Few white knights emerge for bankrupt retailers
Reuters, Thursday January 22 2009 By Emily Chasan
NEW YORK, Jan 22 (Reuters) - Faced with declining consumer spending, hamstrung credit markets and the worst holiday season in years, troubled U.S. retailers are desperately searching for white knights to rescue them.
But after a long-rumored suitor abandoned a deal for bankrupt electronics chain Circuit City Stores Inc this month, retailers are facing the harsh reality that they are unlikely to find buyers for their companies -- even in bankruptcy court.
"For retailers, bankruptcy is like a roach motel -- they can go in, but they won't come out," said Evan Flaschen, chair of the Financial Restructuring Group at Bracewell & Giuliani LLP. "There are very few people buying these businesses in order to reorganize them. The people who want to buy them now are the ones most realistic about the liquidation value," Flaschen said.
While retailers like Federated, Macy's and Kmart were able to reorganize or sell themselves in bankruptcy in decades past, recent attempts to sell bankrupt retailers at auctions have met financing difficulties, wavering buyers, uncertain economic conditions and weak support from critical suppliers.
Deals to rescue retailers Goody's Family Clothing, Steve & Barry's and Tweeter ended in liquidation after a second trip to bankruptcy court. And even the buyers of Boscov's Inc -- one of the only major retailers to successfully sell itself in Chapter 11 last year -- struggled to line up financing in the days before the deal closed.
Deals to buy bankrupt retailers are proposed but rarely consummated, restructuring experts say.
"We're seeing a lot more situations where the deals are getting hung when they generally could have been done if there was a little more liquidity in the market," said Sheila Smith, head of reorganization services for Deloitte Financial Advisory Services LLP. "The banks are guarding their cash and are not willing to finance the deals, and the funds don't want to sell off portfolio holdings in a down market to finance deals."
UNCOMPLETED CIRCUIT
The four days of negotiations last week to try to sell Circuit City illustrate the difficulties potential buyers face in proving they could continue operating a retailer if they were to buy it out of bankruptcy.
Facing a deadline from lenders to come up with a plan, Circuit City conducted simultaneous auctions for liquidators, and for potential buyers who wanted to keep the chain going.
Circuit City's sales had plummeted over the holiday shopping season, and it was nearly in default on its debtor-in-possession bankruptcy loan.
But Circuit City thought it had a white knight.
When the company filed for bankruptcy protection in November, Mexican billionaire Carlos Salinas Pliego emerged almost immediately as a potential rescuer for the retailer, buying up a 28 percent stake in the company.
He had negotiated with the company almost from the beginning, lawyers said at a Circuit City bankruptcy court hearing last week. In the week before the auction, the Salinas group and another bidder, private equity firm Golden Gate Capital, had traveled to the Consumer Electronics Show in Las Vegas to try to gain support from trade vendors for their bids, the lawyers said.
At the auction, attempts to sell the 567-store chain as a whole failed, so Circuit City tried to piece together deals for a Salinas-run chain of about 350 stores, then reduced that block to a potential 180-store chain in the Northeast. But neither deal worked out.
Golden Gate said it would keep the chain operating but did not offer Circuit City's unsecured creditors much beyond a stake in the new company -- something they viewed as inferior to liquidation, Jeffrey Pomerantz, the lawyer for Circuit City's creditors' committee, said at the hearing.
Pomerantz said at the hearing that the creditors' committee had never received firm commitments for financing that would have shown that Salinas could have completed a deal. Trade vendors, who were already smarting from Circuit City's sales decline, could not extend more credit to the company without such assurances, he said.
Salinas would have needed firmer commitments from some of the vendors on Circuit City's creditors' committee to get that financing, Gregg Galardi, a lawyer representing Circuit City, said at the hearing, noting it was a "chicken and egg" problem.
"In this economy, the vendors have to evaluate a potential new owner's financing, or they could find themselves in the same position as if the company was never sold," said Scott Blakeley, an attorney at Blakeley & Blakeley who represents trade creditors.
EXIT AT THE BEGINNING
Circuit City's problems are not unique. Other retailers have faced similar problems, as consumer demand has dropped and the 2005 bankruptcy reforms have forced retailers to decide faster which stores they want to keep operating.
Just a handful of retail companies have actually emerged from bankruptcy this year. Cookie seller Mrs. Field's Famous Brands emerged from bankruptcy successfully last year, but it went in with a prepackaged bankruptcy plan that already had the support of key stakeholders.
Department store chain Boscov's Inc was bought out of bankruptcy by a family-led group, but only after a previously announced deal with Versa Capital had fallen apart due to troubles with financing, the company said in court papers this month.
As more retailers consider filing for bankruptcy this year, they will likely need a firm exit plan in hand, or face liquidation, Bracewell & Giuliani's Flaschen said.
"The ones that are going to come out are the ones that have the luxury of planning it ahead of time with their lenders," Flaschen said. (Reporting by Emily Chasan, editing by Gerald E. McCormick)
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