Another Retail Chain Bought & Stripped Bare by Sun Capital Goes Bankrupt

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Wolf Richter,

Number five in two years. Here’s the list.

“This decision is a difficult, but necessary one,” ShopKo said in its announcement of the Chapter 11 bankruptcy filing. It blamed “excess debt and ongoing competitive pressures” and “a challenging retail environment.” It said it would try to sell its pharmacy business in an auction and close 38 stores of the 360 general merchandise stores that it operates in 26 states, after having already closed about 45 stores last year.

In its filing, it reported less than $1 billion in assets and between $1 billion and $10 billion in liabilities. The company is buckling under its debts, has failed to pay certain suppliers, including pharmaceuticals supplier McKesson, and bankruptcy rumors have been flying for a while. It said it lined up debtor-in-possession (DIP) financing of $480 million to get it through the Chapter 11 process.

Sun Capital Partners, a private equity firm that gobbled up retail chains during the leveraged-buyout [LBO] boom before the Financial Crisis, had acquired ShopKo in 2005, after a bidding war – these were the heady days of “Merger Monday” – for $29 a share, or $877 million.

At the time of the buyout, ShopKo announced that a special committee of the board had unanimously approved the acquisition based on Sun Capital’s “financial resources, experience in the retail industry, relationships with key retail vendors and other suppliers, and experience in successfully completing transactions of this type.” At the time, ShopKo operated 358 stores under the ShopKo, Pamida, and ShopKo Express Rx names.

But Sun Capital got its money out, plus some, right away. In an SEC filing of November 2005, ShopKo explained that the buyout deal would be funded mostly by debt that ShopKo itself had to borrow. This debt came in two pieces, both from Wachovia Bank (which collapsed in 2008 and was handed to Wells Fargo):

  • A line of credit of $600 million, secured by everything ShopKo had, except the only thing that had any significant value, namely real estate.
  • A real estate loan of $600 million, “the proceeds of which will be used to finance a portion of the merger consideration.”

So that’s up to $1.2 billion in debt, shouldered by the acquired company, to fund its own acquisition by a PE firm and perhaps provide some instant profit back to the acquirer. That’s why these deals are called “leveraged buyouts” – because the acquired company gets leveraged to fund its own buyout.

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These retailers – and there were many of them – that had undergone this procedure by private equity firms have been collapsing under their debts in recent years and are forming the core of the “brick-and-mortar meltdown,” as I have come to call it. This includes Toys “R” Us.

Five months later, in May 2006, Sun Capital sold ShopKo’s most valuable asset, its real estate, for $815 million to Spirit Finance Corp. ShopKo then leased back those locations for its stores. So ShopKo had to pay rent, and Sun Capital had the $815 million.

The Wall Street Journal noted at the time:

The move might make waves in corporate real estate, showing retailers and others the possibilities in unloading their real-estate assets. It also shows that private investors are still finding ways to wring money out of retailers’ real estate.

Here are the retailers and restaurants that I have tracked over the past two years that Sun Capital had acquired and that filed for bankruptcy. There may be others that have slipped through my fingers:

Sun Capital portfolio company Marsh Supermarkets. Acquired in 2006, bankruptcy filing in May 2017, now liquidated. The grocery store chain once operated 116 supermarkets and 154 convenience stores. It was acquired by Sun Capital in 2006 in an LBO for $88 million in cash and the assumption of $237 million in debt. Then Sun Capital sold the real estate. And then it sold the stores. A decade of asset-stripping later, Marsh was down to 44 stores and practically no assets, when it filed Chapter 11 bankruptcy. It has since been liquidated.

The Marsh deal had another common angle: pensions. In bankruptcy court documents, it emerged that Marsh had pension obligations that were underfunded by $76 million that it was unable to pay, now that Sun Capital had stripped it clean. It shuffled the pension shortfall to the Pension Benefit Guaranty Corp., a government agency that uses insurance premiums from covered pension plans to rescue failing pension plans. Retirees that had paid into the Marsh pension plan likely got hit with a big haircut in their payouts, as is usually the case when the PBGC takes over. And the PBGC said that it will itself run out of funds within a decade.

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Sun Capital portfolio company Gordmans Stores. Acquired in 2008, bankruptcy filing in March 2017, now liquidated. The department store chain with over 100 locations in 22 states was acquired by Sun Capital in 2008 for an undisclosed amount.

The additional twist is that Sun Capital was able to sell 30% of its stake via an IPO in 2010. Gordman’s got none of the proceeds – everything went to Sun Capital, which is unusual for an IPO. In 2012, Sun Capital sold more shares, slashing its ownership to 50%. In 2013, Sun Capital forced Gordman’s to issue a $70 million special dividend, of which Sun Capital got 50%. Of that dividend, $45 million was borrowed money. In total, Sun Capital obtained $140 million from the proceeds of selling its shares to the public and extracting the dividend. This is in addition to other fees, special dividends, etc., that it might have obtained before the IPO.

Sun Capital portfolio company Limited Stores (not to be confused with The Limited). Acquired majority stake in 2007 and the remainder in 2010. Filed for bankruptcy in January 2017, after which the women’s apparel chain shuttered all its 250 stores and was liquidated.

Sun Capital portfolio company Garden Fresh Restaurant Corp., which owned Souplantation and Sweet Tomatoes. Acquired in 2005, filed for bankruptcy in October 2016. Closed many of its 124 restaurants and was sold off in pieces.

And this one Sun Capital could unload: The Mattress Firm. Acquired in 2002, at the time with about 300 stores. But in 2007, during the LBO boom, Sun Capital was able to exit via a sale to another PE firm J.W. Childs, which unloaded it in an IPO in 2011. In September 2016, Steinhoff International Holdings, a global retail empire headquartered in South Africa, acquired Mattress Firm, which by then had 3,500 stores, for $2.4 billion. Steinhoff went on to collapse spectacularly in late 2017. Mattress Firm descended into chaos amid lawsuits alleging a massive real estate scams, that pushed it into bankruptcy in October 2018. But Sun Capital had gotten out of that one years earlier. It was one of its many “successful exits.”


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