Another Private-Equity LBO Queen Bites the Dust

When a PE firm is through strip-mining a company.

Sports Authority, which had skipped a $20-million interest payment in January while trying to arm-twist subordinated bondholders into accepting a haircut, and which filed for Chapter 11 bankruptcy on Wednesday, isn’t the only retailer in the US that was taken over by private equity firms before the Financial Crisis.

The list is long: Neiman Marcus, Albertsons, Safeway, J. Crew Group, 99 Cents Only Stores, Bon-Ton Stores, Claire Stores, the Container Store…. And they all have problems.

They were part of a magnificent LBO boom that is still leaving skid marks on creditors, employees, and other stakeholders, via misbegotten deals where only Wall Street made money as they strip-mined equity out of these companies while loading them up with debt. Occasionally, even PE firms ended up at the cleaners when these overleveraged constructs collapsed before they could be dumped.

The largest LBO of all times, masterminded by KKR, TPG Capital, and Goldman Sachs, was the $44-billion buyout in 2007 of TXU, the biggest electric utility in Texas. In April 2014, the renamed Energy Future Holdings filed for bankruptcy with about $50 billion in debts.

Harrah’s Entertainment was acquired in January 2008 in a $27 billion deal led by Apollo and TPG Capital. Renamed Caesar’s Entertainment, it squeezed through the IPO window in 2012, but its operating unit filed for bankruptcy last year, trying to stiff its creditors out of $10 billion, which has turned into a wild courtroom battle.

Ten of the top 20 LBOs of that time eventually managed to go public. And now, like Caesar’s and Hilton Hotels, they’re struggling to keep their shares from falling below the IPO price.

By comparison, Sports Authority was a minor deal. Other LBO queens among the retailers are also popping up in the news with disappointing sales, plunging stock prices for those that are now publicly traded like the Container Store, distressed bonds and leveraged loans, layoffs, and store closings.

And PE firms have trouble exiting. The IPO market has dried up, “valuations” have plummeted, and no one has any appetite for buying the shares of troubled brick-and-mortar retailers.

Last year, 11 retailers rated by Standard & Poor’s defaulted, the most since 2009. For 2016, it looks even worse: 24 bond issues by retailers and restaurants have plunged so much that they’re now trading at “distressed levels” [Defaults and Restructuring Next for Retailers].

So the first retailer to topple in 2016 is Sports Authority.

With its 450 sporting goods stores, it’s the quintessential financialized American success story: In 2003, Colorado-based Gart Sports merged with Florida-based Sports Authority. Both were publicly traded. The combination took the name of Sports Authority and the headquarters of Gart Sports. In 2006, a group of PE firms led by Leonard Green & Partners engineered an LBO for $1.3 billion.

And now, after months of rumors, Sports Authority filed for bankruptcy. Layoffs have already been announced. And there will likely be more. According to the press release, the company plans to “to close or sell in the coming months” two distribution centers and “approximately” 140 stores. This includes, as The Dallas Morning News had reported earlier, all 25 stores in Texas.

CEO Michael Foss explained it this way:

“We are taking this action so that we can continue to adapt our business to meet the changing dynamics in the retail industry.”

“We intend to use the Chapter 11 process to streamline and strengthen our business both operationally and financially so that we have the financial flexibility to continue to make necessary investments in our operations.”

“We are taking these actions to ensure that we can do an even better job of meeting our commitment to provide our customers with a broad range of high quality sporting goods and apparel and an outstanding shopping experience, whether in our stores or online.”

If a retailer is burdened with debt, financialized to the nth degree, and focused on rewarding its PE owners, it is logical that it would miss the boat operationally, and the boat in the US is online retailing.

Online sales have been soaring year after year. According to the Census Bureau, fourth quarter online sales jumped 14.7% year-over-year to $89 billion, while brick-and-mortar retail sales inched up 1.6%, or about the rate of consumer price inflation. And that includes auto sales, which were booming. Without auto sales, just forget any illusions of growth for brick-and-mortal retailers.

Retail is a very tough industry. Competitors are everywhere. Sports Authority, which once wanted to be number one in the nation, ranks fourth behind Dick’s Sporting Goods, Academy Sports, and Bass Pro Shops. It also competed with brands that sell direct online, and with the nightmare of every retailer, Amazon. And it lost.

