Harris Scarfe falls on its own sword for a chance of a brighter future!

What to make of the Harris Scarfe collapse? And is Allegro Funds the victim or the villain?

Here’s what we know: the Sydney-based private equity firm took effective control of the troubled Harris Scarfe, along with the Best & Less and Postie chains, on December 2.

Just nine days later, Allegro Funds called in Deloitte Restructuring Services as receivers of the 60-store Harris Scarfe business but not the other two chains acquired from Greenlit Brands, the Australian subsidiary of Steinhoff International.

Here’s what we don’t know: did Allegro Funds undertake adequate due diligence before signing the purchase deal, or did Greenlit Brands not provide a full disclosure of the parlous state of the homewares and apparel chain?

And if Allegro Funds did have a complete picture of the financial state of Harris Scarfe, is the receivership appointment a calculated strategy to effect a restructure and extricate the business from under-performing locations?

Such an intention may well prompt landlords to seek legal advice on their rights with the receivership process allowing Deloitte to potentially close stores without incurring penalties or ongoing obligations under leases.

The loss of another tenant with a relatively large store footprint will is certainly a blow to some landlords, albeit probably not entirely unexpected, especially prior to the Allegro Funds acquisition.

Potential legal consquences

While Inside Retail does not have knowledge of improper conduct by any party in the Harris Scarfe failure, the sudden collapse after a change in ownership is remarkable and could well have legal consequences.

Deloitte Restructuring Services has indicated all 65 stores nationally will continue trading until Christmas while a full review of the business and restructure options are evaluated.

The receivers have also indicated that their intention is to prepare the chain for sale as a going concern, a move that raises further questions about Allegro Funds’ decision to acquire Harris Scarfe as a turnaround project and what may well be a change of heart.

In turn, the sale of Harris Scarfe, which generates annual sales of around $380 million, prompts the question of whether Allegro Funds would want to retain Best & Less and Postie without the scale that Harris Scarfe provides.

The acquisition was a risk for Allegro Funds from the outset due to fierce competition in the mass merchant homewares and apparel category, including Myer, H&M, Big W, Target, Kmart, Adairs, Costco, TK Maxx and the emerging Kaufland.

Without Harris Scarfe, Allegro Funds may quit the category altogether or, alternatively, consider buying another chain to scale up the investment. Resuming ownership of a restructured and slimmed down Harris Scarfe is also a possible option.