The hits keep on coming for NSO Group. We wrote about NSO back on November 14th, indicating that the Biden administration had placed the Israel-based cyber intelligence company on the āEntity Listā ā effectively labeling the company toxic and blacklisting it. Consequently, the companyās term loan had quite a negative reaction trading down to the low 80s. Itās downward trajectory didnāt stop there as it subsequently dropped to the low 70s:
Things may get a bit worse.
On Tuesday, Apple Inc. ($AAPL) announced that it initiated a lawsuit against NSO, seeking to stop NSO from deploying its Pegasus spyware to attack Apple devices. Per Apple:
Appleās legal complaint provides new information on NSO Groupās FORCEDENTRY, an exploit for a now-patched vulnerability previously used to break into a victimās Apple device and install the latest version of NSO Groupās spyware product, Pegasus. The exploit was originally identified by the Citizen Lab, a research group at the University of Toronto.
The spyware was used to attack a small number of Apple users worldwide with dangerous malware and spyware. Appleās lawsuit seeks to ban NSO Group from further harming individuals by using Appleās products and services. The lawsuit also seeks redress for NSO Groupās flagrant violations of US federal and state law, arising out of its efforts to target and attack Apple and its users.
NSO Group and its clients devote the immense resources and capabilities of nation-states to conduct highly targeted cyberattacks, allowing them to access the microphone, camera, and other sensitive data on Apple and Android devices. To deliver FORCEDENTRY to Apple devices, attackers created Apple IDs to send malicious data to a victimās device ā allowing NSO Group or its clients to deliver and install Pegasus spyware without a victimās knowledge. (emphasis added)
In plain English, this means that Apple is seeking an injunction against NSO to stop it from deploying its spyware to attack Apple devices. More importantly for NSOās financials is the fact that Apple is also seeking āredressā which could create a multi-million dollar liability for NSO. A previous lawsuit initiated by Facebook Inc. ($FB) alleging that NSO targeted Whatsapp users was recently granted permission to proceed by a U.S. Appeals Court. Awwww, itās so heart-warming to see Facebook and Apple on the same side for once: in only took a malicious spyware thatās been alleged to have fallen into the wrong hands and used for purposes of murdering journalists to create this hugs-and-kisses atmosphere. So quaint. š
In our previous coverage, we wrote regarding the term loan maturity:
2025 is far away but this thing seems to be riddled with refinancing risk.
Back in May, Moodyās downgraded the corporate family rating to B3 from B2 with a negative outlook; it feared, even before these developments, that the company risked breaching a maintenance covenant in the credit agreement. Surely that negativity is reinforced now and weāre guessing another downgrade is on its way. (emphasis in original)
Weāre gonna double down on those sentiments.
š»A Viable Business Model Ghosted Casper Inc.š»
On November 15, 2021, Casper Sleep Inc. ($CSPR) announced it would be taken private by Durational Capital Management LP for $6.90 per share in cash. On our math, including Casperās $67mm of short- and long-term debt, that equates to an all-in purchase price of close to $310mm. Press releases indicate the offer price ādelivers (a) substantial 94% premium to the November 12th closing share price.ā
Weāre sure long-term shareholders are juuuuust thrilled with this so-called āpremiumā after Casperās horrific share price performance since IPO:
A Barronās article skewered managementās attempts at a victory lap:
Just before going public in February 2020,Ā Casper SleepĀ touted a $432 billion āglobal sleep economyā growing at a compound annual growth rate of 6.3%. āSleep has entered the global wellness equation,ā the mattress company said.
The equation didnāt compute. This past Monday, Casper agreed to a buyout from private-equity firm Durational Capital Management for $6.90 a share. Thatās nearly double Casperās recent stock price and the deal news sent the shares soaring 88%, finishing the week at $6.55. But itās far from a win for Casper shareholders.
