💥Special Edition: Forever 81. Million.💥
Coronavirus, TUES, Agtech BK, Forever 21 & More
|Feb 10|| 21|
With President’s Day this weekend, we’re front-loading some content and going off our typical schedule this week. Plus, we want to play around with a few things. So, thanks in advance for indulging us.
One major heads up: we’re coming up on the two-year anniversary of introducing our paid content. To those of you who are already paid Members, we couldn’t be more appreciative of the support you’ve given us. Thank you.
That said, we’re raising our prices effective our anniversary date: February 22, 2020. If you like what we do but haven’t become a Member yet, now is the time. If you like what we do and haven’t broached the topic of a group Membership with the powers-that-be at your firm yet, now is the time. If you want to stop ceding an advantage to your friends at dinner parties, your peers at networking events, and your competitors, now is the time. Besides, free-riding is so 2017. Folks pay for content now, peoples. 👍
🔥Forever 21 Gets a Landlord Bailout🔥
The bid deadline in the Forever 21 Inc. bankruptcy cases has come and gone and, well, the stalking horse bidders — a consortium between Simon Property Group Inc. ($SPG), Brookfield Property Partners LP and Authentic Brands Group LLC — won the day. The debtors filed a “notice of suspended auction” on Sunday that says it all:
The headline purchase price figure therefore remains $81mm for the distressed retailer (though, counting liabilities like costs to cure defaults, etc., the bankers assert the total deal is worth approximately $290mm). As indicated in the image above, the hearing to approve the sale is set for Tuesday, February 11 at 9am in the Delaware bankruptcy court.
This is not a good result for suppliers who claim they’re owed approximately $347mm, many of whom objected to the bid procedures and proposed sale. While they ultimately wrestled a small concession from the debtors/purchasers on the proposed break-up fee, they were otherwise shut out. Now, even that concession is worthless.
These vendors need to realize: virtually all of these retailers who file for bankruptcy are administratively insolvent on day 1. Forever 21 was supposed to be different. It wasn’t.
Indeed, in December, Bloomberg reported that the debtors were underperforming heading into the holiday season; that exit financing avenues were foreclosing; and that all hopes of a reorganization via its filed plan were going out the window. Indeed, we later learned that the debtors were in default under their DIP credit facility (heads up, academics). All of this precipitated the pivot to a quick sale.
Take a look at the debtors’ operating performance and it’s easier to understand the lender skittishness and strategic pivot. On October 15, 2019, the debtors filed their 13-week DIP budget wherein they projected $722.3mm in total receipts from the petition date through December 21, 2019. Actual receipts, however, totaled only $705.3mm through January 4, 2020. For the math challenged, that’s a $17mm underperformance against budget — EVEN WITH THE BENEFIT OF AN ADDITIONAL TWO WEEKS THAT SUBSUMED THE CRITICAL HOLIDAY SHOPPING PERIOD. This is yet another case where projections didn’t comport with reality: while the projections showed steadily increasing weekly receipts throughout the holiday period, the reality is that people simply didn’t shop at Forever 21 as much as anticipated. Despite millions upon millions of professional fees, this is still a business very much in need of an actual “turnaround” to survive (PETITION Note: the fees reflected below, for the most part, only cover the cases through the end of October).* The high fees further necessitated a quick sale.
SPG and ABG clearly think they are best positioned to ride out an option here. The purchase price is cheap, and there are other benefits that only, as landlord, SPG can derive (i.e., continued rent, full boxes, less in-line tenant risk, etc.). We’ve seen this movie before and it was called Aeropostale.
Here’s what SPG CEO David Simon had to say last week about Aeropostale:
…our cash investment in Aero OpCo was approximately $25 million. We have already received $13 million of distributions, so I have $12 million of cash invested in Aero OpCo. At the time we bought it, it was producing a negative EBITDA of $100 million and had over 500 stores. Today, today, we expect Aero OpCo to produce EBITDA pre-royalty from 575 stores of approximately $80 million of EBITDA.
We believe Aero is approximately, if you put a market multiple on it $350 million today and our ownership is 50%. 12 to three -- to 50% of $350 million. That's the math.
This was a private equity deal, complete with dividends. Only, unlike private equity firms, SPG has a residual interest in maintaining the AERO enterprise as its success directly contributes to the success of its other tenants. This is PE+.
