Clerys closure: Questions remain over deal done in dead of night

"Now looking for new opportunities." This is what it says on the LinkedIn page of Gerhard Scully, former sales manager at Clerys department store. Succinct and sanguine, it is the official status of a man who gave 37 years to Clerys before it was closed in breathtakingly brutal fashion in June after being sold in the dead of night.

Scully, unfailingly polite and upbeat, served his retailing apprenticeship in Cork before moving to Dublin to join Clerys. He has worked in several departments, including as a buyer and as an assistant to the store manager, as well as in stock-taking and sales.

Some of his latter responsibilities included customer service and running the Heritage Gallery of the historic store. When it closed, he was working on Clerys’ plans to celebrate the centenary of the 1916 Rising.

“We were going to have a two-month-long exhibition. Staff were going to dress up in costume, and we also found two employees whose grandparents were involved in the Rising,” says Scully.

“We even had documents that showed how the store manager in 1916 helped evacuate people safely. When he came back a few days later, the store had burnt down.”

Scully misses Clerys, and if it were still open, it might also miss him. One of his LinkedIn recommendations calls him “the soul of Clerys . . . never absent from going-away parties, funerals and all that would show his friendship and respect”.

“I’ve had three months off but I would like to work now,” he says. “My life has been about work. Retail is what I know, but something customer-facing is what I need.”

Back to work

Alan O’Brien, who was Clery’s warehouse manager, worked for the company for 30 years. His father, who died in 1988, worked there before him, having joined in the 1950s. O’Brien is also looking for a new job and is sharpening his skills with an information technology course.

“We used computers all the time in the warehouse, but I want to get properly certified, to get it on paper. I’m not exclusively looking for warehouse work. I want to get back into employment again. I’m used to working, you know?”

O’Brien originally hails from Stoneybatter, a short walk west from Clerys and O’Connell Street, the bustling heart of the city. He did summer work in the store while at school before his full-time role. O’Brien was also the Siptu shop steward.

“You had no choice but to join the union when I started. The old management were always fair to us, though. We had disagreements, but you could always talk to them,” he says.

Gordon Brothers, the US private equity firm that sold Clerys in June, first bought the store in a Bank of Ireland receivership in 2012. O'Brien says staff were never left in any doubt that the US firm would sell as soon as it could make a profit.

“They told us from day one they were short-term owners, that they’d sell. But we thought that would be as a going concern.”

The Gordon Brothers consultants who ran Clerys from 2012 until it was sold this summer kept relations with the unions, but things also changed.

“They didn’t have a staff Christmas party for the first two years. It was stuff like that. They’d try to tie it into other things: you can have a party when figures improve and so on. We told them to either have one or not,” says O’Brien.

He had already finished his shift on June 12th when the store was sold to notoriously pugnacious developer Deirdre Foley's and Cheyne Capital's Natrium consortium for €29 million. Natrium kept the property arm and flipped the operating business on for €1 to Jim Brydie, an insolvency practitioner who promptly put it in liquidation. The whole process appears to have been meticulously planned.

“In the months beforehand we kept hearing stories it was for sale, but management kept telling us it was just an exercise to value it,” says O’Brien.

At lunchtime on that Friday, he heard on the radio that the business had been sold. Management assured the shop stewards in a meeting that afternoon it was as a going concern, O’Brien insists.

Clerys closed at 5.30pm, with all staff and concession-holders called to a meeting at the bottom of its famous staircase, and Dominic Prendergast, the Gordon Brothers-installed managing director, handed over to joint liquidator Eamonn Richardson of KPMG.

Black-clad security guards arrived in the background while staff learned their fate; at the same time other strangers started changing the locks.

For Scully, O’Brien and more than 450 other workers and concession staff at Clerys, it was all over.

Three months on from the shuttering of the country’s most famous department store, the sense of shock among those affected is still palpable, as is the shock at the speed and ruthlessness with which Clerys was dispatched.

It was only a matter of hours after Gordon Brothers received the €29 million and Natrium took over the property for redevelopment that OCS Operations, Clerys trading arm, was allowed to slither into its swamp of insolvency.

“The staff didn’t even know a separate property arm and a trading arm existed,” says O’Brien. “Nobody could understand what was going on.”