So it tried deep discounting to get rid of inventory, which eats into the margins, while its $1 billion in debt was sucking cash out the other end. Its online sales were dogged by growing fulfillment and shipping costs. And so it ran out of cash.

Had this happened at the peak of the credit bubble in early 2014, it is likely that the company could have issued an additional $400 million in bonds at a low interest rate, which would have kept it afloat a while longer while allowing its PE owners to strip-mine more money out of it. But at the day of reckoning, it would have been even more brutal for its creditors. Cheap and plentiful credit just delays the inevitable.

After Sports Authority skipped the interest payment, the stiffed subordinated bondholders hired restructuring and bankruptcy specialist Houlihan Lokey, whose revenues soared 25% from a year ago. It’s profiting from the growing wave of distress among US companies. Read…. What’s Booming in this Economy? Bankruptcy & Restructuring Business “Highest Since Great Recession”

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  45 comments for “Another Private-Equity LBO Queen Bites the Dust

  1. CrazyCooter says:

    I know this has been the cycle for a while (screw investors for fees), but it really feels long in the tooth. Too many generations (elites, middle class, take your pick) expecting too much of the rear view mirror with no looking through the windshield. Ain’t nothing free.

    Something in my gut tells we might not be able to make it here any more.

    James McMurtry “We Can’t Make Here” Anymore



    • night-train says:

      CC: James McMurtry really sums it all up in the song. The sad thing is that he wrote it several years ago and the deal has only gotten worse. It should be a required listening.

      Choctaw Bingo tells a pretty good story too, but one that probably is inappropriate for this site. :)


    • Mac Best says:

      Good song focusing on the right things. “My Boss is a Troll” focuses on this problem too.

  2. Bob Miller says:

    Doesn’t anyone get it? Oh, you get it alright. You just wish it wasn’t so. “McClendon remembered as energy ‘visionary’ despite controversy.” – ‘CONTROVERSY’… you have got to be kidding. Alphonse Gabriel “Al” Capone did far less damage to this country than McClendon. We will never know how many heart attacks and suicides this leech and those like him cause.

    Wolf can burn the candle at both ends trying to interpret the hand writing on the wall in hopes of doing whatever his goal is, but it had better be a self-serving one that he’s risking his health for, because it’ll not change one single thing as long as we try to put lipstick on these pigs. The only difference between the parasites that have taken the likes of Sports Authority down and McClendon is, unfortunately they are at this moment planning another job.

    There was a time in this country if you stole a horse or rustled a few cows, and was caught, you would be found hanging from the nearest tree. True, that didn’t stop the stealing, but it stopped those that were caught from doing it again. Like the ‘War on drugs’ BS. We had the entire US military tip toeing through Opium poppy fields. We Americans are world class people alright. World class hypocrites.

    • night-train says:

      Well said Sir. I hope Wolf follows up with the McClendon affair. There has to be more to the story than what the Feds put out after the indictment. That would be a hard case to win in the great shaky state of Oklahoma. And to my mind, not rising to the level of suicide. Especially for a rich oilman in OK.

      • Bob Miller says:

        I almost hate to admit this, but it took the second read for me to grasp the depth of your comment. Indeed, having lived in Clinton and Altus, Oklahoma, it is a fact that an indictment by the CYA types in our so-called justice system, wouldn’t be enough to cause a man with the sir name, McClendon, to be his own judge, jury and executioner. I suspect I own more shares of CLF than anyone coming to this website, and I blame only myself, because I know these wildcatters. They don’t call them ‘Oil Patch Trash’ for the lack of a better name. And unless you’re willing to suffer the contusions I did in Houma, Louisiana before wising up, you don’t call them that to their face.

        • night-train says:

          Retired oil field trash. No offense taken. I managed to get out with my integrity intact, although my honor probably was besmirched. Petroleum geologist who could never make the numbers on the great oil shale play work out. The degree of jawboning, exaggerating and out right lies would make a sideshow barker blush.

          Please don’t tell mama I’m working in the oil patch. She thinks I am still playing piano at the bordello. :)

        • Bob Miller says:

          I didn’t exclude myself from that ‘Oil Patch Trash’ logo. I flew for Air Logistic and did night medivacs and crew changes for the guys working on McDermott barges in the Gulf from Grand Isle to New Orleans. I thought resupply missions to mountain tops and night medivacs in Vietnam was perilous until I started doing hurricane evacuations from those barges. Flat bottom crafts don’t handle 15-20 waves very well.

