|Feb 5|| 16|
🍎Grocers, Grocers, Grossers. Part II.🍎
North Carolina-based Earth Fare Inc. is the latest grocer to descend into the Delaware bankruptcy courts, closing a horrific stretch for the grocery space in which multiple chains — including Fairway Market and Lucky’s Market — capitulated into chapter 11.
Signs were out there. On January 26th, we noted that the chain was quietly closing locations, a clear indication of trouble and precursor to bankruptcy. Subsequently, The Wall Street Journal reported that the grocer had begun closing approximately 50 stores. The thing is: it only has about 50 stores (across 10 states) so that effectively signaled that the company was kaput. Twenty minutes later, the company confirmed as much, issuing a press release that it would liquidate inventory at all of its stores and pursue a sale of its assets. Whatever those may be. Fixtures anyone? 3,000 people appear poised to lose their jobs. It’s brutal out there, folks. But at least sumo mandarins are back, bringing all new meaning to “get them before they’re gone.”
Earth Fare is owned by Oak Hill Capital Partners III LP (72.1%) and MCP Heirloom LLC (18.76%), an ironic name given that there isn’t expected to be much left of this sucker going forward. Which means that we all should suspect yet another onslaught of “Private Equity Kills X” pieces in the media because, like, those have been all the rage lately. See, e.g., The New York Times and Payless, and Slate and Fairway.
So what’s the story? Well, for starters, you know you’ve got a dumpster fire on your hands when the company’s first day declaration to be entered into evidence in support of the filing is a whopping 18 pages long. Clearly the expectations here aren’t particularly high. Which we suppose is right: the company spent a considerable amount of time trying to bail out this hot mess to no avail. Why bother with extra verbiage?
So, what’s the deal? Similar to Lucky’s Market Parent Company LLC, it appears that the company took on too much debt and expanded too much, too soon, in too many uber-competitive locales. Ah, private equity. Consequently, it has approximately $76.8mm of funded debt including a revolving credit facility held by Fifth Third Bank and Wells Fargo Bank NA and a term loan with a mysterious “Prepetition Term Loan Lender” that the company was apparently fearful of identifying by name in its papers for, uh, like, some reason. 🤔 Like, as if, uh, we won’t find out who the sucker is who dumped $14.8mm into this horror show a mere 6 months ago. In addition to the funded debt, the company owes $60mm in trade and other unsecured obligations. Let’s all pour one out for the grocery supply chain: it’s been a brutal few weeks. 🍺
The company blames its failure on a now-standard lineup of excuses that include (i) crazy amounts of competition, (ii) significant capex, and (iii) too much debt.
Competition? You don’t say. We had hardly noticed the mass proliferation of grocery options. The Charlotte Observer reported that “[t]he number of grocery stores in the [Charlotte] metro area has grown by 38% in five years,” a real head-turner of a stat. GroceryDive added:
“They made some strategic mistakes expanding too far into some non-continuous markets,” Burt Flickinger, managing director of Strategic Resources Group in New York, told Grocery Dive. He said Earth Fare’s key markets “were some of the most over-stored on the Eastern seaboard.”
They also note that the pain is pervasive:
Given their large size and market overlap with Earth Fare and Lucky’s, Sprouts and Whole Foods appear to be the main beneficiaries of this round of specialty store closures, sources said. But these chains certainly don’t have it easy. Whole Foods has not returned to profitable growth under Amazon, according to that company’s quarterly earnings reports, while Sprouts’ stock has dropped with the news from Lucky’s and Earth Fare.
“It’s an unforgiving market out there,” Flickinger said.
Didn’t we already say that? ⬆️
Anyway, back to that debt. The company has been in a perpetual state of amend-and-extend since 2017 when, in May of that year, it secured an amendment/extension of its revolving loan maturity to April 2019. Those private equity bros who are sure to get bashed put $10mm of equity capital into the company at that point. Then in August 2018, the company entered into another amendment pushing out its maturity. In connection therewith, those private equity bros who are sure to get bashed put another $9mm of equity capital into the company. Another extension followed in April 2019 in which those private equity bros who are sure to get bashed put another $5mm of equity capital into the company.
Meanwhile, the company’s efforts to refinance its debt and/or sell stalled badly. It sold 5 underperforming stores but the rest of the company’s assets/inventory will be the responsibility of Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC to sell; the sale of its locations the responsibility of A&G Realty Partners LLC; and the sale of the company’s IP, the responsibility of Hilco Streambank. This mandate is raining liquidators!! Toss in legal, a financial advisor and a strategic communications advisor and the question is: is there anyone left to hire to wind down this company? We would apply but we’re too busy ordering our groceries on Amazon Inc. ($AMZN).
💥Disrupted: Another Manufacturer Files for Bankruptcy (Long ESG)💥
Kansas-based (like, real Kansas-based, as in not in Missouri) API Americas Inc. and its affiliate API (USA) Holdings Limited (the “debtors”) filed for bankruptcy in the District of Delaware.* The debtors manufacture foils, laminates, and holographic materials; they provide (i) packaging to companies in the premium drinks, confectionery, tobacco, perfume, personal care, cosmetics, and healthcare sectors and (ii) laminated paper and board products to end users focused on fine spirits, tobacco, confectionary and beauty brands. They have facilities in both Kansas and Indiana.
