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Wednesday, March 14, 2018 

🍕Only Oprah Can Sell Weight Loss 🍕

Guitar Center, Weight Loss Drugs & TV Advertising

Curated Disruption News
Midweek Freemium Briefing - 3/14/18
Read Time = 4.3 a$$-kicking minutes


Did you miss us on Sunday?

In “Private Equity Faces Increasing Headwinds, we discussed various pressures currently confronting private equity firms. We also covered Claire’s Stores, Toys R Us, Warby Parker, LEGO, Remington Outdoor, Cenveo Inc, widespread transportation issues, inflation….ah you get the point. You missed out.

Anyway, it’s not too late to become a Member. Click below for individual Membership. Or if you’d rather punt to your employer, have the appropriate person reach out to us at

Earlier this week we welcomed groups from Centerview Partners and Skadden to the PETITION Membership.


Want to tell us we're morons? Or praise us? Cool, either way: email us

News of the Week (3 Reads)

1. Advertising - Short(ened) Ad Time and Short(ed) Ad Companies

Earlier this week Fox Networks Group’s ad sales chief floated the idea of cutting commercial ad time down from 13 minutes to 2 minutes an hour in a speech he gave in Los Angeles. This is interesting on a number of levels.

First, this would pose a real challenge to advertisers who, undoubtedly, would have to fight for limited but costly supply. Yes, television advertising has flat-lined, but it is still one of the most effective means to get brand messaging out.

Second, such a maneuver could have the effect of squeezing Netflix ($NFLX). Numerous underwriters highlight that Netflix can always open the ad spigot to help it grow into its ever-growing capital structure. And they’re not talking about product placement. If ads are eliminated elsewhere, will consumers focused on the ultimate user experience tolerate ads before watching treasured content like Ozark or 13 Reasons Why? Or will that result in friction and, in turn, leakage? If this decision gains traction, this as-of-yet-untapped revenue stream for Netflix could be collateral damage.

Ultimately, minimal advertising may help draw users back to non-Netflix content. But it will create all sorts of issues for brands trying to sell product AND, by extension, the advertising companies trying to place those brands.

To point, earlier this week the Financial Times reported that “[h]edge funds have amassed bearish bets of more than $3bn against the world’s largest advertising companies in an attempt to profit as the industry undergoes wrenching disruption and slowing growth.” Publicis, WPP, Omnicom Group ($OMC), and Interpublic Group of Companies ($IPG) are all short targets of funds like Lone Pine and Maverick Capital. With corporates like Proctor & Gamble ($PG) cutting ad spend and Facebook ($FB) and Google ($GOOGL) monopolizing same and building custom tools that cut out the middlemen, this is an area worth continued watching.

2. Guitar Center - Long Capital Structure Rehabilitation 2.0

Before we dive into the current status of Guitar Center Inc., let’s first establish that there is almost zero chance ⬆️ this kid ⬆️ ends up playing guitar when he’s older given today’s music trends. Just saying.

As everyone knows, the instrument retailer recently popped up on a variety of retail doom and gloom lists due to its over-levered capital structure and (relatively) near-term maturities. A quick flashback: the company was the target of a $2.1 billion 2007 leveraged buyout by Bain Capital. In a 2014 out-of-court restructuring, Ares Capital Management swapped its debt for equity in the company, effectively eliminating Bain from the equation and removing $500 million of debt and nearly $70 million in annual interest expense. The transaction was accompanied by a refinancing and maturity extension of other parts of the capital structure.

As a consequence of that transaction, the current capital structure stands as follows:

  • $375 million asset-backed revolving credit facility due April 2019 (“ABL”);

  • $615 million senior secured notes at 6.5% and due April 2019; and

  • $325 million senior unsecured notes at 9.625% due April 2020.

Yes, that’s a total of $1.2 billion of debt. Despite an uptick in pre-holiday sales, the dominant narrative remains that nobody plays guitar anymore. Consequently, there hasn’t been enough revenue coming into the coffers to service this debt. You can blame Yeezy and The Chainsmokers for that. We’ve harped on about the state of music here and, in a separate guest post about Gibson Brands’ struggles, Ted Gavin of Gavin/Solmonese added some additional perspective. Longer-term trends notwithstanding, Guitar Center seeks to live another day on the back of the short-term uptick. To do so, however, it must address that debt.

On Monday, Guitar Center — with the help of bankers UBS and Houlihan Lokey and the consent of Ares — launched an exchange offer and consent solicitation related to its unsecured notes. The offer is to swap the existing $325 million 9.625% notes for $325 million of 5% cash/8% PIK notes due 2022 (along with with some warrants). Per the company’s press release, $299 million worth of holders have already agreed (92% of the issuance). This swap would save the company $13,812,500 a year in interest expense AND have the effect of pushing out the maturity for three years. Gotta love the capital markets these days.

In tandem, the company is proposing to offer $635 million of new 9.5% senior secured notes due 2021. The use of proceeds of these new notes would be to redeem the $615 million 6.5% senior secured notes due 2019. With this piece of the transaction, the company will be taking on an additional $20.35 million of annual interest expense.

Finally, the company will also refinance the $375 million ABL, extending the maturity out by 5 years.

So, if you made it this far, here’s the upshot: if these transactions are successful, the company will have availed itself of a few years to turn itself around by pushing out its debt maturities. But, it will have eliminated ZERO INTEREST EXPENSE in the aggregate. Said another way: this is a band-aid, not a solution.

All of which means that the company needs to hope and pray some rock God hits the scene and reinvigorates the market for guitars in the next two years. We’ll take the under.

3. Orexigen Therapeutics - Long Obesity & Patents, Short Massive Cash Burn

Orexigen Therapeutics Inc. is a publicly-traded ($OREX) biopharmaceutical company with one FDA-approved product named "Contrave.” Contrave is an “adjunct” to a reduced-calorie diet and exercise for chronic weight management in certain eligible adults. In English, it’s a drug to help adults (allegedly) lose weight. And before we continue, please take a minute to appreciate the exquisite creativity these folks deployed with the name, "Contrave." We can only imagine the whiteboarding sessions that went down before someone said in MacGuyver-esque fashion, “Wait! Control + cravings = Contrave!” We hope the company didn't shell out too much cash money to the brand consultants for that one. But we digress.

Anyway, the drug could theoretically service the 36.5% of adults the Center for Disease Control & Prevention has identified as obese — a potential market of 91-93 million people in the United States alone. And that’s just today: that number is predicted to rise to 120 million people in the next several years. Yikes: that's 33% of the U.S. population. Apropos, the company claims that the drug is the number one prescribed weight-loss brand in the US with over 1.8 million prescriptions written to date, subsuming 700,000 patients. The drug is also approved in Europe, South Korea, Canada, Lebanon, and the UAE. 

All of that surface-level potential notwithstanding, the company has lost approximately $730 million since its inception. This is primarily because it has been spending the last 16 years burning cash (like a boss) on R&D, clinical studies for FDA approval, recruitment, manufacturing, marketing, etc., both in and outside the U.S. PETITION Note: And people wonder why drugs are so expensive. The company believes it could be profitable by 2019 under its existing operating model and revenue forecasts; it enjoys a patent until 2030. Clearly, the patent is the critical piece to this company’s future.