      • Wolf Richter says:

        I won’t follow up on McClendon, RIP. But I would have liked to see the indictment lead to a trial so that at least some of the facts from both sides could get out. Now we might never know any of it.

        • night-train says:

          Wolf: Fair enough. You can’t be expected to do it all. You have to set boundaries. Don’t spread yourself too thin. This is an excellent site that provides credible information and has a well informed reader base to boot. Well done.

          Thanks for the effort and keep up the good work.

  3. Petunia says:

    The elephant in the room is that Bain Capital, and Mitt Romney, was/is involved in many of these companies that get stripped mined. He is the reason I didn’t vote republican in the last election. I stood on line and voted third party as a protest vote. Voting for Romney and his buddies would have been crazy. Every time I hear him criticize Trump, without being called out by the media, I can see how far we have fallen. Chris Hedges calls America an Empire of Illusion, he is right.

    • RDE says:

      Mitt Romney and the history of Bain Capital are the All-American success story that ties the evils of Vampire Capitalism and Military Imperialism together in one package.

      When a young and ambitions Mitt went to Bill Bain with his idea to use LBO’s to gain control of companies in need of capital for expansion, suck them dry with management fees and leave the bankrupt hulks drying in the wind, Bain said ‘count me in, but you can’t screw my existing customers.’ Romney found his seed investors among the oligarchs in El Salvador who were financing death squads with the help of the US CIA. A marriage made in hell— supporting a genocidal US foreign policy while financing a business model employing a dagger aimed at the heart of business and employment.

      Mitt may not be as sophisticated as the Clintons, but I didn’t notice the Media pointing out the blood on his hands during his campaign for the Presidency. And mere treason isn’t enough to deny the Hildabeast her turn in the White House.

    • night-train says:

      Petunia: My guess is that they pulled Romney out of mothballs to pave the way for selecting a Paul Ryan/Marc Rubio ticket at a brokered convention. I’m not a betting man, but I might try getting some action down on this prediction.

      • Petunia says:

        The GOP doesn’t want anybody heading the party they don’t totally control. It is all about controlling the money machine. Same thing on the DEM side. They will do ANYTHING to make sure Trump doesn’t make it to the WH.

  4. Mike R. says:

    I am actually startinig to get hopeful; although much pain and suffering will occur before things get better. Trump’s lead and Sanders’ challenge is a strong sign that people are wising up.

    It takes a long time for a country to change; especially when the powers sugar coat reality and bribe the downtrodden; the proverbial turning an oil tanker around; takes some real estate.

    But the Internet, knowledgeable and passionate people like Wolf and his readers do make a difference. And of course real pain at the personal level does the most. It takes time. It will happen.

  5. Uncle Bruno says:

    Census Bureau says online sales are 7.5% of total. Skyrocketing?

    • Wolf Richter says:

      No. Census Bureau says 8.6%

      But yes, there are three concepts: “sales growth”; “share of total retail sales”; and “growth of share of total retail sales.”

      1. In Q4, online sales were 8.6% of total retail sales, not as you said 7.5%. That share has soared from about 2.8% in 2006, and 0% back in the day.

      2. Online sales in Q4 jumped by more than 14% yoy. That’s “skyrocketing.” Anytime sales grow by 14% in the US, you can use “skyrocketing.”

      But with a share of 8.6%, they’re still a relatively small part of total retail sales, which includes auto sales, its largest component. Which also means, they will continue to take share away from brick-and-mortal retailers.

      • Oleaginous Outrager says:

        I hate the term “Freudian slip”, but “brick-and-mortal retailers” is too sweet to pass up.

        • Wolf Richter says:

          You have no idea how often that happens to me.


          When I’m writing articles about brick-and-mortal retailers, I actually search for the world “mortal” to make sure it didn’t Freudian-slip into it.

          But obviously, I failed to do that with this comment.

  6. Paulo says:

    Petunia just beat me to it. I was going to ask if Bain Capital was involved? Hypocrits, all.

    More and more I have started doing two specific things.

    1) I often ask myself, when is enough, enough money and power? McLendon had to rig leases? Do these guys ever stop their machinations and simply say, “I’ve got enough”, or “we’ve done pretty well this year, let’s retrench and consolidate”? It must be a profound psychological disorder. (Certainly, our current Trump is an egotistical narcissist going for it all.) Sports Authority Exec: “I know, let’s do a Tony Soprano on this sporting goods chain and strip all the wealth out of it, load it up with debt, warn our buddies, and stiff the chumps. Screw ‘um. If we have to, we could always have a rash of fires and stiff some insurance companies”. Really, if you look beyond the headlines this is exactly what they have done. And probably, some empty stores will burn down. Probably, some discarded employees will suffer despair and hard times.

