U.K. retailer Zavvi refuses gift vouchers

Company goes into bankruptcy protection

LONDON -- Customers holding gift vouchers for U.K. entertainment retailer Zavvi have been told to contact the joint administrators for a refund, though not all vouchers will be eligible to be exchanged for cash.

Zavvi went into administration on Wednesday, roughly equivalent to Chapter 11 bankruptcy protection in the U.S.

The company launched 15 months ago after a management buyout of the Virgin Megastore arm of the Virgin Group. There are 125 Zavvi stores in the U.K. and Ireland with 2,363 permanent staff and 1,052 temporary staff.

The stores are still trading and a statement from the administrators, Ernst & Young, said there had been a strong performance since the start of its traditional sale on Boxing Day, Dec. 26.

"Zavvi sales since Christmas have been very strong, reflecting the loyalty of our customers and the tremendous support of Zavvi staff," according to a statement. "Footfall across all stores was at an all time high for Zavvi on Saturday, 27 December at 1.3 million."

However, customers with gift vouchers will face difficulties. A message on the Zavvi Web site states: "It is expected that all customers who purchased Zavvi gift cards/vouchers from Zavvi stores from 27 November 2008 will receive a full refund in respect of the unredeemed value of the gift card/vouchers. Unfortunately, it is not possible for gift cards/vouchers to be redeemed in stores."

Customers are urged to write to administrators Ernst & Young, quoting the voucher number. There is also an e-mail, zavvivouchers@uk.ey.com, and helpline on 0845 259 3179.

The message continues: "Regrettably, it will not be possible to refund gift cards/vouchers acquired prior to 27 November 2008. Customers with unredeemed gift card/vouchers acquired prior to 27 November 2008 should write to the joint administrators ... asking for their claim to be registered as an unsecured claim.

"Please note, due to the large volumes of gift card/vouchers that are currently outstanding it is not possible to discuss individual customer queries in person at this stage."

According to Ernst & Young, there have been enquiries from potential buyers of Zavvi. There is no timetable yet for closure of the stores.

Zavvi was hit by the failure of Woolworths Group's wholesale distributor EUK, which went into administration on Nov. 27. From this date, Zavvi's directors put all voucher sales income in a trust account, and voucher sales were stopped on Dec. 4.

An initial statement issued Wednesday said Zavvi had "continued to experience significant difficulty in obtaining stock on favorable credit terms. This has resulted in considerable working capital difficulties as a result of the failure of EUK, in addition to continuing operating losses."

"In the absence of a buyer for EUK, and with dire trading conditions on the high street, the Zavvi Group has seen a material fall in sales and the directors have now been forced to place parts of the group in administration," said joint administrator Tom Jack.

Ernst & Young said Zavvi Guernsey, the online operation, will be liquidated, while the 11-store Zavvi Ireland business was not subject to any formal insolvency proceedings.

Simon Douglas and Steve Peckham, Zavvi Group's founders, said: "We would like to thank all of our employees for their commitment and support since the launch of Zavvi. We have done all that is possible to keep the business trading, but the problems encountered with EUK, and particularly its recent failure, has been too much for the business to cope with."

Virgin Group has downplayed reports of its exposure after it emerged that, under the terms of the management buyout, it guaranteed millions of pounds of Zavvi's payments to EUK for stock.

Virgin spokesman Nick Fox told the Financial Times that Zavvi had about 20 million pounds ($29.1 million) in cash, which would be paid to the administrators of EUK shortly. The remainder of its EUK debt would then be recouped from the current Zavvi stores' sale. Fox said the EUK administrators were capping the debt at 40 million pounds ($58.1 million).

He is predicting a worst-case scenario for Virgin of a loss of 2 million pounds ($2.9 million) to 3 million pounds ($4.3 million). It would also get the lease back on six or seven stores.
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