Making a bundle on Mervyn's
AP
Posted: 2008-11-24 07:29:53
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ContentType:Enterprise/Feature; ContentElement:FullStory; Breaking:False;
bizd/tarbel ta
By PETER LATTMAN
The Wall Street Journal
Charlene Glafke began her career 35 years ago in the toy section of a Mervyn's department store in Daly City, Calif. From that $2.50-an-hour job, she rose to an $80,000-a-year marketing post at company headquarters in nearby Hayward.
On Oct. 17, Mervyn's LLC Chief Executive John Goodman summoned Ms. Glafke and her colleagues into a meeting room, and said the company - already operating under bankruptcy-court protection - was shutting down, the victim of an economic slump and a fiercely competitive retail environment.
The 53-year-old Ms. Glafke lost her job, along with about 18,000 other employees at the 177-store chain.
"I gave my life to Mervyn's," says Ms. Glafke, of Castro Valley, Calif., who now spends her day surfing the Internet to look for work, calling recruiters and meeting with job-placement agencies. "It's heartbreaking."
The company's owners have fared considerably better. Cerberus Capital Management LP and a group of private-equity investors bought Mervyn's from Target Corp. in 2004 for $1.25 billion. The investor group, which structured the buyout as two separate purchases - one for the retail operations, and one for the chain's valuable real-estate holdings - has earned more than $250 million in profits, say people familiar with the deal. The Mervyn's store chain, by contrast, is in liquidation.
Though few businesses have been spared by the current financial crisis, those owned by private-equity firms are in especially dire straits. Several private-equity executives have fretted privately that the Mervyn's deal highlights a longstanding criticism of buyout funds: that they "strip" companies, loading them with debt and carting away good assets, with little regard for employees.
Forty private-equity-owned companies have sought bankruptcy-court protection this year, according to data compiled by Thomson Reuters. And of the 86 Standard & Poor's-rated companies that have defaulted on their debt this year, 53 were involved in private-equity transactions, according to S&P.
S&P expects the default rate to increase sharply over the next year, probably leading to more private-equity-backed companies filing for bankruptcy protection. Creditors, employment lawyers and bankruptcy are expected to step up legal scrutiny of those buyout transactions, which typically involved large amounts of borrowed money.
The Mervyn's deal "was done when money was cheap and private-equity firms could pay themselves a dividend or do any number of clever exit strategies to profit from an investment," says Diane Vazza, head of global fixed-income research at S&P. "These firms are in the business of making money for their investors, but there can be consequences to that."
In September, Mervyn's sued its private-equity owners, seeking monetary damages. The 57-page lawsuit alleges that the structure of the acquisition pushed the company into bankruptcy by stripping the retailer of its real estate. Spokesmen for the private-equity owners said the lawsuit is without merit.
"I don't know the first thing about the financial world and have no idea how the owners were able to do that while the company went bankrupt and we all lost our jobs," says Deborah Fleming, 46, of San Leandro, Calif., who worked in a variety roles at Mervyn's for 23 years, and now is struggling to make mortgage payments on her two-story home and meet medical bills for her daughter. "But they apparently did," she adds.
Cerberus and its partners engineered the Mervyn's deal to split the retailer into a retail operating company and a property company, a strategy known in Wall Street slang as an "opco-propco" structure.
The private-equity owners contributed about $455 million of equity and raised $800 million in debt to fund the Mervyn's purchase. Then, they assigned 98 percent of the deal's value to the property company, which they funded with about $430 million of the equity and all the debt.
The deal assigned only $25 million of equity to the retail operating company. The private-equity owners also shared $58 million in deal fees upon closing the transaction, according to the Mervyn's lawsuit.
The property company, as owner of the Mervyn's stores, leased them back to the retailer. It also sold certain properties to mall owners and other retailers. As real-estate values increased, these and other transactions earned more than $250 million for the buyout group, which included Sun Capital Partners Inc. and real-estate specialist Lubert-Adler. The property company, still an operating business, is one of the creditors of the Mervyn's store chain.
With "the amputation of the real-estate legs from the body of the retail operations," says the company's lawsuit, the private-equity owners "made sure that any residual value or upside in the real-estate assets were reserved for themselves, and not for Mervyn's."
The owners, however, believe the deal's structure had nothing to do with the retailer's collapse, according to people familiar with their thinking.
The private-equity owners made back their investment on the retail operations, too. Mervyn's, which was founded in 1949 by Merv Morris, sold clothes, housewares and jewelry to low- and middle-income consumers. The company sold shares to the public in 1971 and was acquired seven years later by Dayton Hudson Corp., which later changed its name to Target Corp. In 2004, Target put the lagging chain up for sale to focus on its flagship brand.