    2) Another action I have been doing is looking around where I live and simply appreciating what I have accomplished in life experience and in family relationships. Sometimes I talk with my older neighbour about what we would do if we won the lottery? (I seldom, if ever buy a ticket, but he does). I always come back to the plan of setting up family and friends who are struggling and getting rid of the money before it destroyed our lives.

    These movers and shakers are obsessed with more, more, more. Obviously, what they eat is most likely excellent food. They assuredly have very nice homes, if not palatial estates. They have financial security. They even have the respect of their peers. Then, they go on for more and twist everything up. Sometimes they go so far they kill themselves out of shame and desperation.

    Capitalism seems to bring out the very worst in some people. Nature or Nurture, does it really matter in this rigged system? The criminals have taken over the prison.


    • Petunia says:

      Having worked on Wall St. and having seen it first hand. It isn’t exactly that they want more and more. It is just that they get away with so much, after a while, they don’t perceive limits. They start out cautious and quickly spiral out of control. The shock of the first bonus is usually the starting point. They know they are not worth the bonuses, which can be many multiples of their base salaries, but they get away with skimming it out of the customers with no complaints, so off they go. The rest is history, as they say.

      • Toddy says:

        There is also the competition thing. there is an obsession with winning and being “better” (so… greedier)

        • night-train says:

          Toddy: Agreed. Competition has a place and can be beneficial. But so can cooperation and collaboration. But we seem to oversell the first and give short shrift to the later two. Our society appears to have a problem with balance. Or perhaps it is an inability to hold more than one idea in our collective brain.

      • Oleaginous Outrager says:

        I’ll take “Moral Hazard” for $700 billion, please, Ben.

    • retired says:

      The problem is not traditional capitalism,…it’s this fake version of capitalism produced by the Reserve Banking System.Keynesian economics,which is a front for the central bankers reserve banking, is built on a system made for swindlers,’s baked into the system.
      It’s a though the whole population was sitting in on a gigantic poker game.
      The overwhelming majority of these players draw their cards from a standard 52 card deck & must play strictly by the rules.
      A very small group of wheeler/dealer insiders draw cards from a pinochle deck with only high end cards with wild cards thrown in & rules that are not enforced on a regular basis!

      This is what is done regularly on the financial markets.There are endless variations of legally borderline moves that the ordinary players can’t compete with & have no access to!
      . This is how the financial sector is sucking the life out of the real economy!

      • Dan Romig says:

        Very well stated!

        Look no further than Lynch as Attorney General. Check out what she did when first put in a position of power by Bill Clinton.

        “Can you say civil forfeiture?”

      • Jim says:

        As I asked in a previous thread, why do you blame all the criminality of financialization and monetarism on Keynes? When did he ever advocate any of these policies? Better you look at the Milton Friedmans and Alan Greenspans of the world.

        • Bob Miller says:

          Give it up, Jim. Like Ralph Nader and Ron Paul, the herd has had the dots connected for them, and John Keynes, will always be the fall guy for QE/zero interest. You can’t save him or his name. Now of course, you could jump on the McClendon bandwagon. You could stand with the herd a say ‘Rest in Peace’. The good news is, this snake is not resting, he’s dead. Besides, this RIP isn’t for the dead. It’s a self-serving, hypocritical thing like all these war memorials. This so-called democracy, that of course was never even set-up as a democracy, is exactly like Christianity. These good Christians wasn’t flying the aircraft with the battalion commander in it who called in an air strake on an orphanage barbecuing children, a priest, some nuns, and workers who were there because we had already murdered their parents. No, these God fearing people wasn’t flying that aircraft, I was. They just bought the aircraft and paid the colonel and me to do it for them. But they have a way of separating these acts from their democracy. In these cases, it’s not ‘we the people’. It’s you people. How convenient, how wonderfully convenient.