In February 2020, Casper priced its initial public offering at $12 a share. Agreeing to a buyout at less than half the IPO value is a major disappointment for the mattress company, which helped pioneer a whole category of direct-to-consumer businesses. While the IPO market has thrived in recent years, the Casper deal is a reminder that economics usually win out. And Casperās were challenged, to say the least. (emphasis added)
We dug into Casperās financials to figure out exactly why the equation didnāt compute. Hereās the breakdown:
Revenue has been growing and operating losses are declining, but neither metric has moved quickly enough to offset Casperās significant cash burn. While Casper finally printed its first quarter of positive operating free cash flow, gross margins have been negatively impacted by COVID-induced supply chain issues. Per Casperās Q3 2021 10Q:
āDuring the third quarter of 2021, we continued to experience increased upstream supply chain disruptions due to industry-wide components and raw materials constraints critical to mattress production, extensive labor shortages and shipping constraints resulting, in part, from the ongoing COVID-19 pandemic, as well as the lingering effects of severe weather in the southern region of the United States in the first quarter of 2021, among other factors. As a result of the aforementioned upstream supply chain disruptions, during the third quarter of 2021, we experienced and continue to experience increased delivery times for certain of our products and constraints on our ability to meet demand from certain of our retail partners and in our direct-to-consumer channel, as well as higher costs of goods sold with respect to certain of our products.ā (emphasis added)
To mitigate these impacts, Casper claims to be ādiversifying and expanding (the) supplier base,ā āincreas(ing) stock inventory,ā renegotiating ācertain logistics costsā and implementing āprice increases across certain product lines.ā
Clearly, supply chain is top of mind for any consumer retail business. Weāve been mentioning supply chain issues for months and while there are signs that port congestion is abating, thereās not much any company can do aside from physically unloading the equipment themselves. We canāt blame Casper, then, for supply chain challenges. What we do take issue with is how Casperās business model has not been able to evolve into a sustainable, cash flowing business.
Casper offers mattresses at an attractive entry price of $350 up to $3,295 in a try-first, pay later model where customers can demo their mattresses with a 100-night, risk-free trial. Delivery is free. The brand is well-known. But is Casper a viable business? Web Smith and Hilary Milnes of 2PM say it isnāt:
āA one-time unicorn, Casper is now trading at a valuation of $210 million (Eight Sleep just raised at a $500 million valuation). As TechCrunch reported, a DTC founder anonymously speculated that the Apple iOS 14.5 update, which cracked down on appsā ability to track user data without permission, has cut Casperās marketing returns and customer acquisition off at the knees. This anon is inaccurate at best, Casper's problems are more likely to be attributed to three separate issues: i) Lack of vision from the executive ranks ii) Poor supply chain strategy, iii) A history of high SG&Aā (emphasis added)
2PMās Casper writeup drew a comparison to Purple Innovation Inc. ($PRPL):
We updated 2PMās side-by-side analysis to include the latest info. The comparison is telling:
Purple has been able to generate positive Operating Income, Adjusted EBITDA and Operating Cash Flow, something Casper has yet to accomplish. While Purpleās management team commented in the companyās Q2 and Q3 earnings calls that it was negatively impacted by supply chain constraints, Purple has more operational breathing room to manage the inventory situation than Casper.
Perhaps the reason that Casper has not evolved into a viable business is an over-reliance on product marketing. Marketing is core to Casperās DNA: Casperās launch in 2014 coincided with an influencer campaign featuring makeup queen Kylie Jenner. Itās possible Ms. Jennerās solitary post may have created as much value for Casper as any single member of the founding team:
The Kylie Jenner post was important for Casper in two ways. First, it directly validated Casperās product to Kylieās 280mm+ Instagram followers. Second, it helped start a conversation around a category that many consumers hadnāt found exciting before. Post-Kylie, consumers suddenly cared about what brand of mattress they were sleeping on. A 2019 CNBC interview with Casper founders touched on this:
āPeople typically didnāt get overly excited about their mattresses until Casper showed up five years ago.
Casper is the online mattress startup that launched in 2014 and quickly became a social media phenomenon, with celebrities likeĀ Kylie Jenner showing off picturesĀ of their new mattresses on Instagram and YouTube influencers postingĀ āunboxingā videosĀ where they excitedly pull a new Casper mattress out of a cardboard box after it arrived on their doorsteps.
