Turnaround Stories in the News
· Newsweek Owner IAC Seeks a Buyer (see article): The indignities for once-dominant Newsweek, as IAC, which had merged the company with internet property Daily Beast after it was acquired for $1 and the assumption of liabilities from the Washington Post, is reportedly seeking to divest the struggling company.
· How Chris-Craft Survived the Recession and is Rebuilt as a Stronger Company (see article here): Boat builder Chris-Craft saw demand evaporate during the recession, but management succeeded in navigating the company through a difficult restructuring and has now positioned the company for a brighter future.
· Ecommerce Company Totsy liquidating after exhausting funding (see article): The ecommerce shake-out continues as Totsy, a flash sales site that raised a total of $34 million in funding, has fired substantially all staff and is winding down.
· Social Mission does not Shield Nonprofit from Painful Cuts (see article): Wrestling with a $4 million operating deficit, the American Lung Association recently announced the elimination of one third of staff positions in its New York and Washington, D.C. offices.
· Maximizing Value in a Melting Ice Cube (see article): Two academics have recently published a paper advancing an approach for maximizing creditor recovery in a 363 sale process.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Negotiation Tactics for Distressed Deals
Tom Goldblatt, Ravinia Capital
The process of negotiating a transaction is difficult, but the greatest challenge to all parties is often that of understanding one’s own biases. Over the course of an eclectic professional career that has involved considerable time as an operator, investor and advisor, I have had the rare opportunity to experience personally the views and limitations of many key stakeholder constituencies.
This experience has allowed me to refine my negotiating techniques when involved in transactions. The following are six core negotiation approaches that I have found to be invaluable.
1) Do your best to not name a target or a price first. It is surprising how many times if you can keep your target price to yourself that your negotiating opponent if given the chance will name a price better than you thought possible. If you don’t let them speak first you will never find out what they were thinking since when you give a price you have set your limits. Many times I’ve seen when I’m negotiating against another skilled negotiator we will spend a lot of time near the beginning arm wrestling trying to get the other party to give a price first. I will only do this is if I absolutely have too and this is rare.
2) Whenever you are buying a service or product always try to create a competition of at least three possible suppliers. The key to a good price is to create as much competition as possible early and keep the length of an exclusive period with any one buyer to a minimum.
3) Look for Win/Win’s. I’ve found that a lot of good opportunities for successful deals are not pursued because the principals involved in the negotiation see everything as a fixed pie. The more you get the less I get. Actually, the pie is not fixed and if you can use creativity and learn and think hard about the other side’s objectives you will find many times when you can both win.
4) Know “Everything” about your side’s strengths and weaknesses early in a negotiation. Understanding any and all negative factors in advance can allow time to properly shape an explanation to prospective buyers. You do not want negatives to be discovered and come up when you are most vulnerable. The cost of this preparation is high, but the payback is greater.
5) Only negotiate hard on points that really matter. Ahead of time, pick out the few real important economic and legal issues that really matter to you. Do not let your lawyer control the negotiation but let him act like he wants to win each legal point but give in on most of the ones you don’t really care about. When the few issues come up you care about-make your stand.
6) Be prepared to walk. If you are not getting something you need you will only have real leverage if the other side fears you will leave.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Turnaround Stories in the News
· Manufacturers’ Big Squeeze Puts Pressure on Suppliers (see article): In a worrisome development for small and midsized suppliers, large manufacturing companies are increasingly turning to their internal staff to boost cash flow by stretching payment terms to their vendors, potentially creating a ripple effect of cash flow issues throughout their supplier ecosystems.
· Fisker Automotive Stumbles Toward Notoriety As Among the Worst VC Debacles in U.S. History (see articles here and here): Once promising company Fisker Automotive is on the verge of being purchased by an investment consortium for a reported $20 million, after having raised $1.4 billion in private and public capital since its founding in 2005.
· Caesars Entertainment Continues to Use Financial Engineering to Buy Time for Troubled Buyout (see article): With revenue down 4% and an operating loss in the past year, Caesars Entertainment, taken private at the height of the PE boom in 2006, is straining the inventiveness of owners Apollo Group and TPG.
· The Trapdoors at the Fed’s Exit (see article): Nouriel Roubini, globally renowned economist, offers his insight on the challenges ahead as the U.S. Federal Reserve looks to exit its current round of quantitative easing.
