The toxic Safeway-Albertsons combo is waiting in the wings.
Late yesterday, Fairway Group Holdings, parent of Fairway Market – an “iconic New York food retailer,” as it calls itself, that had started out as a “veggie stand” in 1933 and now lists 18 stores on its website – crumpled under a pile of debt and filed for a prepackaged Chapter 11 bankruptcy. Almost exactly three years after its IPO!
Bankruptcy rumors have been swirling for a while. The company announced in February that it would need to raise capital in order to keep its doors open. April 15, Bloomberg reported that the company was negotiating a debt restructuring with its creditors, and that a deal was near for a prepackaged Chapter 11 filing.
When the company did file yesterday, it stated that it wanted to “eliminate” $140 million senior secured debt. In return, these creditors would get common equity and $84 million of new debt of the reorganized company.
All of the currently outstanding shares will be cancelled. Screw those who’d bought them. They should have known better. That was the message.
It was no surprise, except perhaps for the penny-stock jockeys dabbling in its shares: today, FWM plunged 62%, from 21 cents a share to 8 cents a share. They’ll plunge 100% from here to zero.
As in so many cases when investors get wiped out, there’s a private-equity angle to it.
In 2007, private equity firm Sterling Investment Partners purchased an 80% stake in the privately held company, loaded it up with debt, stripped out assets, and pushed it into a big expansion drive to make it look pretty for an IPO down the road.
This was one of many retailers taken over by PE firms. Among the bigger ones:
Safeway and Albertsons, now under one PE hat, postponed its IPO, pending better market conditions; Neiman Marcus scrapped its IPO; Sports Authority just went bankrupt; Aeropostale is preparing for bankruptcy; Vestis Retail Group, owner of Eastern Mountain Sports, Bob’s Stores, and Sport Chalet just went bankrupt; Grocery chain A&P went bankrupt in July 2015, for the second time in five years; The Container Store IPOed in 2013 at $18 a share, first trade at $36, now at $6.60; J. Crew Group, 99 Cents Only Stores, Bon-Ton Stores, Claire Stores, and many more.
In April 2013, when Fairway had 12 stores, it was time for Sterling Investment Partners to exit. So they dumped the shares via an IPO into the laps of the unsuspecting public and conniving institutional investors with the usual Wall Street hoopla.
The IPO was a big success. It priced at $13 a share. Trading opened at $18.07 a share. In July 2013, shares almost touched $29, up 123% from the IPO price. Then reality set in: the company lost money in every quarter.
And it didn’t take long for reality to become a legal issue. Starting on March 19, 2014, the company was hit by a slew of shareholder class action lawsuits that alleged that it had made false statements about its financial condition before and after its IPO. Law360 at the time:
In its registration statement issued in connection with its April IPO, Fairway projected “solidly positive same-store growth” and 25% growth over all for the third quarter of 2014, but at the time, the company was experiencing decreased same-store sales, increased direct store expenses, and sluggish growth, according to the shareholders’ lawsuit.
The suit claims Fairway’s issuance of falsities continued after the IPO, in the form of regular statements reiterating prior announcements’ rosy financial outlook.
If this “rosy financial outlook” sounds familiar, it’s because that’s how IPOs and other stocks are being promoted on Wall Street.
The investors said the truth came to light on Feb. 6, when Fairway reported earnings well below analysts’ estimates, with only 3.2% third-quarter growth, a far cry from management’s prediction, and announced the resignation of its CEO.
According to the complaint, the day after the February 6 announcement, FWM plunged over 27%. Those who’d sold after the plunge were among the lucky ones. It was still trading around $8 a share for a while, before giving up its ghost.
For equity investors, this must be one of the most toxic combinations: retailers that were bought by PE firms that then strip out assets, pile on debt, and then try to get out by selling shares to the unsuspecting public and conniving institutional investors.
The biggest such deal will be the Safeway-Albertsons combo, now waiting in the wings.
In an S-1 filing in July last year, ahead of the now scrapped IPO last October, Albertsons disclosed that for the fiscal year 2014, ended February 28, 2015, it had a net loss of $1.23 billion and was buckling under $12.8 billion in total debt, up from $3.7 billion in 2013 before the acquisition of Safeway.
Will future stockholders have any say? No. The S-1:
Our Sponsors will indirectly control us through their respective ownership of Albertsons Investor and Kimco and will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions.
These “sponsors” include PE firms Cerberus, real-estate investors Klaff Realty and Lubert-Adler, REIT Kimco Realty, and shopping center owner Schottenstein Stores.
Brick-and-mortar retailers are in a very tough business. They’re besieged by online competition and other desperate brick-and-mortar retailers. They have big expenses. And they face strung-out American consumers. Throw a lot of debt into the mix, and it can turn toxic in a minute. It’s far better to let the PE firms stew in their own juices than bail them out of these deals.
And there’s no respite in sight for the plight of brick-and-mortar retailers. Read… Retailer Bankruptcies Are Hailing Down on the US Economy