Prior to filing for bankruptcy, the company’s bankers attempted to effectuate a sale of the company to no avail. The goal of the bankruptcy filing, therefore, is to pursue a sale with the benefit of "free and clear" status (⚡️Nerd alert ⚡️: this means the buyer doesn’t need to take on the substantial litigation risk to clear title in the asset). While no stalking horse bidder is lined up, The Baupost Group LLC, is leading a group of secured noteholders (including Ecori Capital, Highbridge Capital and UBS O'Connor) to provide a $35 million DIP credit facility and buy the company some time. Will they end up owning it? 

Two other things of note here:

  1. The Baupost Group LLC is really toning its bankruptcy musculature lately. Between this deal and Westinghouse, the firm has been active.

  2. Note to company management: Oprah Winfrey may have some more room in her weight loss asset portfolio now that she’s dumped a meaningful amount of her holdings in Weight Watchers International Inc. ($WW). At a considerable gain. Remember: Weight Watchers was once high on distressed watch lists. But then Oprah made her investment and - boom! - the company has been flying ever since. Hint hint Orexigen: influencer marketing does has its merits. Even more so when the influencer puts her money where her mouth is.

A Message From:

An honest, impartial, independent, and fresh viewpoint is what you expect from PETITION, and it’s what you’ll always get from us, too. At Gavin/Solmonese, we pride ourselves on delivering inspired solutions for complex financial matters and restructuring issues. Both in and out of court, our seasoned team of accredited professionals can rapidly address insolvency, distress, or threats to your brand. Recent transactions include, Adams Resources & Energy, Inc. (Chief Restructuring Officer), Limitless Mobile LLC (Creditors’ Committee), hhgregg, Inc. (Expert Witness), and Square Two Financial Services Corporation (Creditors’ Committee). For more information, visit us here.

Feedback - Healthcare Issues

“There has been a lot of pressure on health care providers in general as insurance companies, and government, are increasingly reducing reimbursement fees for procedures and care year over year.  It's absurd, 'well last year we know we paid you x for this procedure, but this year, completely arbitrarily, we will pay you x-25/30%'“ 

When rents go up, salaries go up, supply costs go up, seeing reimbursement fall that drastically and being told take it or leave it is putting a lot of pressure on the health care industry.

Insurance companies seeing windfall profits year over yr, but patients are getting less and sh*ttier while doctors are going out of business or selling to hospital groups who then make them shift workers. Soon the whole country will be the VA.” - Medical Professional

Literally every sizable healthcare chapter 11 filing has listed “reimbursements” as a root cause of decreasing revenues and, in turn, debt service problems. Hence, bankruptcy. You’re right on.

Notably, Moody’s agrees with you too. They reported recent higher health system downgrade levels than during the Great Recession. In 2016, there were 32 downgrades and 41 in 2017. What is this attributable to? Apparently,

“Hospitals and health systems today are dealing with rising pharmaceutical, supply and labor expenses and difficult payer environments in which commercial payers in some cases steer members toward free-standing imaging and urgent-care centers, contributing to the ongoing issue of flat volumes at some hospitals. That leaves many systems with expense growth that outpaces revenue growth. 

Importantly, more than 60% of last year's downgrades were among small to medium-sized hospitals and health systems with less than $1 billion in operating revenue, demonstrating that larger systems are better positioned to weather industry challenges.”

The pain is hitting hospitals in Pennsylvania and Ohio particularly hard. In Pennsylvania, “half of the state’s rural hospitals operated at a net loss in 2016….” And in Ohio, 61 hospitals have low or negative operating margins. Eeesh. Choice quote,

"‘The challenges facing … all Ohio hospitals, are clearly driven by reimbursement pressure from Medicare and Medicaid, renewed efforts by commercial payers to exclude more services from payment, growing pharmaceutical and supply chain costs, physician and nursing shortages, and the costs of keeping up with new health care technology.’"

Wondering: what, if anything, is Washington doing about the reimbursement piece of this? 🤔

Meanwhile, this perfect storm has some wondering whether hospitals will become obsolete. Notably,

“What year saw the maximum number of hospitalizations in the United States? The answer is 1981. That might surprise you. That year, there were over 39 million hospitalizations — 171 admissions per 1,000 Americans. Thirty-five years later, the population has increased by 40 percent, but hospitalizations have decreased by more than 10 percent. There is now a lower rate of hospitalizations than in 1946. As a result, the number of hospitals has declined to 5,534 this year from 6,933 in 1981.”

And the author emphasizes that these trends are on the basis of poor care! We wonder if significant debt loads have any part in that? 🤔🤔

Resource Recommendations

It was clear from our survey results that people are hungry for a$$-kicking resources on the topics of restructuring, tech, finance, and disruption. We compiled a "reading list," of sorts for your benefit. You can find it here. This will be a growing list: if there are any resources that you think should be included, please let us know below. A number of you have already submitted recommendations and we expect this list to change regularly.


Friday, March 9, 2018 

💥 A Final Heads Up 💥

Last Chance to Get Sunday's Briefing

On Sunday, we will send out our kick-a$$ briefing to PETITION Members only. We’re covering private equity, Toys R Us, Claire’s, REITs and much much more.

To make sure you get it, subscribe now for $13 a month or $142 per year.


To the overwhelming number of you who have already become Members or, better yet, Founding Members, we thank you. We’re flattered by your interest and your support and we hope you enjoy your Sunday briefings (in addition to the free Wednesday briefings).

To those of you who haven’t become a Member, what’s up? Have you been (i) billing too many hours, (ii) calculating how steel and aluminum tariffs may affect your future, (iii) reading Stormy Daniels’ complaint against POTUS, or (iv) seeing Black Panther for the 8th time? Well…GET IT TOGETHER! We’re only $13/month and the registration process literally takes a few seconds - a small investment of money and time for your intellectual betterment. Here’s a preview of Sunday to entice you:

…then Bloomberg reported that Claire’s Stores Inc. is finally inching towards its bankrupt destiny, with a potential filing coming within weeks. This private equity-backed LBO poster child is owned by Apollo Global Management LLC, and looks headed for a deleveraging by way of a debt-for-equity swap. Lenders like Elliott Capital Management and Monarch Alternative Capital, among others, will own the company. No doubt, the company’s 2600+ store presence will be cut back considerably. The fine folks from the big REITS might as well sleep in their suits at this point. Or ask the bankruptcy courts for some kind of frequent fraternization card: enter 10x, get a free coffee. Dudes would be hella jacked up on caffeine by now. Anyway, a $60 million interest payment on its debt is due March 13 so set your calendars for April 13.

For those of you who want to punt us to your employers and have them pay for you, we can offer group solutions. Today we welcomed Greenhill & Co. Inc. and MorrisAnderson, and we’ve got several others in the pipeline. Please have the appropriate firm representative reach out to us at

So, final notice: the a$$-kicking robust Sunday briefing you’ve become accustomed to is moving behind a paywall starting SUNDAY. So is a lot of our website content. Become a Member today and keep getting great content like:

  1. 👞UGGs & E-Comm Trample Birkenstock👞

  2. iHeartMedia 👎, Spotify 👍?

  3. Tops, Toys, Amazon and Owning the Robots


Wednesday, March 7, 2018 

👞UGGs & E-Comm Trample Birkenstock👞

Nine West, The Walking & Weinstein Companies, HCR ManorCare

Curated Disruption News
Midweek Freemium Briefing - 3/7/18
Read Time = 4.63 a$$-kicking minutes

ICYM Sunday’s Briefing:

This past week we discussed the convergence of Spotify’s long-anticipated direct listing in the public markets with iHeartMedia’s bankruptcy. We also discussed The Weinstein Company (update below), Doordash’s new round of venture capital financing and more.

