The UK arm of mattress brand Dormeo experienced significant cash flow issues following the collapse of one of its major customers ahead of its own administration.

Adam Harris, of Mazars LLP, was appointed as administrator of Dormeo UK Limited on 23 February 2023. Dormeo UK, a subsidiary of Studio Moderna Brands International Limited – also in administration – and part of a wider European corporate group, relied on frequent funding support from its parent company. Other means of funding support was through its bank, HSBC, which in November 2022 sought to reduce its overall exposure and therefore required the company to seek alternative funding during 2023.

Concurrently to this, the international group had been exploring a restructure to provide refinancing and equity solutions for Dormeo UK. However, this failed to materialise and with the business searching for other routes of investment or a potential sale, Studio Moderna entered administration during January 2023, owing £4.5m to Dormeo UK.

Other amounts by related parties owed to Dormeo UK include £1.8m from Studio Moderna International, £935,000 from Studio Moderna Brands BV, £522,000 from Elisana SARL and £289,000 from VANEMA. Administrators said it is unclear at this stage how much will be recovered from the amounts owed.

Furthermore, the administration of one of its major customers, Ideal Shopping Direct – where Dormeo UK submitted a creditor claim of £1.6m, Brexit and the Covid pandemic, the business saw significant losses build up and experienced pressures with ongoing working capital.

Following a review of its own position, Dormeo UK understood that it did not have enough cash to meet liabilities due, including critical media payments (for both online and TV), which if not met, would have a significantly adverse impact on revenue streams and credibility. A sale was explored, which consisted of three tabled offers but were only for the IP and presented no solvent solutions.

Dormeo UK was then placed into administration and was sold in a pre-pack deal on the same date to United T and C Limited for a total sum of £800,000. This included £417,500 for goodwill, £372,500 for stock and £10,000 for fixtures, fittings, IP, customer data and seller’s records.

“This sale is not part of a wider transaction and there are no options, buy-back agreements, deferred consideration or other conditions to the transaction,” administrators said. The total sum was paid in full on completion.

With regards to the sale background, there were four firm offers for the business, which resulted from 20 initial interested parties. The bids were made up of a mix of retailers, competitors and distressed investors. Shortly after early negotiations, one bidder withdrew, while the other three had tabled offers of £500k, £800k and £701k respectively. The highest offer at this point was not the agreed purchaser.

In response, the purchaser improved its offer to become the preferred choice and went unchallenged. This new offer of £1m was accepted. However, the sum was then reduced to £915k and then again to the sold price of £800k after an intense period of negotiation due to unforeseen ransom payments and future payments to trade suppliers. In addition, the purchaser would also absorb the costs of any deposits paid by customers to be fulfilled, which is understood to be around £1.5m.

Ahead of entering administration, Dormeo UK had one secured creditor, its bank, which was owed £4.2m. Administrators said it is likely to receive some repayment but is expected to suffer a significant shortfall. As for preferential creditors, 27 staff members were transferred to the new ownership under TUPE and therefore expect no claims. The HMRC is the only other preferential creditor, owed around £700,000.

Unsecured creditors are estimated to be owed a combined sum of £7.8m. Customer orders not delivered to date of the administration appointment totalled £3m. The new ownership confirmed it intends to fulfil the majority of pre-administration orders. It is understood that creditors could suffer an overall shortfall of around £15.9m.

New owners UT+C (United Textiles + Components) is a global company with production and warehouse facilities in Europe (Poland) and USA (Danville, Virginia). It aims to provide a one-stop solution for mattress and furniture manufacturers.