Tag Archives: private equity

Retail’s Existential Threat? Private Equity Firms, by John McNellis

What private equity firms do to companies they buy is often nothing short of criminal. From John McNellis at wolfstreet.com:

A “bust out” is a fraud tactic used in the organized crime world wherein a business’s assets and lines of credit are exploited and exhausted to the point of bankruptcy — Wikipedia.

Bleeding badly, Debenhams, a 200 year old British department store chain, died last week. The coroner trotted out the usual suspects — the internet, the oversupply of retail, rising rents, tighter margins and, at the end of the dreary line-up, private equity. As it happens, Debenhams had been purchased by a private equity consortium led by Texas Pacific Group (TPG) in 2003.

That group paid £1.8 billion for the company, using £600 million in equity and £1.2 billion in debt it forced Debenhams to assume. The private equiteers promptly began selling off assets, dramatically cutting costs (store refurbishments dropped 77%) and awarding themselves large dividends for their efforts. And, no surprise, consumers lost interest in the fraying stores.

Since I first wrote about private equity’s looting and ultimate devastation of Mervyn’s (“On Private Equity and Real Estate” September 2012, behind paywall), retailer after retailer has been similarly gutted. Payless Shoes, Toys ‘R’ Us, Gymboree, Sears Holding, Mattress Firm and Radio Shack — all companies at one point owned or controlled by private equity firms — have since filed Chapter 11. In fact, Debtwire, a financial news service, calculates that about forty percent of all US retail bankruptcies in the last three years were private equity backed.

How do the private equiteers do it? Simple, the leveraged buyout. The LBO is the financial world’s pick and roll, that is, a highly effective play that is difficult to counter, especially if the PE firm takes the prudent first step of bribing its intended victim’s CEO into going along with their acquisition.

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The Demise of Toys ‘R’ Us Is a Warning, by Bryce Covert

There are times when private equity is legalized theft. Toy’s ‘R’ Us found out the hard way. From Bryce Covert at theatlantic.com:

REBEKKA DUNLAP

Ann Marie Reinhart was one of the first people to learn that Toys “R” Us was shuttering her store. She was supervising the closing shift at the Babies “R” Us in Durham, North Carolina, when her manager gave her the news. “I was almost speechless,” she told me recently. Twenty-nine years ago, Reinhart was a new mother buying diapers in a Toys “R” Us when she saw a now hiring sign. She applied and was offered a job on the spot. She eventually became a human-resources manager and then a store supervisor.

She stayed because the company treated her well, accommodating her schedule. She got good benefits: health insurance, a 401(k). But she noticed a difference after the private-equity firms Bain Capital and Kohlberg Kravis Roberts, along with the real-estate firm Vornado Realty Trust, took over Toys “R” Us in 2005. “It changed the dynamic of how the store ran,” she said. The company eliminated positions, loading responsibilities onto other workers. Schedules became unpredictable. Employees had to pay more for fewer benefits, Reinhart recalled. (Bain and KKR declined to comment; Vornado did not respond to requests for comment.)

Reinhart’s store closed for good on April 3. She was granted no severance—like the more than 30,000 other employees who are losing their job with the company.

In March, Toys “R” Us announced that it was liquidating all of its U.S. stores as part of its bankruptcy process, which began last September. Observers pointed to the company’s struggle to fight off new competition. In its court filing, the company laid the blame at the feet of Amazon, Walmart, and Target, saying it “could not compete” when they priced toys so low.

Less attention was paid to the albatross that Bain, KKR, and Vornado had placed around the company’s neck. Toys “R” Us had a debt load of $1.86 billion before it was bought out. Immediately after the deal, it shouldered more than $5 billion in debt. And though sales had slumped before the deal, they held relatively steady after it, even when the Great Recession hit. The company generated $11.2 billion in sales in the 12 months before the deal; in the 12 months before November 2017, it generated $11.1 billion.

In 3 Days, the Last Toys ‘R’ Us Stores Die. And PE Firms Behind it? by Wolf Richter

Why isn’t this a crime, or at least a civil wrong? Private equity firms borrow money to buy a company. They then load the company up with more debt, using the proceeds to pay themselves dividends. The private equity firms make out like bandits, but often times the debt-hobbled firms go under. Toys ‘R’ Us presents a case study. From Wolf Richter at wolfstreet.com:

They Come Under “Intense Scrutiny” by the Pension Funds that Feed Them. But this too shall pass.

For the past three mornings, Toys ‘R’ Us has tweeted the countdown of its demise:

  • On Saturday: “Only 6 Days Left! #toysrusclosingsale”
  • On Sunday: “Hurry! Only 5 Days Left! #toysrusclosingsale #toysrus #babiesrus #alwaysatrukid”
  • And on Monday: “Hurry! Only 4 Days Left! #toysrusclosingsale #babiesrus #toysrus #alwaysatrukid”

On June 29, its remaining stores in the US will close. And then it’s over of the iconic retailer — one more victory for PE firms that have plowed into retail during the leveraged buyout boom before the Financial Crisis, loaded them up with debt, and watched them collapse in what I have come to call the brick-and-mortar meltdown. Toys ‘R’ Us is just one of them.