Other recent awesome content:

  1. WeWork Invents a New Valuation Methodology

  2. Tops, Toys, Amazon and Owning the Robots

  3. Gibson Brands’ Swan Song

News of the Week (4 Reads) - Sponsored by B. Riley FBR

1. HCR ManorCare Inc. & 4 West Holdings Inc. (Finally, Healthcare Action)

Earlier this week, the Ohio-based Carlyle-backed long-term care provider of 450 (i) skilled nursing and impatient rehab facilities, memory care facilities and assisted living facilities (the "Long-Term Care Business"), (ii) hospice and home health care agencies, and (iii) outpatient rehab clinics filed a prepackaged bankruptcy after months of back-and-forth with its REIT-parent and Master Lease counterparty, Quality Care Properties Inc. ($QCP). The bankruptcy will effectuate a transaction pursuant to which QCP will shed its REIT status and take on 100% of the stock in the reorganized HCR - a path that some speculate was paved, in part, by tax reform.

Interestingly, retailers aren't the only businesses capitulating under the weight of their rent. Here, the revenues generated by the Long-Term Care Business weren't generating sufficient revenues to cover ordinary course operating expenses and monthly rent obligations to QCP. By way of illustration, 

"For the twelve months ended December 31, 2017, the Company had revenues of approximately $3.741 billion, 82% of which derived from the Long-Term Care Business, and reported a consolidated pre-tax loss from continuing operations of approximately $267.9 million. As of December 31, 2017, the Company had approximately $4.264 billion in total assets and approximately $7.118 billion in total liabilities, debt and financing obligations...."

Rough. In 2016, HCR paid approximately $442mm ($37mm a month) in minimum rent to QCP. In 2017, after extensive negotiations, the amount dipped to $290mm ($24mm a month). With amounts that staggering, no wonder the company struggled. 

The relationship between QCP and HCR emanates out of a 2011 sale-leaseback transaction. After said transaction, QCP became an independent publicly traded company. Significantly,

"At the time of the 2011 Transaction, the business environment in the post-acute/skilled nursing sector was favorable due to a number of factors, including an aging population, expected increases in aggregate skilled nursing expenditures, and supply constraints in the skilled nursing sector due to substantial barriers to entry. The parties negotiated the amount of rent payable under the MLSA against this background."

But, as we consistently point out here at PETITION, projections don't always pan out as planned. Indeed, after the consummation of the 2011 transaction, 

"...the operating environment for post-acute/skilled nursing facility operators has become significantly more challenging. Unfavorable trends for operators of skilled nursing facilities include (a) a shift away from a traditional fee-for-service model toward new managed-care models, which base reimbursement on patient outcome measures; (b) increased penetration of Medicare Advantage plans, which has reduced reimbursement rates, average length of stay and average daily census; (c) increased competition from alternative healthcare services such as home health agencies, life care at home, community-based service programs, senior housing, retirement communities and convalescent centers; and (d) reductions in reimbursement rates from government payors."

Obviously this is a bit of a problem when your have a month rent nut of $37mm. 

You can find a case roster for the matter here.


At the time of publication, another skilled nursing operator called 4 West Holdings Inc. filed for bankruptcy in Texas. It, too, is affiliated with a publicly-traded REIT, Omega Healthcare Investors, Inc. ($OHI). You can find a brief summary of the matter here.

2. The Walking Company Inc. (Long Retail Bankruptcies)

Another retailer - this time a repeat offender - walked into bankruptcy court (see what we did there?). Here, the California-based once-publicly-traded ($WALK) manufacturer of footwear like Birkenstock and ASICS has filed for bankruptcy with a plan on file and an equity sponsor in tow to the tune of $10mm. 

This is a story of staggered disruption. In the first instance, the company expanded via acquisition and grew from 2005-2008 to over 200 stores. To fund the expansion, the company issued $18.5mm of convertible notes and transferred the proceeds of the liquidation of its Big Dog entity to The Walking Company, the use of proceeds including the buildout of omni-channel distribution and vertical integration. But,

As a result of many factors including- among them, challenging negotiations with landlords which did not provide the Debtors with the rent relief they believe they needed, and the state of the national economy, by late 2008 TWC found that nearly 100 of the newer stores it opened during this expansion period were not generating the sales and profits expected.

Moreover, 2008, Big Dogs' business had collapsed more rapidly than the Debtors had anticipated. Big Dogs was in the business of selling moderately priced, casual apparel through a chain of specialty retail stores (Big Dogs stores) located around the country. The rapid growth of big-box, mass-market retailers during this period put great pricing pressure on retailers of moderately priced, casual apparel, putting many of them out of business.

Walmart ($WMT). Target ($TGT). Just say it broheims. Never understand the reluctance in these filings. Anyway, the upshot of all of this? Once the Great Recession hit, mall traffic fell off a cliff, revenue declines accelerated, landlords proved obstinate, and the company filed for bankruptcy in December 2009. 

In bankruptcy, the company reached accommodations with certain landlords and received a $10mm capital infusion from Kayne Anderson Capital Advisors LP

Subsequent to the bankruptcy, the company apparently thrived from 2013 through 2017. It had a better rent structure, it ceased expansion, and it focused on successful brands (e.g., ABEO) and the wholesaling and international licensing thereof. But then the realities of e-commerce struck. Per the company,

During this period, however, the increasing power of Internet retailers made traditional business of retail stores selling products manufactured by others increasingly difficult, and it also had an increasingly negative impact on customer traffic in shopping malls. 

Indeed, Deckers Outdoor Corporation ($DECK)(the manufacturer of UGG footwear) terminated its relationship with the company - presumably to take greater and direct control of the relationship with the end-purchaser. TWC couldn't replace those lost sales fast enough - through third party or private label sales - and the dominos started to fall. The company sought rent concessions and landlords, for the most part, told it to pound sand. Holiday sales declined. Appraisers reduced the valuation of inventory and, in turn, the company had diminished access to its bank credit line. Cue the Scarlet 22.

The company intends to use the bankruptcy to obtain "substantial rent relief by conforming their lease portfolio to market rents." Notably, two of the initial 5 leases that the company seeks to reject in the first instance are Simon Property Group locations in Dallas and Oklahoma City and one Taubman location. Other creditors appear to be your standard retail slate: Chinese manufacturers, trade vendors (ECCO, Rockport) and other landlords ((General Growth Properties ($GGP) is a prominent one with locations listed as 9 of the top 30 creditors)). 

The company otherwise has agreement with its large shareholders (including another $10mm equity infusion) and Wells Fargo ($WFC) to provide DIP and exit credit facilities to finance the company during and post-bankruptcy, respectively. 

You can find a case roster for the matter here.

3. The Weinstein Company

What. A. Sh*t. Show.

4. Nine West & the Brand-Based DTC Megatrend

The Walking Company. Payless Shoesource. Aerosoles. The bankruptcy court dockets have been replete with third-party sellers of footwear with bursting brick-and-mortar footprints, high leverage, scant consumer data, old stodgy reputations and, realistically speaking, limited brand value. Mere days away from a Nine West bankruptcy filing, we can’t help but to think about how quickly the retail landscape is changing and the impact of brands. Why? Presumably, Nine West will file, close the majority of - if not all of - its brick-and-mortar stores and transfer its brand IP to its creditors (or a new buyer). For whatever its brand is worth. We suppose the company’s lenders - likely to receive the company’s IP in a debt-for-equity swap, will soon find out. We suspect “not a hell of a whole lot”.