  7. Vernon Hamilton says:

    CEO Michael Foss explained it this way:

    We are taking these actions to ensure that we can do an even better job of meeting our commitment to provide our customers with a …

    This is one of my favorite bits of Alice-in-Wonderland corporate verbiage – The CEO knows “we” have been doing an excellent job til now, and retreating into bankruptcy will allow us to get EVEN BETTER, just imagine!
    The board of directors will surely sleep well after reading that!

    • Jonathan says:

      I’m sure that CEO would still be parachuting out with at least a 8 digit paycheck because ruining a business is takes talent and hard work.

  8. CENTURION says:

    It really is a choice, even if you don’t realize you have a choice.

    You choose to cheat or not
    You choose to say enough is enough or let your greed run
    You choose that 4th drink
    You choose to ……..fill in blank.

    Once YOU realize this you can get control of yourself and your life.

  9. Ptb says:

    LBOs are a time honored scam. They just employ different “exit strategies” to make money on them. It’s funny and sad. Brick and mortar is going away just the same.

  10. Michael says:

    Here is another story of how arrogant PE investors destroyed a once terrific NY business.

    Inside the Collapse of Fairway

  11. Merlin says:

    what the SA CEO really meant…” entering the Chapter 11 process to loot all the available cash into C-level management pockets before we fire-sale the remaining assets and ruin all the employees lives”

    Despicable bastards.

  12. Bruce Adlam says:

    Looks like all the leaders and bankers got together at the weekend are trying to stabilize the markets at any price as if there is nothing wrong . it will only last so long before realty kicks in .funny mitt Romney criticizes trump but look at how much damage he and mates have done

  13. Bruce Adlam says:

    Coruption all the way to the top has a dark side to stop the truth coming out in China they dissappear in the USA it’s one down who is next????

  14. alan says:

    Can we please call start calling it PIRATE equity?

  15. Chicken says:

    Hopefully voters can see through Romney’s ranting for what it really is, an attempt at maintaining power for the one-party aristocracy.

  16. TC says:

    The failure of even the PE groups, pretty much Wall Street insiders, to successfully exit their business deals is another sign of how much the U.S. economy has degraded over the last decade. Their partners in crime, the big banks, love the PE folks to whom they can make huge loans to and collect huge fees from. All of these deals going south over the same timeframe,, several years-not just over the past couple of years is a sign of how much the economy stinks and that it is a systemic problem not just a short term anomaly. Trying to operate a major business in the U.S. now after years of cannibalization by this parasitic, increasingly-totalitarian, fascist regime is now next to impossible. Our economy is 2/3’s consumer based so when this many retailers hit the skids, you know we are in very bad shape and are on death’s door as an economic force.

  17. nick kelly says:

    Romney like other Repubs is obviously trying to save the party from destruction. Any Repub supporter who doesn’t realize it’s game over if the Trumpet gets the nomination is delusional.
    I thought the Repubs would rename the party after the Bush debacle but they will HAVE to after the Trumpet.
    Trump is a Repub nightmare and a Demo (wet) dream

    BTW: you think the Clintons’ got baggage?
    Wait until the media starts doing some digging on Trump, beginning with getting the book “Trumped” by Jack O’Donnell his former right hand man.

    • Cam says:

      A creative destruction is underway and it is going to overcome and destroy the power elite and their vested interests. They are going to resist this until the very end because they ARE the power elite and HAVE the vested interests. From the ashes a phoenix will arise, it will be a new system better and improved beyond what most could imagine today.

      The tipping point is the the critical juncture, and to my mind this juncture is likely to be global depression but perhaps it is something as simple as the coming US election.

      History is littered with examples… the creative destroyer of 17th century was the rise of the merchant traders obtaining their secure property rights and real power from the monarchy in England, Watt’s invention of the steam engine as the juncture that ushered in the industrial revolution. This change continues to influence our lives today. In the 20th century another example of the creative destroyer was Karl Marx and his weapon of choice was Das Kapital. The tipping point was the bolshevik revolution and again the influence of that event continues to impact on many of our lives today.

      People worldwide continue to deny the Donald, they refuse to believe it can be true. The power elite and vested interests are going to pull all stops to try and prevent his march to the Presidency because when he gets there it is going to change the world.

      • Vernon Hamilton says:

        Donald has no program or agenda of any substance as far as I can see, that doesnt further the interests of the current ruling elite.

  18. rbt137 says:

    trump/romney/demos/repubs/etc et all:

    nobody pays back 19 trillion. period.

    19 trillion is a number just like 5% unemployment.

    they (the numbers) are for stupid people.

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