· Detroit and the Challenges of the Shrinking City (see article): Once a major metropolitan and industrial hub, Detroit’s significance lies now in the lessons it can teach us for how cities can restructure liabilities incurred at a time of broader resources and brighter prospects.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Turnaround Stories in the News
· Bankrupt Videogame Company THQ completes sale of Intellectual Property (see articles here and here): Following the January rejection by a bankruptcy court judge of an expedited sale process deemed insufficient to ensure the maximum recovery to creditors, THQ has filed motions to approve the sale of its intellectual property to three separate bidders.
· Battle Heats Up Over Fate of Troubled Energy Buyout (see article): Energy Future Holdings, the troubled company that was taken private in a $45 billion buyout in 2007, continues to limp toward a likely bankruptcy. The company’s private equity owners face daunting odds of recovering much if any value of the more than $8 billion originally invested in the deal.
· The Real Lesson of JC Penney (see article): Obscured by the media storm over the recent firing of CEO Ron Johnson has been the central fact that JC Penney is in a strategically poor position, and there may be no easy answers.
· The Slow Demise of Time Magazine (see article): By failing to capitalize on its early investments in the internet, Time lost control of its destiny, and will soon be spun off from parent company Time Warner.
· Girl Scouts Wrestles with Financial and Organizational Challenges (see article): The storied nonprofit, best known for its cookie sale fundraisers, is faced with numerous challenges, including declining membership, the impact of an unpopular reorganization, weak local fundraising and employee pension liabilities.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Two Recent Cases Demonstrate Advantages of Section 363 of the Bankruptcy Code
Harold Israel, Goldstein & McClintock LLP
Much has been written about the advantages of liquidating a company outside of bankruptcy, whether through assignment for the benefit of creditors, a “friendly” foreclosure sale under Article 9 of the UCC or a receivership. However, purchasers of assets under such proceedings should take note of two recent decisions that highlight the benefit of purchasing assets pursuant to section 363 of the Bankruptcy Code. In both cases, the purchaser of assets sought to avoid liability as a successor entity.
In the first, Teed v. Thomas & Betts Power Solutions, L.L.C., Case Nos. 12-2440 and 12-3029 (7th Cir. Mar. 26, 2013), class action plaintiffs alleged that defendants violated the Fair Labor Standards Act by failing to pay overtime pay earned prior to the date defendants purchased the company. The company was a standalone company prior to the date seller purchased it. Following the purchase, seller compelled the company, as one of its subsidiaries, to guaranty its debt. Seller defaulted on its debt and a receiver was appointed. Receiver sold the company to defendants “free and clear of all Liabilities”. The Seventh Circuit, applying federal common law, decided that there “was no good reason to reject successor liability in this case” because imposition of successor liability would have been imposed if seller was not financially troubled. Defendants were saddled with liability for overtime pay despite purchasing the assets “free and clear” (but without the benefit of a section 363 order).
In the second case, In re Tougher Industries, Inc., Case No. 06-12960 (Bank. N.D.N.Y. Mar. 27, 2013), a chapter 11 trustee sold assets pursuant to section 363 of the Bankruptcy Code. The sale order contained customary language that the assets were being sold “free and clear of all liens, claims encumbrances and interests” and that the purchasers were not to be deemed successors within the meaning of federal, state or local laws or tax and labor regulations. Subsequently, the state of New York sought to calculate unemployment insurance tax premiums based on the experience ratings of the predecessor entity. The Court rejected this effort, stating that the sellers’ experience rating was an ”interest” in property of the bankruptcy estate of which the assets could be sold free and clear of. Instead, the state had to treat the company as a new entity when computing experience ratings, resulting in significantly lower premiums for the purchaser.
While a chapter 11 case may be more expensive, the long term benefits of an expansive section 363 order may be worth the cost for the purchaser of assets and its stakeholders, including its lenders, when litigating future successor liability cases.
Please contact the author, Harold D. Israel at Goldstein & McClintock (haroldi@goldmclaw.com), if you have questions about the benefits or detriments of section 363 sales.
Any opinions set forth in this article are those of the author and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice. This article may be considered ATTORNEY ADVERTISING in some jurisdictions.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Is JC Penney Too Sick for a Private Equity Rescue?
