06/03/2013 06:53 GMT

Dreams Enters Pre-Pack Administration; 1,600 Jobs Saved But 400 Still At Risk

Around 400 jobs are at risk at bed retailer Dreams after its new owner - courtesy of a pre-pack administration announcement on Wednesday - only secured jobs for 1,600 staff at 170 stores.

Sun Capital Partners bought the assets of the retailer for an undisclosed sum and has said it will honour customer orders where part payment deposits have been made for goods and customer warranties.

But the potential loss of 400 jobs will be seen as yet another blow to the battered high street, which has recently seen the closure of all Comet and Jessops stores and a number of HMV and Blockbuster shops after a spate of high-profile administrations.

What is a pre-pack?

Pre-packs are a kind of bankruptcy procedure, where a restructure plan is agreed in advance to a company declaring its insolvency.

In the United Kingdom, pre-packs have become popular since the Enterprise Act 2002, which has made administration the dominant insolvency procedure.

Pre-packs often preserve more jobs than when trying to sell the business on the open market after it has been declared insolvent. Creditors also tend to receive more of their loans back, although on average they will get back less than half of what they are owed.

Critics believe some business people use pre-packs to get out of debts and obligations, so creditors lose out as a result.

Alan Hudson, joint administrator for Ernst and Young, said: "High street retailers have faced unprecedented conditions over recent years, and the market for higher value discretionary purchases has been particularly tough.

"Dreams is a well known market leader, but in common with many others has suffered as a result of this depressed retail environment, a rapid expansion of its store portfolio and onerous lease liabilities. While recent performance has improved, it has seen a decline in like for like sales across its store portfolio as well as its operating margins being squeezed. This has resulted in the business being unable to continue to operate outside of administration.

“However, we are pleased to announce that a sale has been completed that sees the majority of the Dreams business including 171 of its stores, its head office and its two UK manufacturing facilities being sold to a new company controlled by Sun Capital Partners. The business will continue to trade without interruption, more than 1,600 jobs have been transferred and the future of Dreams on the UK high street has been safeguarded."

No mention was made of what would happen to the other 400 or so employees, other than a brief statement on the remaining stores that are not included in the sale, which will remain open for business whilst the administrators look to find buyers for them.

Private equity firm Exponent, Dreams' previous owner, bought the company from its founder Mike Clare in 2008 in a deal worth more than £200 million.

It is thought that Clare wanted to win back the business and keep every shop open, but according to the Sun newspaper, he was turned down by banks Royal Bank of Scotland and Barclays.

READ MORE about private equity ownership of retailers and whether it represents a good deal for the high street here