Adviser: J.C. Penney not ‘hopelessly insolvent’
A Dallas-based restructuring adviser is giving J.C. Penney stockholders some hope.
Instead of selling off the company in three pieces, which is now on the table, Plano-based Penney can emerge as a smaller company that has benefited from a retail bankruptcy reorganization’s basic tools: rejecting unprofitable store leases and slashing debt and other costs.
A group of about 800 shareholders, longtime individual investors and retirees organized and have gotten some attention in the Chapter 11 proceedings before U.S. Bankruptcy Court Judge David Jones, who often reminds lawyers during the hearings that there are 70,000 J.C. Penney employees out there to consider. He allowed shareholders to form an ad hoc equity committee and approved the funds to pay for legal advice and more recently to hire a financial adviser, William Snyder, a partner in turnaround management firm CR3 Partners.
Snyder, who has helped shareholders extract value from other large bankruptcies, made his case in a filing that supports Penney shareholders who have been saying since the company filed for bankruptcy in May that they aren’t holding aworthless investment.
Snyder concluded that during its bankruptcy, Penney hasn’t been “hopelessly insolvent” at any time and stands “to harvest significantly more value through a reorganization (even if contested) than can be obtained through a distressed sale during a period of severe market dislocation.”
Penney “has the value and resources to reorganize and successfully emerge” from bankruptcy, Snyder said.
Penney’s reorganization plan calls for the company’s assets to be split up, with the operating company to be sold for $1.75 billion to the retailer’s biggest landlords, Simon Property Group and Brookfield Property Partners.
Penney’s six distribution centers and a group of 161 stores will be owned by one or two property companies that would be owned by Penney’s lenders. The newly emerged Penney chain then would lease back those properties. Penney still would operate about 600 stores, some leased and some owned. Penney has closed about 150 stores during the reorganization.
Snyder and Penney shareholder Niko Celentano, who is leading the ad hoc equity committee, are taking their alternative plan to Penney’s independent board members and unsecured creditors. The shareholder group has no legal position to have its proposal considered formally. Penney still is in an exclusive period when its plan is being considered by lenders and the court.
Negotiations are taking longer than some expected. “If they’re choking and if the plan falls apart, we’re the only ones out there saying there’s another way,” Snyder said.
He likens Penney to the situation Green Bay Packers coach Vince Lombardi described when he said his team never lost a game, it just ran out of time. He called the proposed sale to Simon and Brookfield a distressed sale that “materially undervalues the assets.”
But department stores have been losing market share for years as they suffered fromsameness and as mall traffic has declined. On top of that, Penney has struggled with self-inflicted wounds.
Celentano admits that Penney needed to reorganize and said it has now fixed a lot of its problems.
Snyder’s CR3 Partners estimated that Penney’s total enterprise value is in the range of $8.2 billion to $10.2 billion. That includes hard assets of $6.6 billion in real estate based on values from Cushman & Wakefield. Penney stillwould own that real estate or could sell properties and lease them back.
Snyder’s valuation also accounts for Penney’s $1.4 billion-ayear e- commerce business that’s growing and generates annual operating earnings of $100 million. Penney has a profitable credit card business, and Snyder puts a lot of value in themanagement team led by CEO Jill Soltau, which has estimated that the restructured company will be profitable in 2022.
Under Snyder’s plan, Penney would emerge with debt of just under $3 billion and a line of credit of about $1 billion. It now has $5.37 billion in debt: $4.05 billion of secured debt and $1.32 billion of unsecured notes. Here’s how he gets there: Penney has $1.4 billion in cash. It uses $450million of that to pay off the new financing it secured at the beginning of the bankruptcy. It has a $1.18 million assetbased lending credit facility that it would pay down to about $700 million.
Penney would use the remaining $500 million in cash to pay all the administrative costs of the bankruptcy.
Then its $1.5 billion term loan and $500 million first lien loan due in 2023 would be reinstated. About $400 million in second lien notes and $1.3 billion in unsecured debt, which get no payout in the current restructuring plan, would be converted to equity.
That stillwould leave a value of at least $1 billion in the company for the current shareholders, Snyder said.
Penney’s shareholder selected Snyder because he was able to prove that shareholders were due money in two other large bankruptcies, Texas-based chicken producer Pilgrim’s Pride in 2009 and Atlanta-based electric power producer Mirant Corp. in 2012. Shareholders of Pilgrim’s Pride got a 36 percent equity stake in the reorganized company. The Mirant case took a few years, but shareholders received 12.5 cents per share.
Snyder was also the chief restructuring officer for the Texas Rangers baseball team when it was sold out of bankruptcy in 2010.
The bankruptcy has been an emotional ride for Penney shareholders. Dozens of them have sent letters to Jones and listened in on the court hearings, which are conducted on a live call that usually reaches the maximum capacity of 400 people listening in.
A hearing is scheduled Wednesday about the shareholders’ request to become an official equity committee, which grants them rights in the case.