Analysis of post-bankruptcy companies yields some strategic fits and a retail survivor – Middle Market Memo - Update

08 August,2017 - 02:00 pm UTC

Debtwire Middle Market conducted research on 146 companies in North America that emerged from bankruptcy between 2014 and 2017.

 

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Strategics wound up being the most active shoppers in the market as 69 or 47% of all the cases wound up being sold wholesale or piecemeal. Private equity or distressed funds made successful runs in 37 or 25% of all the cases. The balance either wound up in liquidation or resulted in a diverse set of outcomes such as an asset sale and a liquidation. This news service covers companies with debt loads of USD 300m or below, including USD 150m or less of funded debt.

 

One of those private equity rescues was the June 2014 acquisition of niche retailer Brookstone by the Chinese conglomerate Sanpower and Chinese private equity firm Sailing Capital for USD 172m in June 2014. This would come at the precipice of what would be an ongoing wave of insolvencies for mall-oriented retailers.

 

Brookstone’s performance, post-reorganization, would also suffer out of the gate, according to current CEO Steven Goldsmith, who would join the company in March 2016. However, the retailer would also have the built-in advantage of having a Chinese conglomerate Sanpower and private equity firm Sailing Capital with a built-in retail thesis and also a newly deleveraged balance sheet. These advantages, along with Brookstone’s unique product mix, helped the business turn around from its post-petition blues.

 

“It's just not an investment, it’s a core competency. Sailing Capital is on our board and very supportive. They’re just an investor but curious about our turnaround and supportive,” added Goldsmith.

 

And having well-heeled investors is always a good end to a turnaround story. Debtwire Middle Market covers companies with debt loads of USD 300m or below, including USD 150m or less of funded debt. This news service conducted a survey of 146 companies in our universe that emerged from bankruptcy between 2014 and 2017. Strategics wound up being the most active shoppers in the market as 69, or 47% of all the cases, wound up being sold wholesale or piecemeal. Private equity or distressed funds made successful runs in 37, or 25%, of all the cases. The balance either wound up in liquidation or resulted in a diverse set of outcomes such as an asset sale and a liquidation.

 

Reading between the lines, there were obvious trends such as retailers liquidating, though in some instances, the company would survive thanks to a third party acquiring the intellectual property or a fraction of the overall real estate and restarting the chain.

 

There were a number of strategic bidders who went bargain hunting, such as Mattel buying up children’s electronics manufacturer Fuhu or Sunshine Time buying up fellow watchmaker Geneva Watch Group.

 

In one instance, former executives at cloud-based product content network provider EdgeAQ acquired the assets out of a 2014 bankruptcy, then sold it two years later to private equity firm Marlin Equity Partners.

 

One-way ticket

 

According to a study conducted by Edward I. Altman of the NYU Stern School of Business in 2014, nearly one-fifth of all US companies that exit bankruptcy as a going concern seek creditor protection again within five years, an unfortunate result of bankruptcy judges with a deeper focus on shaping an agreement rather than ensuring its feasibility.

 

“And if a company emerges while still being heavily levered, the emerged company’s debt levels could dampen the prospects of the business,” points out Randall Eisenberg, a managing director at AlixPartners.

 

In order to avoid this fate, companies emerging into a post-petition universe deal need to ensure access to capital, put together a cohesive management strategy and proper compensation plans, and ensure confidence amongst stakeholders.

 

For companies in the Debtwire Middle Market universe, though, the risks are less on leverage. The debt is illiquid and the funds that normally do credit bids will eliminate most of the debt, but reinstate some of it or secure a working capital revolver out of the gate.

 

Brookstone Ascending

 

Management was a major driver of Brookstone’s struggles prior to its bankruptcy filing. The company went through seven different CEOs and four different chairmen during the 2007-2014 period.

 

The Chinese consortium not only provided the capital it needed to turn around the company, but also the guidance and expertise necessary to understand the industry as it bought House of Fraser in England in 2014 and holds other retail companies like Nanjing Xinjikeou Department Store. It would also back its partner C.Banner’s purchase of the Hamleys toy store chain in 2015.

 

Once Goldsmith was installed as Brookstone' CEO, the company’s turnaround hinged on reducing its storefront footprint and finding strategies to compete with stores such as Target and Amazon. Brookstone was able to get concessions from landlords, as fellow bankruptcy survivor Pacific Sunwear did in order to remain in certain storefront locations.

 

Still, Brookstone also has to compete with the likes of Best Buy, which is expanding its smart-home tech section featuring products that also line Brookstone’s shelves. However, Goldsmith is optimistic that that the uniqueness of the Brookstone brand will carry the day.

 

“There is only one Brookstone,” Goldsmith recalls a principal saying of the company at a meeting renegotiating the store's lease in a mall.

 

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