Turnaround experts Cerberus and Sun sought to improve Mervyn's fortunes, bringing in a top executive from J.C. Penney Co. to run the chain. Mervyn's retail operations reaped more than $50 million in earnings before interest, taxes, depreciation and amortization, or Ebitda, in the first year under its new owners. This allowed the owners to pay themselves a one-time dividend from the retail operation's cash flow.
But the retailer's sales began to drop as the real-estate market suffered in California, where most of its stores are located. Mervyn's also tried to cater to Hispanic consumers, many of whom have been hurt by the economic downturn and job losses in the mortgage and home-building industries.
Late last year Cerberus, which is struggling with its high-profile investments in auto maker Chrysler LLC and lender GMAC, sold its stake in the retailer to its partners.
In July, Mervyn's filed for protection from creditors under Chapter 11 of the federal Bankruptcy Code and attempted to restructure, before deciding in October to liquidate.
Many of Mervyn's laid-off employees feel bitterness toward the chain's private-equity owners, based on interviews with more than a dozen of them. They are upset that they were denied severance pay, and that their vacation pay has been withheld by the bankruptcy court. Scores of employees have flooded the U.S. Bankruptcy Court in Wilmington, Del., with letters begging the judge to grant them their accrued vacation pay.
Longtime Mervyn's employee Diana Campbell of Hayward sent a two-page handwritten note to the judge explaining she was due 15 vacation days. She ended: "24 years of services = 0 dollars severance, 0 dollars accrued vacation."
Doan-Tam Huynh, a San Jose, Calif., woman who worked for Mervyn's for 21 years, told the bankruptcy court she had saved up 40 days of vacation pay to provide a cushion in an economic emergency; whether she gets it "will make a huge impact to my family, as we struggle through the next year," having to "rely on unemployment for the first time in my life to support my family."
Mervyn's has told the bankruptcy court it will award employees accrued vacation pay so long as its going-out-of-business sales raise enough cash to pay off lenders.
Meanwhile, Mervyn's employees are out looking for work at a time when the competition for jobs is fierce. Priscilla Fong, 53, of San Francisco, lost her job in merchandising after 30 years at Mervyn's.
"Someone who used to work for me called to tell me she applied for a position at the Gap and put me down as a reference," Ms. Fong says. "And I had to tell her, 'Oh no, I applied for that job, too."'
ContentType:Enterprise/Feature; ContentElement:FullStory; Breaking:False;
bizd/tarbel ta
By PETER LATTMAN
The Wall Street Journal
Charlene Glafke began her career 35 years ago in the toy section of a Mervyn's department store in Daly City, Calif. From that $2.50-an-hour job, she rose to an $80,000-a-year marketing post at company headquarters in nearby Hayward.
On Oct. 17, Mervyn's LLC Chief Executive John Goodman summoned Ms. Glafke and her colleagues into a meeting room, and said the company - already operating under bankruptcy-court protection - was shutting down, the victim of an economic slump and a fiercely competitive retail environment.
The 53-year-old Ms. Glafke lost her job, along with about 18,000 other employees at the 177-store chain.
"I gave my life to Mervyn's," says Ms. Glafke, of Castro Valley, Calif., who now spends her day surfing the Internet to look for work, calling recruiters and meeting with job-placement agencies. "It's heartbreaking."
The company's owners have fared considerably better. Cerberus Capital Management LP and a group of private-equity investors bought Mervyn's from Target Corp. in 2004 for $1.25 billion. The investor group, which structured the buyout as two separate purchases - one for the retail operations, and one for the chain's valuable real-estate holdings - has earned more than $250 million in profits, say people familiar with the deal. The Mervyn's store chain, by contrast, is in liquidation.
Though few businesses have been spared by the current financial crisis, those owned by private-equity firms are in especially dire straits. Several private-equity executives have fretted privately that the Mervyn's deal highlights a longstanding criticism of buyout funds: that they "strip" companies, loading them with debt and carting away good assets, with little regard for employees.
Forty private-equity-owned companies have sought bankruptcy-court protection this year, according to data compiled by Thomson Reuters. And of the 86 Standard & Poor's-rated companies that have defaulted on their debt this year, 53 were involved in private-equity transactions, according to S&P.
S&P expects the default rate to increase sharply over the next year, probably leading to more private-equity-backed companies filing for bankruptcy protection. Creditors, employment lawyers and bankruptcy are expected to step up legal scrutiny of those buyout transactions, which typically involved large amounts of borrowed money.
The Mervyn's deal "was done when money was cheap and private-equity firms could pay themselves a dividend or do any number of clever exit strategies to profit from an investment," says Diane Vazza, head of global fixed-income research at S&P. "These firms are in the business of making money for their investors, but there can be consequences to that."