Back in December, we snarked about Proctor & Gamble’s efforts to innovate around cheaper razors in the face of competition from digitally-native vertical brands like (now Unilever-owned) Dollar Shave Club and Harry’s. The struggle is real. Per the Financial Times,

In 2016, revenues of the large consumer good companies — from beer to soft drinks, food and household products — grew at their slowest rate since 2009, when the recession took hold. The 207 results for many of those companies that have reported remain weak.

A few weeks ago the Interactive Advertising Bureau released a new study entitled, “The Rise of the 21st Century Brand Economy.” It is well-worth perusing. In fact, we’re a bit late to the game here because we wanted to give it an earnest review. The upshot? Consumption habits are rapidly shifting away from third-party wholesalers like Nine West towards direct-to-consumer relationships. With nimble, oft-outsourced supply chains, DTC e-comm brands are stealing market share from consumer products manufacturers and distributors. In the aggregate, it’s creating real shocks. Some significant themes:

Economic benefits are accruing to firms that create value by tapping into low-barrier-to-entry, capital-flexible, leased or rented supply chains. These include thousands of small firms in all major consumer-facing categories that sell their own branded goods entirely or primarily through their owned-and-operated digital channels.

First-party data relationships are important not for their marketing value independent of other functions, but because they fuel all significant functions of the enterprise, including product development, customer value analysis, and pricing.

An arms race for first-party data is influencing strategy, investment, and marketing strategies among major incumbent brands across all categories.

The significance of these themes cannot be overstated. Putting some numbers around them:

In the razor category, Gillette’s share of the U.S. men's-razors business fell to 54% in 2016, from 70% in 2010. Almost all of that share has shifted to Dollar Shave Club, Harry’s, and several other digital primary sellers.

In pet food, subscription service The Farmers Dog is averaging 40-50% revenue growth monthly, in a U.S. pet food market projected up 4.4% in 2018.

Grocery store revenue growth is projected to be about 1 percent annually through 2022. Over that same period, the market for Meal Kits is expected to grow by a factor of 10x.

Amazon ($AMZN) has meal kits. Walmart ($WMT) just launched meal kits. Albertsons purchased Plated. Meanwhile, the bankruptcy courts have a laundry list of grocers on their dockets.

Saving the most relevant to Nine West for last,

Sales at U.S. shoe stores in February 2017 fell 5.2%, the biggest year-over-year tumble since 2009. Online-only players like Allbirds, Jack Erwin, and M.Gemi have gained nearly 15 percentage points of share over five years.

Yes, the very same Allbirds that is so popular that it is apparently creating wool shortages. Query whether this factor will be featured in Nine West’s First Day Declaration with such specificity. Likely not.


In writing about L.L. Bean’s decision to cancel their lifetime guarantee, we questioned whether return policies are a big influence on purchasing decisions. Several of you wrote in asking whether we’d lost our minds. Here’s one:

Are you kidding? It's absolutely a factor in deciding whether I buy something online. If it's on Amazon but not Prime or Prime but not shipped by Amazon (even on Amazon you have to be careful), or if I have to pay for return shipping, or worst of all, if it's not returnable, I think twice before buying. (That's why companies like Zappos rule, even if they're marginally more expensive. Free return shipping every time, no small print. I buy ten pairs at a time and return nine--ok, maybe eight. But I digress.)

Less of an issue for store-bought items since (1) who has time to actually set foot in a store and (2) most stores offer some sort of (perpetually shrinking) window in which to return stuff unless it's final sale (and if you're there and the goods are tangible, you can make an educated decision). - Partner, Biglaw

PETITION Response: Maybe we should have been clearer. In the wise words of Omar Little, “A man got to have a code” as much as a retailer must have clear-cut, fair policies. L.L. Bean has an extremely generous lifetime policy. And so, naturally, people then dumpster dive and return something that was purchased 12 years ago. And then when the liability hits $250mm annually and people lose jobs, other people complain about how big business doesn’t care. There’s something a bit wrong with that isn’t there? Remember: the new policy is a year - pretty generous in the scheme of things. Now, again, L.L. Bean went about it the wrong way: from a messaging standpoint, it would’ve been more prudent to maintain the lifetime guarantee and have people register their product (does anyone actually even register?). The fact that L.L. Bean took a lot of heat for this change given the retail malaise is, in our view, a bit absurd. 

What’s also interesting about your comment is that what you wrote is precisely why (i) Amazon ($AMZN) - and Zappos by extension (owned by Amazon) - doesn’t make money on retail (their margin/profit, a new phenomenon in its 20 year history, for the record, all comes from AWS), (ii) $UPS’ stock has been hammered (even they can’t handle more expensive B2C delivery and then 9 shoe box returns), and (iii) more and more retailers are folding (including Nine West - callback to the above). Not to guilt trip you. There’s just no easy answers when customers are used to getting so much for free. We are literally combatting that in real time right now with our subscription launch. The saying, “nothing in life is free,” doesn’t apply to a whole new generation. Everything is free - well, unless you factor in that you’re paying with your data and lack of privacy. But now WE digress. In sum, we would love to get a peek at your shoe closet.

Want to tell us we're morons? Or praise us? Cool, either way: email us

Resource Recommendations

It was clear from our survey results that people are hungry for a$$-kicking resources on the topics of restructuring, tech, finance, and disruption. We went ahead and started compiling a "reading list," of sorts for your benefit. You can find it here. What is the best book you’ve read on any of these topics recently? Email us at


Sunday, March 4, 2018 

iHeartMedia 👎, Spotify 👍?

The Weinstein Company, Uber/Lyft, Doordash vs. Subway

FINAL FREE SUNDAY Briefing - 3/4/18
Read Time = 8.7 a$$-kicking minutes

Channeling Alanis Morissette: In the Same Week that Spotify Marches Towards Public Listing, iHeartMedia Marches Towards Bankruptcy

In anticipation of its inevitable direct listing, we’d previously written about Spotify’s effect on the music industry. We now have more information about Spotify itself as the company finally filed papers to go public - an event that could happen within the month. Interestingly, the offering won’t provide fresh capital to the company; it will merely allow existing shareholders to liquidate holdings (Tencent, exempted, as it remains subject to a lockup). Here’s a TL;DR summary:

And here’s a more robust summary with some significant numbers:

  • Revenue: Up 39% to €4.1 billion ($4.9 billion) in ‘17, ~€3 billion in ‘16 and €1.9 billion in ‘15. Gross margins are up to 21% from 16% in 2014 - and this is, in large part, thanks to renegotiated contracts with the three biggest music labels. Instead of paying 88 cents on every dollar of revenue, the company now only pays 79 cents. Only.

  • Free Cash Flow: €109 million ($133 million) in ‘17 compared to €73 million in ‘16.

  • Profit: 0. Net loss of €1.2 billion in ‘17, €539 million in ‘16, and €230 in ‘15.

  • Funding: $1b in equity funding from Sony Music (5.7% stake), TCV (5.4%), Tiger Global (6.9%) and Tencent (7.5%). Notably, Tencent’s holdings emanate out of a transaction that converted venture debt held by TPG and Dragoneer into equity - debt which was a ticking time bomb. Presumably, those two shops still hold some equity as Spotify reports that it has no debt outstanding.