Of course, SPG also has an investment in ABG. Here’s what Simon said about that:
Now with respect to ABG we invested -- we made a recent investment in it. So we have a total of 600 -- or sorry $67 million in ABG, Authentic Brands Group. At the time of our original investment, which was roughly $33 million, ABG produced EBITDA of approximately $150 million. Today our value is worth $190 million of our $67 million and ABG is expected to produce EBITDA well north of $350 million and the value is growing every day.
This means that, indirectly, SPG also owns Barney’s New York and Nine West, among other brands that have wound their way into bankruptcy courts near you.
With respect to Forever 21, he added:
…we have recently participated with Brookfield and Authentic Brands Group on behalf of the NewCo, SPAR Group, F21, LLC in a stocking horse bid for certain assets and liabilities in a going concern transaction under Section 363 of the Bankruptcy Code. Our Group's successful turnaround of Aero after climbing out of bankruptcy in 2016 gives us confidence with our ability to do the same with Forever 21.
Forever 21 is a storied and well -- widely recognized brand with over $2 billion in global sales. We believe F21 similar to Aero presents a very interesting repositioning opportunity. If the transaction is consummated the newco contemplates the continued operations of many of Forever 21 stores and e-commerce business and maintaining many jobs.
Our interest in the new venture will be approximately 50%. The aggregate purchase price -- acquisition price is approximately $81 million, plus the assumption of certain ongoing operating liabilities.
Again, this is a private equity deal. He continued:
We would not have done Aero and we're -- and we would not be attempting to do Forever 21 for the sole purpose of maintaining our rent. And that's the biggest misnomer out there when I read various publications and analyst notes and media notes. We do it -- we make these investments for the sole purpose of we think there's a return on investment.
Now the fact of the matter is we did all this that Aero and the reality is they kept paying us rent. So that's like -- that's obviously beneficial and I don't want to understate that but that's not why we do it. At the same time with F21, we do think there is a business there, but it's got to be turned around. And I'm not going to project today to you what those numbers are, but we've got our work ahead of us.
But if we are successful in turning around, we will make money at F21 and we'll get paid our rent.
It’s interesting. SPG is beta-testing, in real time, becoming a retail-focused venture and private equity firm. If retail continues to get decimated, we’ll see the extent of their ability to scoop up brands/businesses on the cheap. It seems safe to presume that its portfolio will be larger in a few years than it is now.
*Which is not to say that good work hasn’t been done. As we noted on Twitter here, the debtors, with the help of their advisors, closed 102 stores (creating $91mm of rent relief), reduced operational costs of $100mm, and sold two warehouses for $37mm (the proceeds of which were used to pay down a portion of the DIP credit facility).
Still — and we write this knowing we harp on professional fees a lot — the DIP budget line-itemed $25.1mm for professional fees in the first 13 weeks of the case. According to the most recent operating report, the debtors are already at $11.97mm and that’s really only accounting for the end of October. Query whether 7+ weeks of work topped the budgeted delta of $13.13mm? 🤔
Quick Bit: Tuesday Morning Corporation ($TUES)
Quick coverage of this Dallas-based off-price retailer because, well, it’s performing like dogsh*t. The company reported Q2 ‘20 numbers last week. They. Were. Not. Good.
Nope. Like, not at all. Here are some highlights:
A 4.1% decrease in net sales YOY driven primarily by a 3% decrease in comp store sales;
A 3.7% decrease in the size of the average ticket, offset only somewhat by a 0.7% increase in customer transactions (read: more people buying less stuff — not exactly a testament to inventory quality);
Declining gross margin (down 1.9%);
Operating income down $5.2mm for the Q and $6.3mm for the 1H of fiscal ‘20;
Cash is burning, down $6.5mm from June 2019.
The company blamed this piss poor performance on the shortened holiday calendar (how predictable) and uber-competition within that period that resulted in heavy promotions.
The good news is that the company’s rent expense and exposure is decreasing. It has 175 leases coming due in the next 12 months which means it will likely have significant leverage with those landlords. Year-over-year, it reduced its footprint by 15 stores (down to 705 locations as of year end) and intends to close an additional 16 stores.
Considering the above, this is more a lease story than a bankruptcy story. The company has no maturities prior to 2024 and has significant room under its $180mm revolving credit facility ($91.4mm of availability). Still, this thing needs its performance to turn around or it will be dancing with several other distressed retailers soon enough.
📉Charts of the Week📈
As you can see ⬇️, oil and gas bankruptcies picked up again in 2019 versus 2018. Thus far in 2020, only two sizable oil and gas bankruptcies are in the bag: McDermott International Inc. and Southland Royalty Company LLC.
