Judge approves private equity deal in MEC takeover battle

VANCOUVER• A B.C. Supreme Court judge has ruled in favour of a deal for a U.S. private equity firm to take over MEC and see the outdoor retailer shed its co-op structure, just shy of its 50th birthday.

The Friday ruling, part of MEC’s creditor-protection proceedings, allows the retailer’s board to proceed with a deal with Kingswood Capital Management. Board members unanimously supported the move, arguing they’d exhausted all other alternatives to keep the retailer going in the face of financial troubles exacerbated by the COVID-19 pandemic. Justice Shelley C. Fitzpatrick also denied requests for a two-week delay from several groups, including one called Save MEC, which was scrambling to cobble together an proposal that would keep MEC a co-op.

“I am granting the SAVO (sale approval and vesting order), which will approve the transaction with Kingswood,” Fitzpatrick said in court, after dismissing all opposing parties’ applications. She said reasons for her decision would follow later.

Kingswood declined to comment. “The process has run its course,” said Eric Claus, who will become MEC’s CEO after the deal closes, in a statement to The Logic.

MEC’s board of directors, which unanimously approved the deal, said in a statement to The Logic that “the sale strengthens MEC’s finances and core operating business.” The board noted it preserves jobs and many of its retail locations.

Save MEC met later Friday with its legal counsel to review the decision. “The court’s decision is deeply disappointing,” the group said in a statement to The Logic.

It is “working with our friends at Co-ops and Mutuals Canada to understand any legal options — there are fundamental legal principles at stake relating to co-ops.” Co-operatives and Mutuals Canada also petitioned the court for an adjournment.

MEC surprised members on Sept. 14 when it announced a plan that would see it taken private by Kingswood. The outdoor retailer, which was struggling financially even before the COVID-19 pandemic, said it conducted a monthslong process seeking alternatives before determining a sale to Kingswood was its best option. It entered creditor-protection proceedings to finalize the deal. Kingswood will pay between $107.5 million and $110 million cash for MEC’s assets and assume at least $40.2 million in liabilities, according to court documents.

Of the four final bidders, Kingswood committed to keeping the most stores open, with 17 out of 22, and 75 per cent of active employees on the payroll. MEC’s incoming leadership plans to focus turnaround efforts on stores, as well as product assortment and development.

But while Kingswood pushed its agenda forward — even appointing a man with controversial experience to step in as MEC’s president and COO — many members were galvanized. They formed Save MEC and raised more than $100,000 for legal fees. Their lawyers argued the court should grant an adjournment so the group could finalize an alternate proposal.

“They have made great headway in putting things together that may come together as a full package,” one of their lawyers, Peter J. Reardon, told the court Tuesday.

Wealthy individuals committed between $15 million and $20 million, and an anonymous group had “been in discussions” to purchase MEC’s real estate assets for about $90 million, according to various court documents. Credit unions, banks and Canadian credit-card company Brim Financial also offered help. And Save MEC remained optimistic that involving member funding to some degree could raise an additional $13.5 million to $21.6 million.

“There is … the very real possibility that they will succeed in putting something together that will save their co-operative,” argued Reardon.

The member-funded model, though, is one MEC rejected early on in its search for a solution, calling it “impracticable to impossible,” in court documents.

MEC is losing about $1.6 million weekly, lawyers argued, and a two-week delay would have cost it about $4.65 million.

Lawyers for MEC, Kingswood and RBC, which is the agent for the credit agreement with MEC, argued against requests for an adjournment made not only by the members’ lawyers, but also those of two landlords whose leases will not be part of the Kingswood deal. They pushed for an urgent approval, with Kingswood’s lawyer arguing it needed the approval to be able to negotiate with landlords and others.

The retail industry is also gearing up for the holiday shopping season.

“The inventory that is supposed to be in the stores for those seasons isn’t just going to arrive at the snap of your fingers,” said Kibben Jackson.

But that rush is “all of their making,” Save MEC’s lawyer Reardon argued Wednesday.

“They set the timetable when they entered into this transaction,” he said, adding they chose not to give members much time to oppose it.

Jackson rejected that assertion, saying Thursday nothing suggests Kingswood would have expected opposition to the application.

“That is absolutely unsupported by the evidence.”