HMV-owner Hilco leads race to buy ailing DIY chain Homebase

The investor which rescued HMV five years ago is close to striking a deal to buy Homebase, Britain's second-biggest DIY chain, that would inevitably lead to further retail sector job losses.

Sky News has learnt that Hilco Capital, which specialises in working with troubled retailers, emerged as the frontrunner to buy Homebase during talks on Thursday with its Australian owner, Wesfarmers.

People close to the discussions said a deal was likely to be announced in the next few days although they warned that it had yet to be formally agreed and could still fall apart.

‎Hilco is understood to have edged ahead of rival bidders such as Alteri Investors after convincing management that it had a cheaper and more credible plan to salvage the wreckage of Homebase, which is losing about £20m a month.

If it proceeds with the sale, Wesfarmers is expected to hand over a dowry to Hilco worth many tens of millions of pounds to fund the business through its ongoing losses.

Estimates of the value of that dowry have ranged during the process from £50m to well over £100m.

A sale to Hilco will be painful for an unknown number of Homebase's creditors and 11,500 workers, with store closures, an insolvency process called a company voluntary arrangement and disposals all among the likely options to be pursued.

Thousands of Homebase jobs are ultimately expected to go, whatever the outcome of the negotiations.

Hilco bought HMV, the music and entertainment products retailer, from administrators in 2013, and has revived the business, albeit with a reduced high street presence.

Its plans for Homebase are unclear, although the scale of its financial travails means a new owner will have to act swiftly to staunch the bleeding from one of the most disastrous takeovers in British retail history.

Sources said it was inconceivable that Hilco would not seek to restructure Homebase - which is part of Wesfarmers' Bunnings division - by closing a significant number of its 220 stores, potentially putting thousands of people out of work.

Wesfarmers began approaching potential buyers of the DIY chain earlier this year, just two years after completing a £340m takeover.

The Australian group has promised to update investors on the future of Homebase in early June.

Homebase was intended to be a launchpad from which the Australian retailer would take on B&Q in a battle for supremacy in the DIY market.

However, Wesfarmers' strategy has backfired spectacularly in the last 18 months‎, forcing it to write off more than £500m after it ditched some of Homebase's most popular business lines.

Sales in the three months to the end of March fell 13.5% to £211m, according to figures published last month that Wesfarmers blamed partly on the "Beast from the East" weather front which brought inclement conditions to the UK for an extended period earlier this year.

Alvarez & Marsal (A&M), a restructuring advisor, has been working with Wesfarmers on alternatives to a sale of Homebase, including a CVA.

Sources said that A&M would also be in line to act as administrator to Homebase if a solvent sale falls through in the coming days.

CVAs are being used by chains including Carpetright (Other OTC: CGHXF - news) , Mothercare (Other OTC: MHCRF - news) and New Look in an effort to shed unprofitable stores.

Marks & Spencer (Frankfurt: 534418 - news) is not turning to a CVA but announced this week that it would close 100 stores by 2022.

While Homebase's travails are largely self-inflicted, they have compounded the sense of gloom engulfing Britain's retail sector as online competition and rising high street costs squeeze many established chains.

‎Investment bankers at Lazard (Frankfurt: A0DQP8 - news) are handling the sale process.

Wesfarmers could not be reached for comment, while Hilco and Homebase both declined to comment.