This is Why No One Should Bail Out the “Smart Money” Stuck in Brick-and-Mortar Retailers: Let them Shed their Own Tears, by Wolf Richter

Private equity often boils down to legalized theft. Here’s Wolf Richter with a crime report from retailing, on

The toxic Safeway-Albertsons combo is waiting in the wings.

Late yesterday, Fairway Group Holdings, parent of Fairway Market – an “iconic New York food retailer,” as it calls itself, that had started out as a “veggie stand” in 1933 and now lists 18 stores on its website – crumpled under a pile of debt and filed for a prepackaged Chapter 11 bankruptcy. Almost exactly three years after its IPO!

Bankruptcy rumors have been swirling for a while. The company announced in February that it would need to raise capital in order to keep its doors open. April 15, Bloomberg reported that the company was negotiating a debt restructuring with its creditors, and that a deal was near for a prepackaged Chapter 11 filing.

When the company did file yesterday, it stated that it wanted to “eliminate” $140 million senior secured debt. In return, these creditors would get common equity and $84 million of new debt of the reorganized company.

All of the currently outstanding shares will be cancelled. Screw those who’d bought them. They should have known better. That was the message.

It was no surprise, except perhaps for the penny-stock jockeys dabbling in its shares: today, FWM plunged 62%, from 21 cents a share to 8 cents a share. They’ll plunge 100% from here to zero.

As in so many cases when investors get wiped out, there’s a private-equity angle to it.

In 2007, private equity firm Sterling Investment Partners purchased an 80% stake in the privately held company, loaded it up with debt, stripped out assets, and pushed it into a big expansion drive to make it look pretty for an IPO down the road.

This was one of many retailers taken over by PE firms. Among the bigger ones:

Safeway and Albertsons, now under one PE hat, postponed its IPO, pending better market conditions; Neiman Marcus scrapped its IPO; Sports Authority just went bankrupt; Aeropostale is preparing for bankruptcy; Vestis Retail Group, owner of Eastern Mountain Sports, Bob’s Stores, and Sport Chalet just went bankrupt; Pacific Sunwear of California just went bankrupt; The Container Store IPOed in 2013 at $18 a share, first trade at $36, now at $6.60; J. Crew Group, 99 Cents Only Stores, Bon-Ton Stores, Claire Stores, and many more.

In April 2013, when Fairway had 12 stores, it was time for Sterling Investment Partners to exit. So they dumped the shares via an IPO into the laps of the unsuspecting public and conniving institutional investors with the usual Wall Street hoopla.

To continue reading: This is Why No One Should Bail Out the “Smart Money” Stuck in Brick-and-Mortar Retailers: Let them Shed their Own Tears

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