  • Subscribership. 159 million MAUs and 71 million premium (read: paid) subscribers as of year end - purportedly double that of Apple Music. Services 61 countries.

  • Available Cash. €1.5 billion

  • Valuation. Maybe $6 billion? Maybe $23.4 billion? Who the eff knows.

For the chart junkies among you, ReCode aggregates some Spotify-provided data. And this Pitchfork piece sums up the ramifications for music fans and speculates on various additional revenue streams for the company, including hardware (to level the playing field with Apple ($AAPL) and Amazon ($AMZN)…right, good luck with that), data sales, and an independent Netflix-inspired record label. After all, original content eliminates those 79 cent royalties.

Still, per Bloomberg,

Spotify for a long time was a great product and a terrible business. Now thanks to its friends and antagonists in the music industry, Spotify's business looks not-terrible enough to be a viable public company. 

Zing! While this assessment may be true on the financials, the aggregation of 71 million premium members and 159 million MAUs is impressive on its face - as is the subscription and ad-based revenue stemming therefrom. Imagine the disruptive potential! Those users had to come from somewhere. Those ad-dollars too.


Enter iHeartMedia Inc. ($IHRT), owner of 850 radio stations and the legacy billboard business of Clear Channel Communications. In 2008, two private equity firms, Bain Capital and Thomas H. Lee Partners, closed a $24 billion leveraged buyout of iHeartMedia, saddling the company with $20 billion of debt. Now its capital structure is a morass of different holders with allocations of term loans, asset-backed loans, and notes. The company skipped interest payments on three of those tranches recently. While investors aren’t getting paid, management is: the CEO, COO and GC just secured key employee incentive bonuses. Ah, distress, we love you. All of which will assuredly amount to prolonged drama in bankruptcy court. Wait? bankruptcy court? You betcha. This week, The Wall Street Journal and every other media outlet on the planet reported that the company is (FINALLY) preparing for bankruptcy. And maybe just in time to lend some solid publicity to the DJ Khaled-hosted 2018 iHeartRadio Music Awards on March 11.

For those outside of the restructuring space, we’ll spare you the details of a situation that has been marinating for longer than we can remember and boil this situation down to its simplest form: there’s a f*ck ton of debt. There are term lenders who will end up owning the majority of the company; there are unsecured lenders alleging that they should be on equal footing with said term lenders who, if unsuccessful in that argument, will own a small sliver of equity in the reorganized post-bankruptcy company; and then there is Bain Capital and Thomas H. Lee Partners who are holding out to preserve some of their original equity. Toss in a strategic partner like billionaire John Malone’s Liberty Media ($BATRA) - owner of SiriusXM Holdings ($SIRI), the largest satellite radio provider - and things can get even more interesting. Lots of big institutions fighting over percentage points that equate to millions upon millions of dollars. Not trivial. Would classifying this tale as anything other than a private equity + debt story be disingenuous? Not entirely.


"It is telling when companies like Spotify hit the markets while more traditional players retrench. Like we've seen in retail, disruption is real and if you stand still and don't adapt, you'll be in trouble. It gets harder to compete when new entrants are delivering a great product at low cost." - Perry Mandarino, Head of Restructuring, B. Riley FBR.

Indeed, there is a disruption angle here too, of course. Private equity shops - though it may seem like it of late - don’t intentionally run companies into the ground. They hope that synergies and growth will allow a company to sustain its capital structure and position a company for a refinancing when debt matures. That all assumes, however, revenue to service the interest on the debt. On that point, back to Spotify’s F-1 filing:

When we launched our Service in 2008, music industry revenues had been in decline, with total global recorded music industry revenues falling from $23.8 billion in 1999 to $16.9 billion in 2008. Growth in piracy and digital distribution were disrupting the industry. People were listening to plenty of music, but the market needed a better way for artists to monetize their music and consumers needed a legal and simpler way to listen. We set out to reimagine the music industry and to provide a better way for both artists and consumers to benefit from the digital transformation of the music industry. Spotify was founded on the belief that music is universal and that streaming is a more robust and seamless access model that benefits both artists and music fans.

2008. The same year as the LBO. Guessing the private equity shops didn’t assume the rise of Spotify - and the $517 million of ad revenue it took in last year alone, up 40% from 2016 - into their models. Indeed, the millennial cohort - early adopters of streaming music - seem to be abandoning radio. From Nielsen:

Finally, Pop CHR is one of America’s largest formats. It ranks No. 1 nationwide in terms of total weekly listeners (69.8 million listeners aged 12+) and third in total audience share (7.6% for listeners 12+), behind only Country and News/Talk. In the PPM markets it leads all other formats in audience share among both Millennial listeners (18-to-34) and 25-54 year-olds. However, tune-in during the opening month of 2018 was the lowest on record for Pop CHR in PPM measurement, following the trends set in 2017, the lowest overall year for Pop CHR, particularly among Millennials. While CHR still has a substantial lead with Millennials (Country ranked second in January with 8.4%), it will be interesting to track the fortunes of Pop CHR as the year goes on, and music cycles and audience tastes continue to shift.

This is the hit radio audience share trend in pop contemporary:

And, consequently, radio ad revenues have essentially flattened. And if Spotify has its way, the “flattening” will veer downward:

With our Ad-Supported Service, we believe there is a large opportunity to grow Users and gain market share from traditional terrestrial radio. In the United States alone, traditional terrestrial radio is a $14 billion market, according to BIA/Kelsey. The total global radio advertising market is approximately $28 billion in revenue, according to Magna Global. With a more robust offering, more on-demand capabilities, and access to personalized playlists, we believe Spotify offers Users a significantly better alternative to linear broadcasting.

One company’s disruptive revenue-siphoning is another company’s bankruptcy. Now THAT’s “savage.”

Want to tell us we're morons? Or praise us? Cool, either way: email us

News of the Week (6 Reads) - Sponsored by B. Riley FBR

1. Ad Agencies Get Hammered (Short Don Draper)

Draper never would’ve made it in the age of #MeToo anyway.

This week, Proctor & Gamble ($PG) announced that it cut its digital ad spending by approximately $200mm, a shot across the bow of certain undisclosed big ad players (cough, Google) and a major blow to the middlemen ad agencies that seem to be caught in a maelstrom of disruption. Back to that in a sec. More on P&G,

P&G, however, has not cut overall media spending. Funds have been reinvested to increase media reach, including in areas such as TV, audio and ecommerce media, a company spokeswoman told Reuters.

Not yet, anyway. P&G intends to cut an additional $400mm in agency and production costs over the next 3 years. In so doing, they’re also going back to the old school after realizing that the 1.7 seconds of eyeball view time doesn’t necessarily translate into sales. Podcast producers take note.

So what about those middlemen? Judging by WPP’s 10% stock price plummet this week ($WPP), investors are bearish. WPP is a British multinational advertising and public relations company besieged by the ease with which advertisers can publish directly on Facebook ($FB) and Google ($GOOGL) and, in an instant, receive performance metrics. Ad agencies, therefore, are no longer needed as much to connect brands with end users. Per the Wall Street Journal:

For their part, big ad agency companies that have traditionally bought advertising space on behalf of marketing clients are under pressure to reinvent themselves to remain relevant as the industry changes. Advertisers are demanding that their agency partners be more transparent about media-buying, so it is clear that agencies are getting the best possible deal for the clients and aren’t receiving rebates from sellers.

