👦An Unprecedented Win for Toys' Employees?👦

Toys R Us & Amazon's Minimum Wage Efforts

Disruption from the Vantage Point of the Disrupted
Freemium Briefing - 10/3/18
Read Time = 7.14 a$$-kicking minutes
Twitter: @petition
Website: petition.substack.com

🗞News of the Week (2 Reads)🗞

1. Follow the Money (Short PE; Long Activist LPs).

In “🎆Lehman + Blockbuster = Anniversary Fever🎆,” we wrote:

Speaking of Toys R Us, the aggrieved employees are impressively relentless. They’re now going after the New Jersey State Investment Council in an effort to persuade it to reconsider its limited partner relationship with hedge fund Solus Alternative Asset Management. As Lester Freamon once prophetically said, “follow the money and you don’t know where the f*ck its gonna take you.” Someone seems to be taking that advice to heart.

The pressure on the “money” seems to be paying off.

Last Friday, The Wall Street Journal reported:

The private-equity owners of Toys “R” Us Inc. are putting together a $20 million fund to make payments to thousands of former employees left jobless by the retailer’s liquidation, according to people familiar with the matter.

The fund’s creation by Bain Capital and KKR & Co. is an unusual move by private-equity owners of a bankrupt company. It isn’t required under bankruptcy law and has no ties to the bankruptcy process, the people said. The funding will be provided by the buyout firms’ general partners, they added.

The Minnesota State Board of Investment had temporarily suspended commitments to KKR on account of this fiasco. The New Jersey State Investment Council continues to communicate with Solus — one of the major lenders involved who apparently precipitated the liquidation — about the situation. Even Anthony Scaramucci — the “Mooch,” himself — is (allegedly) putting on the pressure (the Mooch’s investment vehicle, Skybridge Capital, is a fund of funds that is invested in Solus).

Follow the money indeed.

Blowback from LPs looks like it is resulting in a significant push for something that is not only legally unnecessary but can set some puzzling precedent. Pitchbook writes:

Setting up this type of mea culpa fund would be a highly unusual move for a private equity industry that typically aims to maximize profits at all costs. But KKR and Bain Capital both received significant blowback from both the public and LPs after Toys R Us suffered a swift demise following a disastrous holiday sales season. 

AxiosDan Primack adds:

Other private equity firms might not like to hear it, but this is creating industry precedent. Not for bankrupt portfolio companies, but for ones that also get liquidated.

If this actually happens we’ll have been dead wrong with our previously published skepticism about it. Spoiler alert: we’re a bit cynical. But the devil will be in the details as we’re sure that, LP pressure notwithstanding, the investment vehicles will want to make sure that this is messaged and set up in such a way that it has little to no precedential value. Not exactly sure how that happens but it will be interesting to see whether collective action campaigns target private equity owned debtors in the future.

Of course, note that the funds (like Solus) that are largely accused of opting for liquidation rather than reorganization haven’t committed to any distributions. Yet.


Meanwhile, it appears that the Toys R Us brand isn’t entirely dead.

Late on Monday, Bloomberg reported that Toys R Us’ lenders intend to hold on to the company’s intellectual property with the hope of potentially investing in new retail operating businesses and leveraging the brand. Accordingly, the bankruptcy court cancelled an auction of the intellectual property. Bloomberg wrote:

Maintaining the brands under a new independent U.S. business was the best option with respect to the recovery of the Toys “R” Us estate, as well as the benefit of other indirect and direct stakeholders, according to the filing. “The qualified bids were not reasonably likely to yield a superior alternative.”

They might want to get that giraffe back.


Speaking of following the money, it’s always interesting to view things on a relative basis. A day after Toys R Us cancelled the intellectual property auction, its counsel, Kirkland & Ellis LLP filed its third interim fee application covering services rendered during the time period of April 1 through June 30. In summary:

Let’s do some arithmetic shall we? The fees apps span roughly a 10 month period. $41.2mm of fees and expenses during the first two periods plus a new ask of $13.6mm for the third period equals approximately $55mm in fees and expenses over the course of the Toys R Us bankruptcy. Said another way, that’s roughly $5.5mm of burn per month.

We’re not publishing this as an incrimination of lawyers. Toys was (and is) a complex, nuanced case with international operations, a large capital structure, and multiple constituencies with different theses and motives all ready to do combat with one another. The lawyers, no doubt, deserve to get paid for navigating all of that.