They have also become the latest victims of disruption.** The debtors note:
The Debtors have suffered from operating losses over the last couple of years, arising out of three main factors. First, the Debtors have experienced a significant drop in demand for their products, due to unfavorable market dynamics and a shift toward more environmentally sustainable products. In large part, the drop in demand is due to tobacco customers shifting to lower cost, alternative packaging and a substantial portion of the US market moving from merchant to captive.
Given the recent push towards ESG, we suspect we’ll see more debtors note “a shift towards more environmentally sustainable”-everything as a significant headwind. Indeed, McKinsey & Company issued a recent report entitled, “The drive toward sustainability in packaging — beyond the quick wins.” McKinsey noted:
Sustainability—particularly regulatory and public concerns around single-use packaging waste—is combining with other powerful trends to drive major changes in consumer packaging. Regulators are moving on the issue, and Fast-Moving Consumer Goods (FMCG) companies and retailers are proactively making bold commitments to improve both the sustainability of their packaging and to fundamentally rethink their packaging systems.
There will be significant impact on packaging converters and their value chain, which could threaten the survival of many in the industry. However, for packaging converters with the right focus and innovation capabilities, the new landscape could offer significant growth and new partnership opportunities to support customers in revising their packaging portfolios. Going forward, converters will have to proactively embrace sustainability issues as consumer demands and regulatory requirements multiply.
Interestingly, the debtors also note that operating losses are also the result of competitive pressure stemming from overcapacity in the industry. In other words, the demand side is decreasing while the supply-side seems robust. Which competitors of the debtors will follow into bankruptcy as a result? Time to start looking at whose those players might be. 😎👍
We’ve been commenting here at PETITION that the consumer has been carrying the US economy for months now as certain major manufacturing and services indices had(?), in contrast to increasing consumer confidence and spending numbers,*** been reflecting negative warning signs about the state of the economy.**** Interestingly, the debtors highlight:
…the manufacturing sector in general has faced economic headwinds in recent months. On January 10, 2020, the New York Times reported that the Institute of Supply Management’s manufacturing index for December 2019 reflected the fastest rate of contraction since June 2009.
We repeat: which competitor companies will follow the debtors into bankruptcy as a result? 🤔
The debtors have $44.4mm outstanding under its ‘17 $700mm revolving credit facility with PNC Bank NA. With the consent of PNC, they’ll use cash collateral to fund the cases.
So what now? Well, it’s a bit unclear. The papers give no indication of a trajectory for the cases but an attempted sale looks likely. That said, it doesn’t appear like a banker had been engaged at the time of filing.
*Ultimate parent API Group Limited entered administration proceedings in the UK on 1/31/20.
**The debtors cite other specific reasons for its financial distress including poor integration/consolidation of facilities and capex required after the acquisition of one of its plants. These issues cost the debtors $11mm over since 2016.
***Recent consumer confidence numbers continue to be positive.
**** Of course, different surveys generally reflect mixed messaging on this front. For instance, the Fed manufacturing index showed some positive signs. And then, on Monday, the Institute for Supply Management’s purchasing manager’s index (PMI) showed a sharp increase from 47.8% to 50.9%. Readings above 50% are generally a positive signal.
Please note that one of our favorite events is coming up: the 16th Annual Wharton Restructuring and Distressed Investing Conference is on February 21st at The Plaza Hotel in NYC. The Conference offers a great learning and networking opportunity for industry professionals and those interested in investment banking, operational/ turnaround consulting, and private equity and hedge fund investing.
Howard Marks (Co-Founder of Oaktree Capital), Mark Brodsky (Founder of Aurelius Capital), and Judge Shelley Chapman (Southern District of New York) will keynote. There will also be a variety of different panel discussions. Tickets are available here and more information here.
We are pleased to announce that the winners of our drawing for the two free admissions we had go to: Kishan Patel, an investment banker at Ducera Partners LLC and Jeffrey Liu a Senior Manager at Topgolf. Guys — email us at firstname.lastname@example.org and we’ll connect you to the Wharton folks.
To those of you who lost out, don’t worry: here is a discount code for the conference: PETiTiON2020WrDiC. Cheers.
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
Alex Boerema (Manager) joined CR3 Partners (Chicago) from Aurora Management Partners.
Bryan Kotliar (Partner) joined Katten Muchin Rosenman LLP (New York) from Skadden Arps Slate Meagher & Flom LLP.
Cade Kennedy (Director) joined CR3 Partners (Dallas) from Deloitte.
Christian Champ (Managing Director) joined First Eagle Investment Management (Chicago) from THL Credit.
David Bitterman (Managing Director) joined SierraConstellation Partners from Huron Consulting and will open a firm presence in New York.
David Hurst (Partner) joined McDermott Will & Emery (Delaware) from Cole Schotz PC.
Robert Hirsh (Partner) joined Lowenstein Sandler LLP (New York) from Arent Fox LLP.
Sean Cunningham (Partner) joined CR3 Partners (New York) from Conway MacKenzie Inc.
Andrew Carty on his promotion to Partner at Brown Rudnick LLP.
Ben Browne, Kate McGlynn and Patrick Widmaier on their promotion to Managing Director at AlixPartners.
David Tiffany on his promotion to Partner at CR3 Partners.
Layne Deutscher on his promotion to Manager at CR3 Partners.
Neil Gupta on his promotion to Managing Director at SSG Capital Advisors.
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