Disrupting kickbacks too? Rough.

2. Busted Tech (All Hail Uber & Lyft)

Late on Friday, the co-founders of Fasten, a ride-hailing company that proudly boasts of over 5 million rides completed, sent around a note to users that it has been acquired by Vezet Group. If you’ve never lived or worked in Austin or Boston, you probably don’t give a damn about this so you can move on. But, if you did, you’re aware of Fasten - particularly since it was the only real viable ride-hailing option in Austin during a period of time (2016) when Uber and Lyft fought with regulators. That fight was resolved, however, and Uber and Lyft returned to the city less than a year ago. Now Fasten is done for: this acquisition is an IP-sale. Operations in the US will be shut and 35 employees let go. In the dog eat dog world of ride-hailing, it is telling that the winners like Uber are those who survive - regardless of a cash burn in the billions of dollars annually. Move fast(est), burn cash, and break things.

3. Commercial Real Estate (Is New York City F*cked? Part IV).

We’ve been asking whether New York City is effed in a series of posts on our OG website; we have also cast shade on Vornado Realty Trust ($VNO) on a number of occasions.

It seems that landlords in New York are finally come back down to earth in a world where vacancies litter the streets. Per Bloomberg,

The scene unfolding on the cobblestones of one of New York’s trendiest shopping areas shows the increasingly fraught negotiations between tenants and landlords as vacancies soar and retail rents plunge. Similar scenarios are playing out along Madison Avenue to the north and along other thoroughfares in the city that have long been a draw for those shopping for designer clothing and other luxury goods. Property owners are confronting demands once unheard of in Manhattan, from rent reductions to short-term leases. 

Ruh roh. Part of the problem is that property owners modeled incomes based on post-Great Recession rental rates and income projections. After holding out for months-if-not-years with the hope of maintaining rates that comport with those projections, those same property owners are now acquiescing to lower rents and shorter terms:

In Soho, Hermes is negotiating a deal at 63 Greene St. that gives the retailer the option to leave after one year, while a few blocks over at 375 West Broadway, Gucci signed a lease that allows it to vacate the space if sales don’t meet expectations after two years, according to people familiar with the deals, who asked not to be identified because terms are private.

But, wait there’s more:

Downtown landlords aren’t the only ones caving. On a tony corridor of Madison Avenue on the Upper East Side, an 18,000-square-foot (1,670-square meter) stretch of luxury retail is facing vacancies. Landlord Vornado Realty Trust doesn’t expect tenants including Gucci and Cartier to sign long-term renewals to leases that expire in September given market conditions, according to mortgage documents tied to the property. It’s offering short-term agreements at lower rates to keep the space occupied, the documents show. As of last month, no deals had been struck.

Vornado, which recently paid off its mortgage at the property, declined to comment.

Of course it did. Vornado of course has held firm in its assertion that New York City is largely impervious to these overall market trends. Maybe that’s true for properties it no longer has mortgages on. Generally, though, Howard Schultz of Starbucks ($SBUX) appears to beg to differ in a leaked memo this week:

“We are at a major inflection point as landlords across the country will be forced (sooner than later) to permanently lower rent rates to adjust to the ‘new norm’ as a result of the acute shift (consumer behavior) away from brick and mortar retailing to e-commerce….”

“Landlords will be faced with having to answer two questions: Do they maintain their current rent expectations while their storefronts remain unoccupied? Do they begin to significantly lower the rent?,” Schultz wrote, adding, “Trust me, rents are coming down!”

To point, retail rents have declined as much as 17% in certain parts of Manhattan. Which presents additional problems beyond the so-called #retailapocalypse. More from Bloomberg,

Property owners with outstanding mortgages face a more difficult task when it comes to offering sweeteners, said Richard Hodos, a vice chairman at brokerage CBRE Group Inc. They may not be able to put in a tenant that’s paying less than what they had budgeted for when they took out a loan, he said.

“Landlords that have a lot of debt are hamstrung in some ways,” Hodos said.

So far, low borrowing costs have helped cushion the blow for retail landlords by making it easier to refinance debt and make loan payments. That could be about to change as interest rates climb.

Property owners are conferring with lenders behind the scenes, buying time to find elusive tenants when the income from their buildings falls short, according to Jones Lang LaSalle’s Smith.

Most lenders “play ball with the owner to get the space leased,” Smith said. “When you have a market where the conditions are uncertain, the idea of taking a property back is not the best scenario.”

And that right there illustrates a bigger piece of the problem. Mortgaged landlords don’t necessarily have the flexibility to lower rents. Peak purchases at now-unrealistic projections can’t be rented out lower or refinancing upon maturity will be difficult. Hence the deluge of vacancies.

Indeed, $4 billion worth of retail acquisitions were consummated in SoHo alone in the last six years and, as of October, at least, nearly 25% of that remained vacant. Said another way, there are several hundred millions of dollars worth of retail vacancies all situated within a few blocks from one another.

All of which begs the question: what happens when interest rates go up on these mortgaged properties and tenants remain elusive? Mmmmm Hmmmm.

4. Retail Roundup (Some Surprising Results; More Closures)

  • Macy’s ($M) reported earnings earlier this week and surprised to the upside - particularly with the news that its sales grew in the latest quarter (after 2.75 years of consistent decline). Most of the upside came from cost control measures (and the expansion of its off-price offering, Backstage). Likewise, Dillard’s.

  • Toys R Us entered administration in the UK.

  • Charlotte Russe earned itself what we would deem a “tentative” upgrade after consummating an out-of-court exchange transaction that delevered its balance sheet. S&P Global cautioned that it expects “liquidity to be tight” over the next 12 months.

  • Chico’s FAS Inc. ($CHS) reported same store comp sales down 5.2% and indicated that it closed 41 net stores in 2017, including 14 net stores in Q4. Net income and EPS was higher.

  • Foot Locker ($FL) intends to close net 70 stores in 2018 after closing net 53 stores in 2017.

  • Kohl’s Corp. ($KSS) is becoming a de facto co-retailing location after first partnering with Amazon ($AMZN) and now Aldi.

  • JCPenney ($JCP) announced that it is cutting full-time employees and increasing use of part-time employees instead. Total sales rose 1.8% but missed estimates. Comparable sales rose 2.6% and net income, ex-tax reform benefits, was down 6.6%.

  • Office Depot ($ODP) reported comp store sales declines of 4% and total sales down 7%. It closed 63 stores, including 26 in Q4. Note that we’re not reporting net closures: the company didn’t open any stores.

  • Supervalu may be shutting down 50 Farm Fresh Supermarkets in North Carolina and Virginia.

5. Subway (The Restaurant, Not the NYC Transportation System, But Short Them Both).

Both, frankly, sound like they could use the help of an operational advisor. This piece discusses Subway’s plans to reinvigorate and/or rightsize its 26,000 location footprint. Some critical info:

Subway is coming off a difficult stretch in which it lost two key players: its founder, Greco’s brother Fred DeLuca, to cancer, and its longtime spokesman Jared Fogle to prison. But its broader problem has been what Greco calls “a slow erosion of customers.”

Subway’s traffic has fallen 25% since 2012, a decline that put a brake on that uninterrupted growth.