Margaret Bogenrief, ACM Partners
This has been an eventful week for troubled department store company JC Penney.
CEO Ron Johnson has been ousted, with Myron Ullman, the man Johnson replaced, stepping back in to right the ship.
Dealmakers now find themselves debating whether the cash-strapped, 111-year-old American institution is set to go private or stay public.
Of course, many believe there exists a strong case for a JCP buyout. There is some logic to this. With the distraction of Ron Johnson’s tenure behind them, JC Penney’s executive team now has some time to work on stabilizing the business.
The major issue with a buyout is not whether such a deal makes sense for the company’s management and beleaguered shareholders, but whether it is sufficiently enticing to a prospective buyer.
As trading closed today (April 10th), here is where things stood:
· Current Share Price: ~$14
· Current Market Cap: ~$3.1B
· Current Enterprise Value: ~$5.1B
· Book Value per Share: $14.46
· Gross Margin: 31.4%
· TTM EBITDA: (~$800MM)
JC Penney may offer an interesting case study in a company too sick to entice any attractive buyout offers. The good news for shareholders might be that if a turnaround of the company can be engineered, it might accrue to their benefit, rather than to a private equity buyer.
About the Author
Margaret Bogenrief is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services. She can be reached at 312-505-0700 or at margaret@acm-partners.com.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Reinventing The Deal Platform (Video)
No one familiar with the turnaround industry would object to the proposition that debt and equity investments continue to be made inefficiently. Luckily for capital constrained companies, Fundology is seeking to change that. Run by Kison Patel, Fundology provides a robust and efficient deal platform for small and midsize companies seeking debt or equity investments.
In a recent video clip Kison Patel shares his thoughts on current inefficiencies in the market.
See video clip here.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Turnaround Stories in the News
- Layoffs continue as Google tries to turn around Motorola Mobility (see article): Google’s $12.5 billion purchase of Motorola Mobility continues to show signs of strain, as the company has announced plans to lay-off 1,200 employees in addition to the 4,000 lay-offs in 2012.
- Struggling Kodak Eyes Bankruptcy Exit (see article): According to management the storied company, which filed for bankruptcy in January 2012, is poised to emerge from chapter 11 by mid-year 2013.
- Can Barnes and Noble Be Saved? (see article): After the bankruptcy and liquidation of long-time competitor Borders, Barnes and Noble faces the question of whether it can successfully compete against Amazon.
- Getting More Value from Divestitures (see article): Struggling companies often look to divestitures in order to reduce debt or streamline operations. By taking a disciplined approach, advisors, capital providers and management can work to ensure that companies receive maximum value for these non-core assets.
- What does it take to turn around a Web company? (see article): The strategies for a successful turnaround are to some extent determined by the industry a company operates in. Web companies present their own set of unique challenges to a successful turnaround.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Interview with Ted Koenig of Monroe Capital (Video)
Founded in 2004, Monroe Capital has been very active in recent years. Coming to market with a flexible mandate that allows it to provide senior and subordinated debt as well as equity co-investments to middle market and lower middle market companies, Monroe Capital provides a much needed solution to many organizations in the midst of change.
Recently CEO Ted Koenig sat with Paola Trentadue of Fundology to discuss his perspective on the market.
See video clip here.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
Lessons Learned from the J.C. Penney Turnaround (Video)
Turnarounds are challenging as best, and near thankless slugs through the muck more often than those in our industry acknowledge. J.C. Penney CEO Ron Johnson surely wishes he could make the leap to that less painful first category, as his turnaround efforts to date are looking remarkably unsuccessful.
The blows keep coming for the beleaguered department store chain. Major shareholder Vornado, which in 2010 acquired a 9.9% stake in the struggling retailer, recently moved to sell over half of its shares. On January 29 the company received a notice of default on bonds due in 2037, a claim that is perhaps more worrisome due to the involvement of activist investor Carl Icahn. The board of directors appears divided on the current strategy, and by all accounts is primed for decisive action if performance does not improve.
Margaret Bogenrief of ACM Partners recently offered her insight into the challenges facing this troubled retailer.
See the video clip here.
If you have a case, article, or other item that you would like to see appear in the TMA/Chicago Midwest blog, please contact David Johnson at: david@acm-partners.com.
