliers, said this “unexpected and sudden” withdrawal of credit insurance had put its finances under pressure. The business, which made pre-tax profits of more than £7m in 2007, is expecting to make a pre-tax loss this year.

ScS is now in exclusive discussions with the potential purchaser. But its statement added: “However, as these discussions have developed, it has become clear to the directors of ScS that the extent of the additional working capital funding required may result in only negligible value being attributed to the shares in ScS Upholstery Plc.

“As a result, the directors of ScS have requested a suspension in the trading of the company’s shares with immediate effect.” The shares were suspended yesterday at 6.5p and analysts say that shareholders will get little from the sale even though it would save the company.

Vinay Bedi, divisional director of stockbroker Brewin Dolphin in Newcastle, said: “The directors are saying that because the money they are going to require or a purchaser is going to need to put into the business, that will limit the amount of money that can be given to shareholders for their shares,” said.

“The market value is around £2m and the purchaser is going to pay less than that for the shares, and I would suspect quite a lot less than that.”

But he added: “From an employment point of view, it may be more positive in that the business assets can continue. Hopefully there will not be the closure of any retail outlets.”

ScS announced a 20% drop in sales over the crucial May Bank Holiday weekend compared to a year earlier, while footfall over the same period had almost halved.

The business closed its loss-making Network Services Division earlier this year and had abandoned plans to open new stores, as it struggled under the worsening economic picture.

In addition to the slowing housing market, the Bank of England has warned inflation may rise above 4% by the end of year as food, fuel and utility bills increase. Spiralling costs of raw materials and higher prices demanded by suppliers in the Far East are pushing prices even higher.

Ian Shepherdson, a former City and Wall Street economist now working in Newcastle, warned there would be no quick fix to the situation, which he believes will last “years not months”. He said: “ScS is really in at the heart of the storm, although the credit crunch is affecting all firms affected by credit, the problem is worse for those that depend on activity in the housing market. When you get a big sudden drop in the housing market, people are more price conscious and they are less likely to be able to get credit. This squeeze is in every direction possible.”

He said businesses in the same sector as ScS should think about contraction not expansion. The slowdown, he said, was of an “extremely deep nature” which “would not rebound very quickly”.

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SUNDERLAND-based ScS Upholstery has been trading under a number of names since 1890.

The 95-outlet sofa giant it is today is mainly due to the efforts of Mike Browne, its current chairman.

Irish-born Browne joined the business, then called A Share and Sons, in 1975.

He saw the company morph into the Sunderland Suite Centre and when the last controlling family member left, he began moving the firm towards what would become ScS.

Under his guidance, the business grew from 20 outlets in the mid-1980s to almost 100 today. Four years ago, there were just 64 stores but ScS continued to pursue an aggressive growth policy under Browne’s guidance.

Browne took the helm in 1993 when he and two colleagues did a £15m management buy-in. Four years later, the business was floated on the stock exchange.

ScS, which describes itself as a middle market company mainly operating from out-of-town retail parks, currently employs around 1,300 people.