āOh my God, when Kylie Jenner posted about Casper I think it broke our website,ā says Neil Parikh, one of Caspers co-founders, about Jennerās March 2015 Instagram post, which garnered more than 870,000 likes.ā (emphasis added)
2PM interviewed Modloft CEO Neil Kusens, who suggested that this reliance on marketing isnāt just important to the company, itās the defining feature. Per 2PM:
āPurple (PRPL) is now trading at a $1.5 billion market cap with mid-teens adjusted EBITDA. Simply put, Purple is run with the correct vision and strategy required to navigate this current climate of manufacturing shortages, logistics costs, and erratic demand generation. According to Kusens, "Casper is just a marketing company, Purple is vertically integrated. That's the model that you want this day and age." New sleep darling Eight Sleep more resembles Purple than Casper in strategy, in this respect.
And Casperās cost structure issues are compounded by high SG&A and distracted, ineffective management. 2PM continues:
āAs far as DTC categories go, mattresses have been oversaturated and despite Casperās early dominance, new players have made clear that differentiated product and good internal management are moatsā¦itās not the industry to blame.Ā Casperās bed-in-a-box specifically was commoditized, while itās internal management was messy (this is Milnes being kind, here). SG&A has always been high, profitability was not a priority until it got to be too late, and as spectators have noticed:Ā executives have gotten distractedĀ by running SPACs. There is quite a difference between a good brand and a fundamentally sound retailer, here'sĀ hoping that Casper finds a way to achieve both. (emphasis added)
Unfortunately, Casper never could figure it out on its own.
As part of Durationalās buyout transaction, CEO Phillip Krim will vacate the top job and Emilie Arel will step in. Ms. Arel is a familiar name in distressed retail land, having served as the CEO of Quidsi, an Amazon company with 10 online brands including Diapers.com and Soap.com, as well as FULLBEAUTY Brands, a plus-size apparel company. Mr. Arel oversaw FULLBEAUTY through its debt restructuring. Which is certainly the direction Casper was headed if not for its rescue buyout. Interestingly enough, Casperās auditors slapped going concern language on the latest 10Q. The reason? Casper states that even when factoring in the Durational buyout, it needs to cut costs to avoid having to raise incremental capital to fund operations. Per the Q3 2021 10Q:
āThe Company will require additional liquidity to continue its operations over the next twelve months. In addition to securing additional capital pursuant to the Bridge Loan and entering into the proposed transaction with Durational Capital Management LP, the Company is focused on identifying operational improvements and related cost savings and will work to implement any identified savingsĀ inĀ 2022.Ā TheĀ also [sic]CompanyĀ intendsĀ toĀ raiseĀ additionalĀ fundsĀ byĀ wayĀ ofĀ refinancingĀ itsĀ debtĀ orĀ throughĀ privateĀ orĀ publicĀ offerings,Ā ifĀ theĀ completionĀ ofĀ theĀ proposedĀ transactionĀ with Durational Capital Management LP is not successful. While the Company believes in the viability of its strategy to generate sufficient revenue, reduce costs and in its ability to raise additional funds, there can be no assurances that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. The ability of the Company to continue as a going concern is dependent upon the Companyās ability to further implement its business plan and generate sufficient revenue and its ability to obtain additional financing.ā (emphasis added)
Itās not only the auditors who are expressing some doubt about Casperās path forward. The credit markets are too. Bridge lenders to the Durational buyout are extracting a pound of flesh. The $30mm bridge loan contains the following terms:
Interest rate of Prime + 6.75% per annum;
A one-time, upfront facility fee equal to 1.00% of the funded amount ($300k);
An end of term fee equal to 10.0% of the funded amount ($3mm); and
A success fee of
(x) $150k if the merger closes on or before January 15, 2022 and
(y) $300k if the merger closes after January 15, 2022.