Keith Rogers, who ran the Ecco shoe concession in Clerys, says the way it was sold to Natrium and then closed was "possibly the worst act committed in retail history in Ireland".

“There were legal loopholes that these guys got around. That’s business. It’s good for them and bad for the rest of us,” says Rogers.

Redundancy bill

This week, KPMG hosted the first meeting of the creditors’ committee to oversee the liquidation. The corporate funeral is moving ahead, although this week’s threat of litigation from an angry concessionaire, LS Catering, could affect that.

Concession-holders have been told they will get an initial payment of €400,000 from the €2 million they say they are owed. The State could be stuck with a €2.5 million bill for statutory redundancy for workers.

Meanwhile, the KPMG liquidators and the creditors’ committee are expected to closely examine several financial transactions entered into by OCS Operations in the period before it was sold by Gordon Brothers.

This may include the treatment of insurance proceeds from the flood that shut the store for most of the latter half of 2013, as well as examining payments by the trading arm for professional fees in the immediate run-up to the sale to Natrium.

A balance sheet-insolvent OCS Operations, for example, shifted €1 million of the flood insurance proceeds back to the solvent property arm on the eve of the buyout, which it says was to correct a “fundamental error” in how it was originally allocated.

Gordon Brothers, and its two executives who were OCS Operations directors, Malcolm MacAulay and Rafael Klotz, did not respond to a series of detailed questions on these matters from The Irish Times.

The creditors’ committee is expected to meet again in the final week of September or the first week of October. Rogers is one of the concession owner representatives on the group. Ecco is owed €67,000 and was the oldest concessionaire in the store. It traded from Clerys for 38 years, 25 of them as a concession.

Rogers says Ecco was achieving “strong double-digit growth” in Clerys at the time of the closure.

“Things were good. The first six months of our trading year were better than at any time over the past five or six years. We were very happy with the business, which is another disappointing aspect ,” he says.

Despite how things have worked out, Rogers says he “holds no grudge” against Gordon Brothers. Some other creditors of OCS Operations are rather less enamoured with the private equity group.

Gordon Brothers is headquartered in Boston, although it acquired Clerys through its European division, based in London. The group’s website lists hundreds of transactions across a range of commercial sectors.

The retail industry is prominent, however, with deals involving companies such as bookstore chain Borders and ToysRUs. It also recently took control of the loss-making Ben Sherman fashion brand and has installed Simon Smith, one of the consultants it retained to run Clerys, to oversee the brand's operations.

Many of its deals involve insolvency and restructuring. In 2013, for example, it bought into the struggling Blockbusters chain in the UK, although the film rental business re-entered insolvency in December of that year with a loss to British taxpayers of around £7 million.

MacAulay, the Gordon brothers executive who was a director of Clerys, was also involved in the Blockbusters deal.

Property debt

A former executive with Gordon Brothers, who asked not to be identified, says that in his opinion it is “really a liquidation firm”, although it would probably dispute that.

“Clerys didn’t make sense as a standalone business under Gordon Brothers’ ownership,” said the firm’s former executive.

Gordon Brothers first emerged on Clerys’ radar about two years before its 2012 acquisition. During the crash, the retailer was saddled with about €27 million of mostly property debt to Bank of Ireland. It made an ill-timed foray in 2006, when the market was at its peak, to buy a building on nearby Sackville Street.

It was also suffering with expensive rents at some Clerys satellite stores, such as at Leopardstown, where it paid a chunky €380,000 per annum.

Clerys wanted to raise up to €7 million for investment in the business, but the banks wouldn't lend it the money during the recession. Gordon Brothers Europe then came over the hill. Clerys was put into receivership by the bank, and Gordon Brothers bought it, taking on €16 million of written-down Bank of Ireland debt. Gordon Brothers is also understood to have lent Clerys about €6 million as part of the deal.

It was also around this time that the business was split into separate operating and property arms, with both owned by a holding company, with Gordon Brothers as the shareholder.

Some sources believe the seeds of the operating company’s later insolvency were sown at this time. OCS Properties was quickly profitable and held attractive assets, while OCS Operations was loss-making from day one and reliant upon the property arm for financial support to pay its many creditors.