But sometimes nuance gets lost in a story like this. When David Brandon and other members of management abscond with millions of dollars of bonuses pre-petition and the lawyers and other professionals stand to make tens of millions of dollars post-petition (nevermind what Kirkland was paid pre-petition), it’s a bit telling that employees are lucky to get access to an unprecedented $20mm fund. The juxtaposition is stark.

THIS is precisely why people are getting more and more angry around the country.


And activism (anger?) is increasingly becoming a headwind to businesses. Last week, Smith & Wesson, much like Sturm Ruger earlier this year, lost a long fight with The Interfaith Center on Corporate Responsibility — a group of 300 religious investors, including nuns — on a gun safety resolution. The Center’s proposal called on American Outdoor Brands, Smith & Wesson’s parent company to (i) compile a report on whether there’s more its subsidiary can do to adequately address its products and gun violence and (ii) show evidence that it is examining ways to reduce violence. Given the extent of their holdings, it is believed that behemoth asset managers BlackRock and Vanguard also supported the resolution.

Barron’s adds:

Still, it’s not just nuns and not just guns. Also this week, finance and government leaders, including the CEO of French banking giant BNP Paribas and the treasurer of the state of California announced a “tobacco-free finance pledge” to consider “the adoption of tobacco-free finance policies across lending, insurance, and investment,” with the goal of reducing deaths related to tobacco.

Other potential flash points include alcohol, fast food, drug makers fueling the opioid epidemic, and chemical manufacturers whose products may cause cancer—it’s not clear where this ends. Because morality is, to a point, subjective, arguments for corporate responsibility abound.

We’re excited for the First Day Declaration that lists nuns as one of the factors that contributed to an eventual bankruptcy. 😜

2. Amazon Effectively Tells the Libs to Get Bent (Long Margin Compression).

On Sunday in "❄️Winter is Coming for Grocers❄️," we noted how grocers are scratching and clawing to evolve and sustain. Food sellers from Walmart Inc. ($WMT) to Aldi are experimenting with delivery, curbside pickup, and meal kits in an effort to go "omnichannel" and survive. This experimentation, however, requires investment and investment tends to affect the bottom line.

Another thing that affects the bottom line is labor costs and Amazon Inc. ($AMZN) just tossed another concrete barrier in front of the competition.

On Monday, Amazon announced that it was raising the minimum wage of all of its full-time, part-time, temporary and agency-placed workers to $15/hour. This initiative includes WholeFoods. While these employees will still make less than, say, Port Authority employees at La Guardia Airport come 2023 (PETITION query: is NYC f*cked?), this is still a big move.

It is also sneaky AF. This exchange between Bernie Sanders and Jeff Bezos is telling:

Um, okay, Bernie. Ever hear of a thing called “the Trojan Horse?”

Of course Bezos hopes “others will join in.” Margins are already compressed for Amazon’s (WholeFoods’) competition and this will no doubt compress them further. Amazon makes no mistake about trying to crush the competition. This will also make it harder for the competition to hire if they don't follow suit. Walmart and Target Inc. ($TGT) thought they were heroes with their previous minimum wage increases. Now those moves are peanuts.

Um, Mr. Barlett, you mean “increase Amazon’s competitive advantage” but the point is well taken.

In this piece, John Larson argues that grocers need to focus on customer service. In the absence of matching Amazon’s increase, good luck with that. Amazon will get all of the best candidates. This move benefits Amazon and Bezos knows it. Make no mistake about that.

Amusing. But this probably isn’t all too funny to those trying to compete with Bezos and Amazon.

😎Notice of Appearance😎

This week we welcome a Notice of Appearance by Evan Hengel, a Managing Director in the sunny Los Angeles office of Berkeley Research Group LLC. We edited the dialogue lightly for content and length. Enjoy.

PETITION: You're located in the entertainment capital of the world. What is your assessment of distress in TMT today? What may we expect in the next 6-9 months?

Looking at the local LA entertainment scene (to address the broader TMT market would require more space), further studio consolidation (e.g. Disney/21st Century Fox) could put the next tier of industry participants in a tough position, as they’ve already struggled to adapt to a theatrical release schedule that is organized around fewer tentpoles. That said, with the number of new expensive series (I hesitate to call it TV) being green lit, concerns of a “content bubble” in the near term are probably overblown, as the appetite for that content appears to remain insatiable, even if it’s shifting from theaters to the home. The more interesting story may be the role of tax incentives in the geography of movie/TV production. Other states are obviously hungry for a piece of the industry (hello, Georgia and Louisiana), and foreign countries have not been shy either (a 32% tax rebate may have played a role in the decision to shoot The Last Jedi in Ireland, for example). The recent renewal of California’s own tax credit program will help slow the exodus of work, but there’s no denying the trend toward industry decentralization.