PE firms Kohlberg Kravis Roberts (KKR), Vornado Realty Trust, and Bain Capital Partners acquired the publicly traded shares of Toys ‘R’ Us via a $6.6 billion LBO in 2005. They funded the acquisition in large part by loading up the acquired company with debt — hence “leveraged buyout.” In other words, the PE firm had little skin in the game, and over the years extracted $400 million in fees even as the retailer died.

The 33,000 employees, when it is all said and done in a few days, will be out of a job.

In a sense, the end came very rapidly, after 13 years of building up to it under the PE-firms’ iron cost-cutting fist. The meltdown started in early September when rumors emerged that Toys ‘R’ Us had hired a bankruptcy law firm. Its bonds collapsed on the spot. On September 18, the company buckled and filed for bankruptcy, assuring everyone that it would go on as a going concern. In early March, it became apparent that liquidation would be next. On March 15, the company announced it would liquidate all its operations in the US and Puerto Rico. And it began “final liquidation sales” at all its remaining Toys“R”Us and Babies“R”Us stores.

To continue reading: In 3 Days, the Last Toys ‘R’ Us Stores Die. And PE Firms Behind it?

Is PetSmart Next? by Wolf Richter

One of these days they’ll start putting people in jail for what the private equity shops do to companies. From Wolf Richter at wolfstreet.com:

Bondholders of the PE-firm-owned brick-and-mortar retailer grapple with their fate.

PetSmart, the largest brick-and-mortar pet supply and services retailer in the US and Canada, with 55,000 employees, 1,600 big-box stores, 200 pet boarding facilities, and $8.7 billion in revenues in fiscal 2017, has a little problem: $8.1 billion in debt.

And you guessed it: Half of this debt is the result of its leveraged buyout by a private equity firm. When a company gets acquired via an LBO, it is the company itself that ends up carrying the debt used to acquire it. Hence the phrase “leveraged” buyout. In 2014, “activist” hedge funds took a stake in the publicly traded shares and started clamoring for a sale. PE firms took notice. A bidding war broke out – a bidding war for a brick-and-mortar retailer, as if they’d never even heard of e-commerce!

BC Partners in London, with zero experience in US retail, won the bidding war with its ludicrous $8.7 billion offer. It was the most expensive retail LBO ever. After the deal closed in 2015, BC Partners loaded PetSmart up with debt and extracted a special dividend of $800 million. With this dividend, BC Partners likely made its money, no matter what happens to PetSmart.

And then, in a move of desperation and in a sign that the credit market was boiling over with blind enthusiasm for anything junk-rated, PetSmart borrowed another huge load of money to buy its online competitor Chewy.com for $3.4 billion. It was the most expensive acquisition of an online retailer ever.

In its last SEC filing as a publicly traded company in February 2015, PetSmart reported $343 million in cash and a mere $560 million in debt. Now it has 15 times as much debt — $8.1 billion — and some of this debt is getting into painful trouble.

No one in bond-land will easily forget the epic collapse of Toys “R” Us bonds. They were still trading above par at 101 cents on the dollar in late August 2017. By September 18, they’d plunged 88% to 12 cents on the dollar, as bankruptcy rumors for the PE-Firm owned LBO queen became reality.

When Toys “R” Us filed for Chapter 11 bankruptcy, it assured everyone it would keep doing business as normal. The bonds jumped to 40 cents on the dollar by October 27, and those who’d had the balls to dive in at 12 cents made a bundle if they were able to unload them in late October (however, with little liquidity in this kind of bond, it can be hard to unload).

To continue reading: Is PetSmart Next?

The Private Equity Firms at the Core of Brick & Mortar Retail Bankruptcies, by Wolf Richter

Private equity is often legalized theft. Here’s how it’s done, from Wolf Richter at wolfstreet.com.

An astounding list of the meltdown: PE firms doomed the retailers.

One of the big forces in the brick-and-mortar retail meltdown are private equity firms that acquired retail chains via leveraged buyouts during the LBO boom before the Financial Crisis or more recently. Numerous of those retail chains have now filed for bankruptcy.

A PE firm typically borrows to undertake the leveraged buyout. But instead of carrying the debt at the firm, the debt is loaded on the acquired company, on top of the debt it had before the buyout, and it has to service that large pile of debt.

In addition, PE firms typically extract fees and “special dividends” from their portfolio companies which will fund them with additional debt. These fees and special dividends are tools with which PE firms extract profits up front. Lenders and other creditors carry the risks.

The final goal is to unload the portfolio company by selling it either to a large corporation or to the public via an IPO within a few years (seven years is a rule of thumb).

This works ok-ish in a booming industry. But brick-and-mortar retail – particularly apparel stores, shoe stores, sporting goods stores, department stores, and the like – came under withering attack from online sales in recent years, while suffocating under their debts.

