Clinton Cards is the latest retailer to go under.
Today was another bad day for British high streets, as Clinton Cards (LSE: CC) suspended its shares and headed for administration.
Busted by banks and Yanks
At 8am on Wednesday, Clinton Cards -- the UK's largest specialist retailer of greetings cards -- requested that its shares be suspended, prior to the group being placed into administration by a subsidiary of its largest supplier, American Greetings Corporation.
Last night, Barclays (LSE: BARC) and Royal Bank of Scotland (LSE: RBS) -- Clinton's main lenders -- told the retailer that they had sold its outstanding debt to American Greetings. Following the transaction, American Greetings had absolute control of Clinton's £35 million of credit.
Although Clinton was "not in breach of any financial covenant or repayment obligation under the facilities," it had been "in receipt of temporary waivers for some technical breaches of default related to management changes and supplier-related discussions."
Following the transaction and based on earlier discussions, Clinton expected the US firm "would enter into discussions with the Company with regard to its ongoing support for the business and expected it to extend the waiver of the technical breaches of the loan agreement."
Unfortunately, having seized control of Clinton's debt, American Greetings "immediately informed the Board that it intended to enforce the loan against the Company and the Board has concluded that because it is unable to repay the loan it has no option but to concur with American Greetings' proposal to place the Company and its subsidiaries into administration."
In effect, Clinton's body blow came from two British banks and a bunch of rival Yanks. What an unusual and distasteful way to bring down a well-known British business that has been trading since 1968.
8,000 jobs at risk
Of course, going into administration won't mean the end of Clinton Cards, but it will wipe out all shareholder value. Before they were suspended, Clinton's shares were trading at 7p, valuing the company's equity at £14.5 million. Given that the group's debt is more than twice this equity figure, there will be nothing, nil, zilch and zip left for Clinton's long-suffering shareholders.
In all likelihood, Clinton will emerge from administration with no external shareholders, a smaller estate and less debt (as some of this £35 million will be written off).
Right now, the main concern must be for the 8,000 employees working at 628 Clinton Cards stores and 139 Birthdays outlets. Sadly, many of these workers will lose their jobs as American Greetings seeks to minimise its losses before re-launching a slimmed-down operation.
A bungled business
Although the Clinton name is likely to continue to be seen across UK high streets, it will no longer be a listed business. Clinton floated on the London Stock Exchange in 1988 and grew strongly via acquisitions, notably though the purchase of The Birthdays Group in December 2004.
Alas, the writing has been on the wall for Clinton Cards for at least two years, as its sales declined in the face of reduced consumer spending, plus online competition from the likes of fast-growing rivals moonpig.com and funkypigeon.com.
What's more, Don Lewin, Clinton's founder, was being paid an enormous salary for running a small-cap company. Last October, my Foolish friend G A Chester revealed that Lewin -- then chairman and chief executive -- was pocketing more than £1 million a year. This big-hearted award came despite a massive collapse in Clinton's share price, the axing of its dividend and substantial trading losses.
In March, Clinton reported a six-month loss approaching £4 million and warned the decline in its like-for-sale (LFL) sales was worse than expected. Today, it confirmed that LFL sales were down 3.5% in the past 14 weeks.
Blame the banks?
I suspect the public perception of today's events will be: "It always seems to be banks pulling the plug that cause companies to collapse. We didn't bail them out in 2008 so they could then destroy British businesses."
While it's true that taxpayers own 82% of RBS (following our cash injection of £45.2 billion) and provided vital liquidity support to Barclays, these banks must act in the best interests of their shareholders. Their sole concern is get back as much as they can when loans turn bad.
Even so, this news is sure to anger many people, especially those with personal or business links to Clinton Cards. They will argue that Barclays and RBS should not have joined forces with a US corporation to drag down a major UK retailer. No doubt many 'sound-bite politicians' will agree.
Finally, the lesson for investors is an easy one: avoid weak companies with debt burdens that greatly exceed their market values, as these businesses often end up in the hands of their banks!
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Cliff does not own any of the shares mentioned in this article.