If the Merger doesnāt close āon or before March 15, 2022ā lenders are entitled to equity warrants with coverage equal to 40% of the outstanding amount, at a strike price equal to the 5-day trading price average for the period ending on March 15, 2022. Needless to say, this is an extremely juicy rescue financing package.
The market has been absolutely punishing some of the frothiest consumer internet and technology businesses over the past few weeks. With private equity dry powder at all-time records, we wouldnāt be surprised to see more of these ācapitulation buyoutsā take place.
š Winners & Losers of the (Mid)Week š
Winners
1. Authentic Brands Group (Long Jamie Salter).
Back in July, we wrote a very enthusiastic synopsis of Authentic Brands Groupās proposed IPO, highlighting, on the financial side, impressive revenue, margins, operating income and adjusted EBITDA figures and, on the operating side, how the company has some interesting ideas on how to leverage their (growing) collection of brands and position them for growth in an ever-evolving market. We were, frankly, stoked to see this one go public ā especially since ABG has been an active force in bankruptcy courts over the last several years. Apparently others shared that enthusiasm.
This week the company announced that it would not, in fact, go public; rather, CVC Capital Partners and HPS Investment Partners wrote some hefty checks to obviate the need for IPO dollars and acquire minority stakes at a $12.7b valuation (PETITION Note: Mr. Salter pounded his chest, saying that he was sure the company could fetch a higher valuation by going public but his strong preference was to stay private). Axios subsequently reported that the investment size was $3.5b on pro forma EBITDA of $745mm. We did a double-take when we saw that figure. Adjusted EBITDA in 2020 was $373.3.mm.
2. Lowenstein Sandler LLP. Not sure weāve seen this before:
Click through and youāll find a pithy 1:55-long explainer on the recent make-whole ruling in the Mallinckrodt case. It bogs down a bit at the end but otherwise quickly gets you up to speed on the recent 3rd Circuit ruling. Maybe firms have been doing this for a long time ā that is, leveraging alternative distribution mechanisms to get their expertise out there ā and weāve just missed it. Or we didnāt miss it and law firms are finally going where their (potential and current) clients are: online. On YouTube. And Twitter. Whatās next? An explainer of make-whole precedent while conducting a TikTok dance challenge? As weāve said before, after the events in this yearās markets, nothing surprises us anymore. Anyway, points for creativity.
3. Jerome POW-ell. For obvious reasons. More importantly for restructuring professionals is what the proposed re-appointment of Mr. POW-ell by President Biden means for us. You can never know for sure but just a few short months ago, the market seemed to be of the view that there was a minimal chance of interest rate hikes by June 2022. Like, less than 10%. Now, though, the market seems to think thereās a greater than 75% chance. The question for all of us is how many times and how high.
Losers
1. Nordstrom Inc. ($JWN)(Short āthe Department Stores are Backā Narrative?). Hereās the good news: the department store chain beat analyst estimates for Q321 on the top line with $3.64b versus $3.55b expected. The bad news is (i) this also reflects a poor comp against Q319, where revenue was $3.67b, (ii) Nordstrom Rack sales were down 8% against ā19, and (iii) earnings per share came in $0.17 lower than expected as the bottom line got crushed by higher labor costs:
Finally, despite Macyās Inc. ($M) and Kohlās Corp. ($KSS) raising guidance, Nordstrom reaffirmed its previous outlook. The stock fell off a cliff after-hours:
2. White Plains Commercial Real Estate. Back in March 2020 in āš„Long Office Demand in White Plainsš„,ā we wrote how, in the context of Internap Technology Solutions Inc. ($INAP), venue was a frikken joke in bankruptcy ā and that was before venue became controversial in the Purdue Pharma case:
One more thing on this one: venue is appropriate in the Southern District of New York because one of the debtorsā principal place of business is in midtown New York City and another is downtown. This case is in White Plains, though, and the debtorsā justification for that is a bank account and a lease at 50 Main Street, Suite 1000, White Plains NY 10606. Which, we have to say, is complete and utter bullsh*t. Apparently this one building just coincidentally happens to be home to every debtor with a fast-tracked prepackaged chapter 11. Deluxe Entertainment Services Group Inc.? Yup, a tenant at 50 Main Street. Suite 1014. Sungard Availability Services LP? You bet. A tenant at 50 Main Street. Suite 1014. Curious how that works. FULLBEAUTY Brands Inc.? Mmm hmm. A tenant at 50 Main Street. Suite 1000. We suppose FULLBEAUTY moved out after consummating its plan and, conveniently, another company that just happened to file for bankruptcy a year later just happened to move in afterwards. This sh*t isnāt even slick, people. š
Well, it looks like you can kiss this nonsense goodbye. Per Bloomberg:
The Southern District of New York, one of the most sought-after bankruptcy venues, will randomly assign its judges to large Chapter 11 cases that are worth at least $100 million, regardless of which of its courthouses first received the initial filing.