Here’s the thing, the coronavirus may not be impacting debt and equity markets much (which, frankly, is a bit astounding), but it is affecting various commodities. “Like what?” you ask? Well, broheim, in case you couldn’t tell from the contextual clues, we’re referring to oil.* Here is a chart of brent crude for the last month, beginning roughly around the time talk of the virus took off:
Over the last month, the price of brent crude has fallen approximately $14 or 15%. Chinese-stimulus notwithstanding, there are critical questions that remain about the effect the virus will have on oil demand/volume. Nobody knows how long the virus will be an issue, adding duration uncertainty into the mix as well.** If things don’t subside soon, get ready to see “coronavirus” listed in a debtor First Day Declaration coming to a bankruptcy court near you.
*Other issues at play here include (a) a crazy warm winter (remember that recent 70 degree day?) and (b) OPEC+’s hesitation to do anything on the supply-side.
😬Coronavirus Strikes (Long Supply Chain Disruption)😬
Ok folks, this is weird. Mere minutes after editing the preceding segment last night (Sunday), the coronavirus infected its first set of bankruptcy papers.
New Jersey-based Valeritas Holdings Inc. ($VLRX) and three affiliates (the “debtors”) filed for bankruptcy on Sunday night — interrupting our admiration for Brad Pitt and Eminem (random) — to effectuate a sale of its Chinese-manufactured insulin delivery device (V-Go) and associates assets to Zealand Pharma A/S ($ZEAL) for $23mm in cash plus the assumption of certain liabilities.
On the surface, there’s not much new here: most of these biotech cases follow the same pattern. The debtors get to a certain stage of development and then run out of cash and try to find a strategic partner. Except, here, the debtors also ran into a manufacturing issue. Consequently, they had to halt product delivery and take time to identify and solve for the issue, suffering a $3.5mm inventory write-off in the process. All of this scared away any potential buyers.
This is where the coronavirus comes in. Per the company:
Notwithstanding the Company’s quick response to address the manufacturing yield issue, it could not resurrect the Out of Court Process. Moreover, the yield issue unfortunately coincided with certain external factors impacting production. The CMO and the Company’s other manufacturers and suppliers in China are closed for the Lunar New Year (Chinese New Year) celebrations, which took place this year between January 27, 2020 through February 3, 2020, which was extended through February 9, 2020 by the Chinese government due to the coronavirus epidemic in China.
Additionally, many Chinese businesses, including the Company’s CMO, employ rural workers and, as a result, may experience production capability issues due to the uncertainty surrounding when these rural employees will return to work. All of the foregoing unanticipated delays further strained the Company’s balance sheet and truncated its financial runway, although, due to careful planning, it generally has not impacted the Company’s ability to make V-Go® available to the majority of patients to date. Specifically, these delays have impacted new production, retesting of existing V-Go® kits, and the packaging and shipping of finished goods to the United States.
Oooof. Talk about bad timing. Query whether this depressed the purchase price. 🤔
So, there you have it folks: our first coronavirus mention in US-based bankruptcy papers. We reckon it won’t be the last.
Comments are open to EVERYONE!! Feel free to post comments, ask questions or call us morons. Whatever does it for you, people. See ⬇️.
🌿Some CBD Sure Could Make Bankruptcy More Bearable🌿
Cannabis companies may not have access to federal bankruptcy courts but vertically-integrated agtech companies that develop federally-legal hemp-derived cannabinoid products like CBD sure do. 👍 Introducing debtor GenCanna Global USA Inc!
Now, we know what you’re thinking: CBD is all the rage, everyone is talking about it, everyone — even Nana — is using it, and everyone is infusing it in their products, so how the hell could an “industry pioneer” in the space end up in bankruptcy court?!? Sh*t. We have a whole bin of it in the corner of our WeWork office, just under where the beer used to be. In fact, we collectively drank some and rubbed some all over our bodies in a team building exercise just prior to righting and editting this peace so that’s a very fair question.
The companies troubles include:
An inability to find a strategic partner or find a banker — in the age of WeWork — that would carry the company through a capital-raising IPO.
Consummate a transaction with a public-traded strategic with a hyper-inflated stock price of its own (callback to the epic rise of weed stock values) prior to reality set in.
A fire at a production facility. How ironic.
A contract dispute with a contractor working on a new hemp processing facility. How trite.