Last year, according to Technomic's Top 500 Chain Restaurant Advance Report, Subway’s system sales in the U.S. declined 4.4% to $10.8 billion—its lowest level since 2010. Its unit count declined by 3.1%, to 25,908. It was the second straight unit count decline after more than 20 years of increases. The chain has closed 1,200 locations over the past two years.

Yes, that’s yet another 1200 locations that probably aren’t being accounted for in retail closure tallys.

Notably - and particularly interesting in light of the 25% traffic decline - you can order Subway on, among other platforms, Doordash, the on-demand delivery platform that announced this week that it has secured $535 million of Series D funding from the likes of Sequoia Capital, GIC and Wellcome Trust. From the press release:

As part of its merchant-first approach, the company plans to double-down on DoorDash Drive, the platform that enables a merchant to offer delivery to customers that have placed orders directly with the restaurant. The Drive platform has grown 1,300 percent year-over-year.

No, no typo explains that number. Doordash is going after the “last mile” hard and now has a treasure trove full of $535 million of benjamins to do so.

In 2017, DoorDash more than doubled delivery volume, while growing gross profits six fold year-over-year. This fast and sustainable growth played a role in the investors' enthusiasm for the company. DoorDash's growth rate has accelerated further in 2018, and this year the company is expected to triple its geographic footprint from 600 to 1,600 cities and hire more than 250 people across its corporate offices.

Right. Why leave your home if the “last mile” is otherwise covered? Subway might want to speed up its footprint evaluation. After all, delivery isn’t going anywhere.

6. The Weinstein Company (Long SeeSaws)

On. Off. On. Off. On. We have whiplash.

The ink on The New York TImes’ piece explaining “How a Deal to Sell the Weinstein Company Fell Apart” was barely dry before it came out on Thursday that the much-ballyhooed Ron Burkle-backed $500 million deal was back. And, significantly, New York Attorney General Eric Schneiderman is on board. A victims fund will be established, jobs preserved, and Maria Contreras-Sweet will, along with a slate of female directors, lead the efforts to rehabilitate the company 100% under a different corporate name.

The buyers, which include Lantern Asset Management, will assume $225 million in debt and place $275 million in equity, a large portion of which will be set aside for a victims’ fund. Existing equity - including that of the Weinsteins, Goldman Sachs ($GS) and WPP (rough week for those dudes) - will be wiped out.

Disruption comes in various forms; it can come slowly and gradually; or it can come in a sudden bathrobe-draped freefall horror. It seems, however, like this is a step in the right direction for the innocent parties (e.g., employees) affected by the actions of one megalomaniac.

Final note: have you considered what the creditor matrix would have looked like in a bankruptcy filing? Ashley Judd, Salma Hayek, Uma Thurman, Rose McGowan, et. al. It would have been a stalker’s paradise.

Chart of the Week

Resource Recommendations

It was clear from our survey results that people are hungry for a$$-kicking resources on the topics of restructuring, tech, finance, and disruption. We started compiling a "reading list," of sorts for your benefit. You can find it here. The list is expanding regularly. Our latest addition is Conspiracy: Peter Thiel, Hulk Hogan, Gawker, and the Anatomy of Intrigue.”

Pros Say

For those of you who missed the Wharton Restructuring conference last Friday, a kind Redditer posted a summary of a good portion of the content - including thoughts from Jamie Dinan (York Capital), Marc Lasry (Avenue Capital), and Bruce Richards (Marathon Asset Management).


ABI Battleground West, 3/6, Los Angeles

Orrick Breakfast Briefing: Business and Bankruptcy Issues at the Supreme Court, 3/7, NYC

Notable: What We're Reading (4 Reads)

Apple (New Numbers). Looking at the business ($AAPL) through the lens of active devices.

DNVBs (Clicks to Bricks). Casper opened its first standalone store in New York this week and it’s not just a showroom; it’ll actually carry inventory. This comes on the heels on a recent partnership with (and investment from) Target. Elsewhere, Harry’s is electing not to renew the lease of its New York based “Corner Shop”.

Dieting (Long Oprah Winfrey). We’re old enough to remember when Weight Watchers International Inc. ($WTW) was on distressed watchlists. Not anymore: the company’s stock was gangbusters in 2017 and is off to the races again in 2018 (despite a recent pullback off the highs - along with the rest of the market). The company’s boost is largely attributable to new programs and international expansion - both of which have benefitted significantly from the advocacy of Oprah Winfrey. Apparently her business track record includes keeping companies out of bankruptcy.

Sunpower Inc. ($SPWR) (Short Tariffs). The American solar company is laying off 10% of its workforce to cut costs - in part to address new headwinds emanating out of solar tariffs.


Stephens Inc. has purchased Blackhill Partners. And now Stephens’ U.S. restructuring advisory practice launches with 14 former Blackhill professionals including managing directors Lance Gurley, Jeff Jones, Eric Scroggins, and Joe Stone.

Wednesday, February 28, 2018 

WeWork Invents a New Valuation Methodology

Facebook's Algorithm, EB-5 Investing, Gibson Brands

Midweek Freemium Briefing - 2/28/18
(Read Time = 3.883 a$$-kicking minutes)


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On Sunday we discussed Tops, Toys, Amazon & Owning the Robots.

Other recent awesome content:

  1. Gibson Brands’ Swan Song?

  2. Walmart and Trucking Issues (Short Grocers)

  3. Remington Outdoor File for Bankruptcy

Want to tell us we're morons? Or praise us? Cool, either way: email us

News of the Week (3 Reads) - Sponsored by B. Riley FBR

1. EB-5 Visas & Bankruptcy/Distress Part II

A week ago we highlighted the bankruptcy filing of Lucky Dragon Hotel & Casino LLC. In that bit, we wrote the following:

“All of which is all to say that there may be an opportunity for some industrious lawyers seeking an untapped niche as the distressed EB-5 experts.”

We were more prescient than we thought.

Yesterday Greentech Automotive Inc., an electric car company that heavily relied upon 283 EB-5 investors (to the tune of $141.5 million of funding), filed for bankruptcy in Alexandria, Virginia. And the company’s downfall is, in part, an interesting case study in the weaponization of political media.

The debtor noted in its bankruptcy papers that a conservative digital media company named Franklin Center for Government and Public Integrity - through its web site - posted 76 negative articles about the debtor which, at one point, was affiliated with liberal Virginia gubernatorial candidate, Terrence McAuliffe. And contrary to what 50 Cent may say, all publicity is apparently NOT good publicity.

In this instance, the attention from avalanched into public scrutiny from the SEC and the Office of the Inspector General of the Department of Homeland Security. Regarding the former, the SEC investigation never led to further action. In the latter, the OIG conducted an investigation of GreenTech and the involvement of Mr. McAuliffe in communications with the DHS’s Citizenship and Immigration Services (“USCIS”). A subsequent report added additional bad publicity. All of which affected the company’s ability to raise more capital AND affected the view of the USCIS toward the investor petitions for permanent residency under the EB-5 program. Whoops. The company blew through a lot of funds combating these various issues and other litigation - including litigation the company lost defending lawsuits from a subset of its EB-5 investors. One such lawsuit resulted in a multi-million dollar judgment; others remain outstanding.

So now the company has filed for bankruptcy to pursue a possible sale of its assets and deal with its outstanding litigation. It sure sounds like they’ll have to deal with several hundred angry EB-5 claimants whose immigration status in the U.S. is now in limbo and who will now become intimately acquainted with the automatic stay.* Have fun with that.