The new rule on āmegaā Chapter 11 cases, which goes into effect Dec. 1, will result in a āmore balanced utilization of judicial resources,ā the U.S. Bankruptcy Court for the Southern District of New York said Monday.
As a result of the new rule, an SDNY judge whoās assigned to a case may preside over it in a courthouse where he or she isnāt usually assigned.
This means thereāll no longer be a guarantee that youāll get the one sitting White Plains judge or the one sitting Poughkeepsie judge just because you rent out an empty office and plop $5 into a bank account. It was good while it lasted, we sāpose.
š„Tweet of the (Mid)Weekš„
This is all totally normal:
š„Video of the Weekš„
Ummmmā¦š¤
š¤Noticeš¤
Scott Bowling (Partner) joined Baker Botts LLP from Weil Gotshal & Manges LLP.
šCongratulations to:š
Aziz Abdul on his promotion to Counsel at Weil Gotshal & Manges LLP.
Clifford Carlson on his promotion to Counsel at Weil Gotshal & Manges LLP.
David J. Cohen on his promotion to Partner at Weil Gotshal & Manges LLP.
Debra McElligott Sinclair on her promotion to Partner at Willkie Farr & Gallagher LLP.
Harriet Fielding on her promotion to Counsel at Weil Gotshal & Manges LLP.
Jamie Netznik on her promotion to Partner at Mayer Brown.
Jenny Davidson on her promotion to Partner at Weil Gotshal & Manges LLP.
Lauren Tauro on her promotion to Counsel at Weil Gotshal & Manges LLP
Tyler Ferguson on his promotion to Partner at Mayer Brown.
šResourcesš
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption.Ā š„You can find it hereš„.
š°New Opportunitiesš°
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Greenhill is seeking an experienced associate to join its Restructuring & Financing Advisory team in New York.Ā The position offers qualified individuals the opportunity to assume significant responsibilities on both restructuring and financing matters, and provides a unique opportunity to work closely with clients and experienced senior professionals.Ā For more information, please visitĀ hereĀ to apply online, or submit your resume via email toĀ thomas.mccarthy@greenhill.com
PETITION is making two (paid) internship slots available for the Fall semester. Weāre looking for entrepreneurial, commercial, creative and, frankly, not too ācorporateā MBA or Law school students to work with us and help take us to the next level. Primary responsibilities include (i) research and writing and (ii) ownership of some new strategic and creative initiatives. We want to try some new sh*t ā even if that means failing. Current paying subscribers will get first look (logically, paying subscribers have a much better sense of what we write about and what we stand for).Ā Email us at petition@petition11.com and write āPETITION Internā in the subject line.
ToneyKorf Partners is recruiting talented, experienced, and driven people for ourĀ Vice PresidentĀ andĀ Senior AssociateĀ levels. If you are interested in a culture that focuses on making a difference in people's lives, colleagues who know and care for each other, and clients who appreciate our commitment and passion for their businesses, then ToneyKorf Partners would like to hear from you. ToneyKorf Partners is a results-driven management and advisory firm specializing in helping healthcare organizations address complex and critical challenges. For more information, please visit here or contact us at Careers@ToneyKorf.com.
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