Toys ‘R’ Us shows how this was done: PE firms KKR, Vornado Realty Trust, and Bain Capital Partners acquired the publicly traded shares of Toys ‘R’ Us in an LBO in 2005. In 2004, Toys R Us had $2.2 billion in cash and short-term investments. By Q1 2017, this had collapsed to just $301 million. Over the same period, long-term debt surged from $2.3 billion to $5.2 billion.

In other words, “cash minus debt” was -$112 million in 2004. By 2017, it had ballooned to -$4.9 billion.

While the PE firms were busy extracting cash, the company, cash-strapped and focused on cost-cutting, failed to create an online presence that could compete with Amazon and others, didn’t successfully make the transition to electronic devices, video games, and apps, and let its physical stores deteriorate. It should have spent the last decade investing heavily in its future. Instead, it was forced to borrow large amounts of money just to enrich its PE-firm owners. In September last year, it filed for Chapter 11 bankruptcy.

To continue reading: The Private Equity Firms at the Core of Brick & Mortar Retail Bankruptcies

Asset-Stripping by Private Equity Firms Is Booming, by Wolf Richter

There are many ways to legally steal money, and asset-stripping ranks close to the top of the list. From Wolf Richter at wolfstreet.com:

Here are the numbers. Peak chase-for-yield by institutional investors?

Most of the brick-and-mortar retailers that have filed for bankruptcy protection to be restructured or liquidated over the past two years have been owned by private equity firms – including the most recent major casualty, Toys ‘R’ Us. Part of how PE firms make money is by stripping capital out of their portfolio companies via special dividends funded by “leveraged loans” – more on those in a moment – leaving these companies in a very precarious condition.

So just how much have PE firms paid themselves in special dividends extracted from their portfolio companies? $4.76 billion in the third quarter, bringing the year-to-date total to $15.3 billion. So the year-total for 2017 is going to be a doozie.

In all of 2016, this sort of activity – “recapitalization,” as it’s called euphemistically – amounted to $15.7 billion, up from $10.5 billion in 2015, according to LCD, of S&P Global Market Intelligence. LCD’s chart shows the quarterly totals:

“This high-profile recap activity is a sign of the times in today’s still-overheated leveraged loan market,” LCD says:

Deals such as these typically proliferate when there is excess investor demand, allowing borrowers to undertake “opportunistic” issuance, such as corporate entities refinancing debt at a cheaper rate or, here, PE firms adding debt onto portfolio companies, then paying themselves an often hefty dividend with the proceeds.

As private-equity-owned retailers that are now defaulting on their debts have shown: this type of activity where cash is stripped out of the portfolio company and replaced with borrowed money is very risky.

Leveraged loans are provided by a group of lenders to junk-rated over-indebted companies. They’re structured, arranged, and administered by one or several banks. But leveraged loans are too risky for banks to keep on their balance sheet. Instead, banks sell the structured products to loan mutual funds or ETFs so that they can be moved into retirement portfolios, or they repackage them into Collateralized Loan Obligations (CLO) to sell them to institutional investors, such as mutual-fund companies.

To continue reading: Asset-Stripping by Private Equity Firms Is Booming

Brick and Mortar Retail Meltdown Fueled by Asset Stripping. Details Emerge in Bankruptcy Courts, by Wolf Richter

American law criminalizes many productive transactions, and often legalizes theft. Case in point: private equity larceny, whereby a private equity firm buys a company, loads it with debt, has the company issue a special dividend so large it decimates the company (but makes the private equity firm whole), then at the first sign of trouble leaves the company for roadkill. From Wolf Richter at wolfstreet.com:

PE firms win again. Stiffed creditors not amused in bankruptcy court.

Nearly every retail chain caught up in the brick & mortar meltdown is an LBO queen – acquired in a leveraged buyout by a private equity firm either during the LBO boom before the Financial Crisis or in the years of ultra-cheap money following it. During a leveraged buyout, the PE firm uses little of its own capital. Much of the money needed to buy the retailer comes from debt the retailer itself has to issue to fund the buyout, which leaves the retailer highly leveraged.

The PE firm then makes the retailer issue even more junk bonds or leveraged loans to fund a special dividend back to the PE firm. Come hell or high water, the PE firm has extracted its money.

Then the PE firm charges the retailer hefty management fees on an ongoing basis.

This form of asset stripping removes cash from the retailer and leaves it struggling under a load of debt. It works wonderfully until it doesn’t – until booming online sales started eating their lunch, sending these overleveraged retailers, one after the other, into bankruptcy court, where creditors learn what it means to end up holding the bag. But they’re not amused, as we now see. But first the numbers…

Since 2010, retail chains owned by PE firms have issued $91 billion in junk bonds and leveraged loans just to raise the money for the special dividends paid to their PE owners, according to data by LCD of S&P Global Market Intelligence, cited by the Wall Street Journal. This does not include debt piled on retailers during the LBO itself. And it does not include drug stores and food retailers – such as PE-firm-owned Safeway-Albertsons, caught up in the middle of the meltdown.

To continue reading: Brick and Mortar Retail Meltdown Fueled by Asset Stripping. Details Emerge in Bankruptcy Courts