An inability to find proper “financial leadership.” Apparently, the lenders were unimpressed with the company’s chosen CFO and then required the retention of Huron Consulting Group which then led to the sh*tcanning of the CFO which then led to that CFO claiming that there was fraud on the books which then led to an investigation which then concluded that it was all just “psyche, I’m just a sore loser” and….damn this CBD feels good. How could there be drama like this when everyone has this sh*t tingling all over their body?
Fights with farmers who didn’t get their fixed payments after the company’s sales did not materialize as projected. Ah, projections.
A price collapse. Per the company, “Beginning in the summer of 2019, pricing in the industry plummeted across all CBD product categories. By the end of the year and through today, bulk product prices in nearly all categories have dropped by as much as 80%. This dramatic plunge in pricing also correlated to the large drop in the public capital markets for cannabis companies in both the US and Canada.” Apparently the fact that this sh*t is easy to produce and popped everywhere in basically 1.2 seconds is not good for pricing. Who knew?
A lack of regulatory clarity about the status of hemp-derived products has delayed investment and development of products.
The latter two points are critical. Per Barron’s:
Many farmers planted hemp last year, hoping for some of the bonanza predicted for the newly legal, nonintoxicating variety of cannabis that yields the soothing stuff called CBD. But demand didn't materialize, and the price fell 30% from December to January, say researchers at New Leaf Data Services. "[L]arge volumes of biomass remain unsold," notes a New Leaf's Hemp Benchmarks report, "suggesting that further price erosion is possible."
Even Mitch McConnell was a big CBD supporter — hoping that CBD revenue would replace declining tobacco revenues.
Boosters believed that CBD products would fill supermarkets, drugstores, and mass merchandisers. Fashionistas would wear hemp threads.
But there were trouble signs:
The likes of PepsiCo and Walmart haven't committed to CBD-laced products. The Food and Drug Administration says it can't permit the biologically active ingredient in food and drink without safety tests. Health regulators in states like California are also keeping it off shelves.
CBD may become hot again. But for now, Hemp Benchmarks reports that only a fraction of the acreage licensed to grow hemp was harvested in 2019, yet a glut still resulted. As the new planting season approaches, farmers should be buying seeds and starter plants. But seed prices are lower than they were in October.
Of course, the biggest trouble was probably the involuntary chapter 11 petition filed against the company by three creditors. But, in the spirit of making lemonade, the company will take advantage of the opportunity to convert the company to a voluntary 11 and use the benefit of the automatic stay obtain some much-needed liquidity in the form of a $10mm DIP credit facility and figure out a path forward.
In every newsletter we invite our community to call us morons if they see fit. This past week, a few of you took us up on our offer.
In response to Sunday’s Members’-only briefing entitled, “💥FUBAR'D Franchisees Abound💥,” a couple of you highlighted for us the distinction between MCAs and factoring agreements. Apparently, we were too cavalier and we conflated the concepts. We wrote:
A factoring counter-party offers upfront cash payments for future receivables.
This is actually incorrect. This describes a “merchant cash advance” which, to be fair, is what the debtors we described called it and we simply dropped the pass. One reader wrote us:
MCA is a bit different than a factor in that they buy future receivables . A factor purchases current. MCA is way more expensive and usually death knell
And indeed it was in the situation we described. Thanks for writing in.
In response to our Members’-only briefing entitled “💥ESG is a BFD💥,” one reader wrote us:
The “new normal” is in front of us and is supported by, not in lieu of, fundamental economics (see the levelized cost of energy report published by Lazard). Not to sound dramatic, but there will simply not be any larger disruption than the fundamental shift in the energy landscape that is happening right now.
Adaptation at this stage is simply a matter of how fast folks all along the value chain (consumers, utilities, corporates, investors, etc.) pivot to the new reality. Naturally, their respective inflection points, as well as their intentions, will not always be aligned.
One reader wrote in seeking our help and since we drew a blank, we figured we’d throw this out to the PETITION community and see if anyone had any ideas:
I was wondering if your team could suggest a PE-related (preferably upper MM/large-cap buyout) newsletter that offers the same level of detail/research that Petition does? I am looking for in-depth analysis of a few select transactions as you guys do, as opposed to a daily recap of buyout activity.
Anyone aware of anything?
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
The folks over at Seaport Global Holdings LLC and Gordian Group LLC on the creation of their new joint venture, Seaport Gordian Energy LLC, which will focus on combining restructuring and energy-focused investment banking specialties.
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