It is understood Gordon Brothers and Bank of Ireland became parties to a waterfall agreement – a tiered blueprint for distributing proceeds – to determine how the value of Clerys might be distributed whenever Gordon Brothers sold it on.

Foley’s Natrium paid €29 million in June, while Gordon Brothers also sold Sackville House in 2014 for about €3.7 million, giving a total to be divvied under the waterfall of close to €33 million.

Sources said the bank would have received its €16 million loan back first under the agreement. Gordon Brothers next got its €6 million loan back, while the bank took the next bite. Another slice is understood to have been split between the bank, Gordon Brothers and the consultants who ran Clerys on behalf of the private equity owner.

The bank declined to comment on client affairs when asked about the waterfall. It also would not comment on precisely when it became aware of the Natrium deal that ultimately resulted in Clerys’ closure.

The two main Gordon Brothers consultants who ran Clerys, Smith and managing director Prendergast, did not respond to numerous messages asking them to comment on what waterfall payments they may have shared, reputed to be six figures.

The consultants were brought in to replace former Clerys managing director PJ Timmins, who originally dealt with Gordon Brothers prior to the receivership. He told The Irish Times this week he was "shocked, dismayed and disgusted" at the manner of the closure.

“I was most disappointed for the employees and the concessionaires,” he said.

Legal action

The decision to close Clerys was clearly taken by OCS Operations after it was sold by Gordon Brothers, but the private equity firm’s proximity to the whole affair, having sold it mere hours earlier, surprised Timmins.

“It never made sense to me for them to be a partner to this transaction,” he said. “It doesn’t seem to make any sense to me that it would do that with an iconic retailer that has been around for so long.”

All parties involved in the deal also did not comment on this week's announcement by businesswoman Lorraine Sweeney, who owns catering concessionaire LS Catering, that she intends to launch a legal action in relation to the sale.

Sweeney, a former chair of the Small Firms Association, wants the assets of the three OCS entities pooled for the purposes of the liquidation. She is expected to argue that the entities should be considered a group and she is concerned that the split blocked creditors of Clerys from having access to assets that could have been used to defray the cash owed to them.

Gordon Brothers’ waterfall arrangements with the bank, together with how this fitted in with the perceived rights of other creditors, is also likely to feature in the suit.

“I was paying Clerys under Gordon Brothers €105,000 annually to rent my little cafe, and I also paid €100,000 three years ago to fit it out. I’m also owed money in takings, and I intend to fight,” she says.

Sweeney has refused to take part in the process to elect an oversight credit committee, because she says it “endorses” the liquidation. She is currently consulting lawyers and intends to launch a High Court suit within weeks.

“Maybe I’ll get my money back, or maybe I won’t. We don’t have unlimited resources. But at the very least, I am going to try and stop something like this from happening again by making people aware of what happened.”

Other financial issues raised by creditor sources include that while the operating company paid for Clerys’ intellectual property in the 2012 receivership, the trading names appear to have gone to the property company, which is outside the liquidation.

There also appears to be some confusion over how much OCS Operations paid during the 2012 receivership for its fixtures and fittings. The receivers’ accounts show receipt of €75,000, while OCS’s accounts record fixtures and fittings as having cost €1.7 million. Gordon Brothers did not reply to a request to clarify this.

Sources also expressed concern at the level OCS Properties spent on professional fees in recent years. It is also unclear how much of a facility fee Clerys paid for loans from Gordon Brothers, but some sources speculated it could have been as high as €1 million. Gordon Brothers did not comment.

Public disquiet

Natrium has taken much of the public’s ire over the summer for its role in the events leading to Clerys’ closure. Ged Nash, a junior enterprise minister, also wrote to it to set out his concerns.

In keeping with Foley’s mantra of almost zero engagement with media, Natrium would not comment when asked about its purchase of Clerys, including whether it had anticipated any problems with the repayment to concessionaires of their cash.

Cheyne Capital, Foley's London partner which is known to be uncomfortable with the level of public disquiet around the transaction, also declined to comment.

The former Clerys’ workers, meanwhile, have been given a regular space to meet by the nearby Gresham hotel. On the first Friday of each month, the store’s staff can assemble there to support each other as they all look for new livelihoods.

“Clerys was like a big family,” says Scully. “We have to help each other.”

Others will help themselves.