PETITION: Unbeknownst to many, LA has one of the top tech ecosystems in the country now. We write a lot about "#BustedTech" in PETITION. As an operational advisor, what is one piece of advice you'd give early stage startups to ensure that they're setting themselves up for operational success down the road? 

I’d advise early stage founders to do everything possible to keep more cash than you think you need. As we also see on the other side of disruption, horrific business decisions are often made not out of incompetence, but rather due to a lack of liquidity/options. Trying to negotiate bridge financing between rounds is tough to do when the people on the other side of the table know you’re low on alternatives, and it’s near impossible to make the right long-term strategic decisions/investments when you’re worried about making payroll next week. Also, hire people who are good at what you aren’t. A spitting image of yourself may grab your attention (we’re all prone to vanity) but won’t add new skills to your company.

PETITION: Your firm tends to do a lot in retail. What is one thing that retail management teams continue to get wrong despite all of the hyper-focus on the area today? 

One thing we often still see is a failure to amend merchandising plans to reflect realistic expectations of traffic and conversion. The effect of the resulting glut of inventory is both immediate and long term…margins deteriorating as excess goods are then shoved through discount channels, which in turn hurts the long-term perception of the brand in consumers’ eyes (nobody wants to see their prized $750 jacket being sold at an off-price retailer next week for 60 percent less). Committing to a lean purchasing plan is difficult, as it often requires you to admit that tough times loom ahead, but the risk of not doing so is immense. Being realistic about demand (and the brick-and-mortar footprint needed to meet that demand) will be a key differentiating factor in who will survive the current period of disruption intact. Those who can hold back meaningful allocations of certain products at the distribution center to assess where it should be deployed at maximum margin get bonus points for reducing discount-dependency to clear inventory, but the road to get there has a lot of potholes.

PETITION: What is the best book you’ve read that’s helped guide you in your career?

Reading The Lords of Strategy by Walter Kiechel gave me a helpful sense of history regarding the consulting world. It’s easy to step in to this field and think of it as relatively static, but when you go back in time, it’s actually changed fairly quickly relative to other professional disciplines. The types of work that consultants were engaged in during a given decade are often unrecognizable when compared to the decade prior. Shining that light on restructuring advisory specifically (a fairly minor subset of the larger community), becoming an expert at 13-week cash forecasts and lease rejection analyses may keep you around in the immediate future, but long-term success will be enjoyed by those who push boundaries and identify what executive teams and stakeholders really want from their advisors that they aren’t already getting (and may not even know that they want yet).


We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. In addition to Evan’s recommendation above, we’ve also added Oaktree Capital Management’s Howard Marks’ new book, “Mastering the Market Cycle.” A great number of you enjoyed Mr. Marks’ investor letter, which we linked to last week. The book ought to be great.

💰New Opportunities💰

Young Conaway seeks motivated junior-level attorneys with approximately one to three years of transferable experience to join its Bankruptcy and Restructuring Practice Group.  Associates will work closely with firm attorneys, co-counsel, and clients to provide guidance, advice, and litigation support in both in- and out-of-court complex corporate restructurings.  Delaware bar admission is preferred, but candidates willing to take the 2019 Delaware Bar Exam will also be considered.  Interested applicants should submit their cover letter, resume, undergraduate and law school transcripts, and a writing sample to Margaret Whiteman Greecher, Director of Recruiting and Associate Development, at mgreecher@ycst.com.

PETITION is looking for a unicorn who wants to help build something from scratch. We are a revenue generating startup with a lot of vision for what comes next. If you have a background in finance, law, or consulting and want to be a utility player helping us build out our content, sales/marketing infrastructure, partnerships, ops, and whatever else we conjure up in our big domes, ping us. All inquiries will be handled on a strictly confidentialbasis. Preference will be given to MEMBERS. How else can you be educated about what we’re doing and how we’re doing it if you’re only seeing part of the picture?!

If your firm has job opportunities, please email us at petition@petition11.com.

Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.