In September, Mervyn's sued its private-equity owners, seeking monetary damages. The 57-page lawsuit alleges that the structure of the acquisition pushed the company into bankruptcy by stripping the retailer of its real estate. Spokesmen for the private-equity owners said the lawsuit is without merit.
"I don't know the first thing about the financial world and have no idea how the owners were able to do that while the company went bankrupt and we all lost our jobs," says Deborah Fleming, 46, of San Leandro, Calif., who worked in a variety roles at Mervyn's for 23 years, and now is struggling to make mortgage payments on her two-story home and meet medical bills for her daughter. "But they apparently did," she adds.
Cerberus and its partners engineered the Mervyn's deal to split the retailer into a retail operating company and a property company, a strategy known in Wall Street slang as an "opco-propco" structure.
The private-equity owners contributed about $455 million of equity and raised $800 million in debt to fund the Mervyn's purchase. Then, they assigned 98 percent of the deal's value to the property company, which they funded with about $430 million of the equity and all the debt.
The deal assigned only $25 million of equity to the retail operating company. The private-equity owners also shared $58 million in deal fees upon closing the transaction, according to the Mervyn's lawsuit.
The property company, as owner of the Mervyn's stores, leased them back to the retailer. It also sold certain properties to mall owners and other retailers. As real-estate values increased, these and other transactions earned more than $250 million for the buyout group, which included Sun Capital Partners Inc. and real-estate specialist Lubert-Adler. The property company, still an operating business, is one of the creditors of the Mervyn's store chain.
With "the amputation of the real-estate legs from the body of the retail operations," says the company's lawsuit, the private-equity owners "made sure that any residual value or upside in the real-estate assets were reserved for themselves, and not for Mervyn's."
The owners, however, believe the deal's structure had nothing to do with the retailer's collapse, according to people familiar with their thinking.
The private-equity owners made back their investment on the retail operations, too. Mervyn's, which was founded in 1949 by Merv Morris, sold clothes, housewares and jewelry to low- and middle-income consumers. The company sold shares to the public in 1971 and was acquired seven years later by Dayton Hudson Corp., which later changed its name to Target Corp. In 2004, Target put the lagging chain up for sale to focus on its flagship brand.
Turnaround experts Cerberus and Sun sought to improve Mervyn's fortunes, bringing in a top executive from J.C. Penney Co. to run the chain. Mervyn's retail operations reaped more than $50 million in earnings before interest, taxes, depreciation and amortization, or Ebitda, in the first year under its new owners. This allowed the owners to pay themselves a one-time dividend from the retail operation's cash flow.
But the retailer's sales began to drop as the real-estate market suffered in California, where most of its stores are located. Mervyn's also tried to cater to Hispanic consumers, many of whom have been hurt by the economic downturn and job losses in the mortgage and home-building industries.
Late last year Cerberus, which is struggling with its high-profile investments in auto maker Chrysler LLC and lender GMAC, sold its stake in the retailer to its partners.
In July, Mervyn's filed for protection from creditors under Chapter 11 of the federal Bankruptcy Code and attempted to restructure, before deciding in October to liquidate.
Many of Mervyn's laid-off employees feel bitterness toward the chain's private-equity owners, based on interviews with more than a dozen of them. They are upset that they were denied severance pay, and that their vacation pay has been withheld by the bankruptcy court. Scores of employees have flooded the U.S. Bankruptcy Court in Wilmington, Del., with letters begging the judge to grant them their accrued vacation pay.
Longtime Mervyn's employee Diana Campbell of Hayward sent a two-page handwritten note to the judge explaining she was due 15 vacation days. She ended: "24 years of services = 0 dollars severance, 0 dollars accrued vacation."
Doan-Tam Huynh, a San Jose, Calif., woman who worked for Mervyn's for 21 years, told the bankruptcy court she had saved up 40 days of vacation pay to provide a cushion in an economic emergency; whether she gets it "will make a huge impact to my family, as we struggle through the next year," having to "rely on unemployment for the first time in my life to support my family."
Mervyn's has told the bankruptcy court it will award employees accrued vacation pay so long as its going-out-of-business sales raise enough cash to pay off lenders.
Meanwhile, Mervyn's employees are out looking for work at a time when the competition for jobs is fierce. Priscilla Fong, 53, of San Francisco, lost her job in merchandising after 30 years at Mervyn's.
"Someone who used to work for me called to tell me she applied for a position at the Gap and put me down as a reference," Ms. Fong says. "And I had to tell her, 'Oh no, I applied for that job, too."'
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11/24/08 07:29 EST
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