*Nerd alert: when a company files for bankruptcy, an “automatic stay” immediately goes into effect serving as an injunction against claimants pursuing claims against the company.

2. Digital Media is Hard (Long Algorithmic Disruption)

Women-focused dIgital publisher, Little Things, a producer of Facebook-based feel-good content (think recipes), announced yesterday that it is shutting down after failing to find a buyer. If it had a First Day Declaration in a bankruptcy filing, it could theoretically start with “What Facebook Giveth, Facebook Taketh Away.”

In case you haven’t heard, Facebook ($FB) has been under a bit of scrutiny lately. Something to do with bots, Russians, influenced elections, and heaps of societal division. So, recently, Mark Zuckerberg announced a tweak to the Facebook algorithm meant to prioritize friends and family content in your newsfeed and de-emphasize other content - including media content. This, naturally, is a big problem for media brands native to the Facebook platform. How big? Quantifiably big: Little Things apparently lost 75% of its organic traffic. Revenues and profit took a corresponding plunge. Yes, tech can obviously disrupt tech too. That’s the beauty of being the platform as opposed to be ON a platform.

In the company’s words,

“Unfortunately, as we were receiving those offers a full on catastrophic update to Facebook's algorithm took effect. The prioritization of friends/family content over publishers was the last straw. Our organic traffic (the highest margin business), and influencer traffic were cut by over 75%. No previous algorithm update ever came close to this level of decimation. The position it put us in was beyond dire. The businesses looking to acquire LittleThings got spooked and promptly exited the sale process, leaving us in jeopardy of our bank debt covenants and ultimately bringing an expedited end to our incredible story.”

Ouch. Like we said, media is hard.

P.S. Have we mentioned that you can become a Member and help PETITION avoid this fate?

3. WeWork (Long Free-wheeling Sex, Flowing Beer, Unicorns and Idyllic Pastures).

Yes, we’re obsessed. And how can you not be with #longform pieces like this on the company. Choice bit,

“‘Adam’s explanation for the valuation of WeWork speaks for itself,’ said Chris Kelly, co-founder and president of Convene, a company that offers flexible event spaces and is backed by major real estate firms. ‘This is not an Excel spreadsheet calculation. He believes there’s an energy behind the brand, and he’s gotten people to invest at that valuation. He has not tried to explain it in traditional financial terms.’

Indeed, to assess WeWork by conventional metrics is to miss the point, according to Mr. Neumann. WeWork isn’t really a real estate company. It’s a state of consciousness, he argues, a generation of interconnected emotionally intelligent entrepreneurs. And Mr. Neumann, with his combination of inspiration of chutzpah, wants to transform not just the way we work and live, but the very world we live in.”

A state of consciousness. A state of effing consciousness. Being a biglaw associate is also a state of consciousness but that doesn’t necessarily mind-port you to partner after 8 years, let alone 12.

Wait, more pixie dust - this time from The Atlantic:

“Whether that’s a $20 billion business, however, is a matter of contention. Companies specializing in shared office space have come before. As The Wall Street Journal noted this fall, the office-leasing company IWG manages five times the square footage but has about one-eight the market value. Even Adam Neumann, a co-founder of WeWork and its CEO, admits that his company is overvalued, if you’re looking merely at desks leased or rents collected. ‘No one is investing in a co-working company worth $20 billion. That doesn’t exist.’ he told Forbes in 2017. ‘Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.'“

We’re sure bankers all across the world will be happy to add “energy and spirituality analysis” to the lineup of valuation methodologies like precedent transaction, comparable company and discounted cash flow analyses. What the bloody hell.

But, wait, back to the New York Times:

“If more strangers are colliding by the grapefruit water, the thinking goes, they are more likely to meet up and invest in one another’s socially responsible start-ups, and then the world will be a better place.”

Hahaha. What?!?! We were in New York last week and collided with a lot of strangers on the subway and, suffice it to say, no deals were cut and, as some dude danced on a pole, nearly kicked Nancy in the face, and a dodging Jonny spilled over into the lap of a homeless dude, the world seemed like a pretty sh*tty place. But maybe that’s because the subway car we were in didn’t have retail, free IPAs, or J.Crew threads.* Now that we mention it, maybe it should. Like the Amtrak cafe car. Brilliant.

Anyway, finally, this is obviously not investment advice (clearly, of a private company), but this:

* As for J.Crew, the WeWork partnership may actually be a great move towards injecting some life into the sleepy brand.

Ponder This

By: Ted Gavin, Managing Director & Founding Partner of Gavin/Solmonese

It’s not new information that Gibson Brands, famed maker of guitars, is struggling. And some of the coverage in last week’s PETITION sheds light on why. When Justin Bieber is the only current superstar artist of note that one points to that uses Gibson gear, that’s not a good sign for a brand built on traditional rock star names like Jimmy Page and Slash. Not that they don’t build great guitars – they do, I own several of them. But their problem isn’t aging guys holding on to their musical tendencies. Their problem is that the primary feeder of the market for guitar makers – which is new guitarists – is evaporating.

For the last decade or more, the notion of the rock star front man has all but disappeared. Today’s popular music – like it or not – is more vested in the singer and producer than the musicians. The musicians may be session pros called in for backing tracks on the recording and maybe the tour; or the music may be samples added in production and taken on tour in the form of a digital file. None of this creates the inspiration for people to find a way to pick up a guitar and learn to do that thing that the guitarist in the band they love does on every song. Once Eric Clapton and Buddy Guy are gone, there are no more Eric Claptons and Buddy Guys to influence the next three generations of hopeful guitar buyers. The Allman Brothers band isn’t the same draw it used to be, and neither is Ace Frehley. Dave Grohl plays Gibson – I have one of his guitars (which is what 1,116,000 American Express Rewards points will buy you). It’s a fantastic instrument and it’s become my primary stage instrument. But not a lot of people are going to buy a $7,000 guitar (for example, I didn’t – hence the AMEX points). John Mayer is perhaps the most well-known mass market virtuoso guitarist-performer today. He plays Fender.

Speaking of Fender, they’re geniuses. They knew they had to make it easier to attract millennials to the instrument, so they created an online lesson system that fits into every learning stereotype of what millennials want. I’ve been a musician my entire life – you generally aspire to play what your teacher plays, and that creates lifelong loyalty. Loyalty entirely unlike what Gibson’s foray into electronic equipment created (hint: if it created loyalty, it was to someone else’s equipment). Gibson makes more than guitars, but nobody’s making bank on the mandolin market. A week ago, I had a beer with a guitarist bankruptcy lawyer friend and we couldn’t remember if Gibson actually made basses. As it turns out, they do (thank you, handy Internet) – but we couldn’t remember anyone who plays one.

And there’s the problem. Gibson is doomed because their market has gone away and they haven’t done the things they need to do to invent a new market pipeline. They say that kids come out of the womb wanting Oreos – that’s great news for Nabisco, but that’s not how it is with musical instruments. If you want a market, you have to constantly create new buyers. Gibson’s efforts in that regard have been ... *sigh* … off-key.

(New!) Resource Recommendations

It was clear from our survey results that people are hungry for a$$-kicking resources on the topics of restructuring, tech, finance, and disruption. We went ahead and started compiling a "reading list," of sorts for your benefit. You can find it here. This will be a growing/evolving list. Our latest addition is Conspiracy: Peter Thiel, Hulk Hogan, Gawker, and the Anatomy of Intrigue.”

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