Another Retail Chain Bought & Stripped Bare by Sun Capital Goes Bankrupt

Number five in two years. Here’s the list.

“This decision is a difficult, but necessary one,” ShopKo said in its announcement of the Chapter 11 bankruptcy filing. It blamed “excess debt and ongoing competitive pressures” and “a challenging retail environment.” It said it would try to sell its pharmacy business in an auction and close 38 stores of the 360 general merchandise stores that it operates in 26 states, after having already closed about 45 stores last year.

In its filing, it reported less than $1 billion in assets and between $1 billion and $10 billion in liabilities. The company is buckling under its debts, has failed to pay certain suppliers, including pharmaceuticals supplier McKesson, and bankruptcy rumors have been flying for a while. It said it lined up debtor-in-possession (DIP) financing of $480 million to get it through the Chapter 11 process.

Sun Capital Partners, a private equity firm that gobbled up retail chains during the leveraged-buyout [LBO] boom before the Financial Crisis, had acquired ShopKo in 2005, after a bidding war – these were the heady days of “Merger Monday” – for $29 a share, or $877 million.

At the time of the buyout, ShopKo announced that a special committee of the board had unanimously approved the acquisition based on Sun Capital’s “financial resources, experience in the retail industry, relationships with key retail vendors and other suppliers, and experience in successfully completing transactions of this type.” At the time, ShopKo operated 358 stores under the ShopKo, Pamida, and ShopKo Express Rx names.

But Sun Capital got its money out, plus some, right away. In an SEC filing of November 2005, ShopKo explained that the buyout deal would be funded mostly by debt that ShopKo itself had to borrow. This debt came in two pieces, both from Wachovia Bank (which collapsed in 2008 and was handed to Wells Fargo):

  • A line of credit of $600 million, secured by everything ShopKo had, except the only thing that had any significant value, namely real estate.
  • A real estate loan of $600 million, “the proceeds of which will be used to finance a portion of the merger consideration.”

So that’s up to $1.2 billion in debt, shouldered by the acquired company, to fund its own acquisition by a PE firm and perhaps provide some instant profit back to the acquirer. That’s why these deals are called “leveraged buyouts” – because the acquired company gets leveraged to fund its own buyout.

These retailers – and there were many of them – that had undergone this procedure by private equity firms have been collapsing under their debts in recent years and are forming the core of the “brick-and-mortar meltdown,” as I have come to call it. This includes Toys “R” Us.

Five months later, in May 2006, Sun Capital sold ShopKo’s most valuable asset, its real estate, for $815 million to Spirit Finance Corp. ShopKo then leased back those locations for its stores. So ShopKo had to pay rent, and Sun Capital had the $815 million.

The Wall Street Journal noted at the time:

The move might make waves in corporate real estate, showing retailers and others the possibilities in unloading their real-estate assets. It also shows that private investors are still finding ways to wring money out of retailers’ real estate.

Here are the retailers and restaurants that I have tracked over the past two years that Sun Capital had acquired and that filed for bankruptcy. There may be others that have slipped through my fingers:

Sun Capital portfolio company Marsh Supermarkets. Acquired in 2006, bankruptcy filing in May 2017, now liquidated. The grocery store chain once operated 116 supermarkets and 154 convenience stores. It was acquired by Sun Capital in 2006 in an LBO for $88 million in cash and the assumption of $237 million in debt. Then Sun Capital sold the real estate. And then it sold the stores. A decade of asset-stripping later, Marsh was down to 44 stores and practically no assets, when it filed Chapter 11 bankruptcy. It has since been liquidated.

The Marsh deal had another common angle: pensions. In bankruptcy court documents, it emerged that Marsh had pension obligations that were underfunded by $76 million that it was unable to pay, now that Sun Capital had stripped it clean. It shuffled the pension shortfall to the Pension Benefit Guaranty Corp., a government agency that uses insurance premiums from covered pension plans to rescue failing pension plans. Retirees that had paid into the Marsh pension plan likely got hit with a big haircut in their payouts, as is usually the case when the PBGC takes over. And the PBGC said that it will itself run out of funds within a decade.

Sun Capital portfolio company Gordmans Stores. Acquired in 2008, bankruptcy filing in March 2017, now liquidated. The department store chain with over 100 locations in 22 states was acquired by Sun Capital in 2008 for an undisclosed amount.

The additional twist is that Sun Capital was able to sell 30% of its stake via an IPO in 2010. Gordman’s got none of the proceeds – everything went to Sun Capital, which is unusual for an IPO. In 2012, Sun Capital sold more shares, slashing its ownership to 50%. In 2013, Sun Capital forced Gordman’s to issue a $70 million special dividend, of which Sun Capital got 50%. Of that dividend, $45 million was borrowed money. In total, Sun Capital obtained $140 million from the proceeds of selling its shares to the public and extracting the dividend. This is in addition to other fees, special dividends, etc., that it might have obtained before the IPO.

Sun Capital portfolio company Limited Stores (not to be confused with The Limited). Acquired majority stake in 2007 and the remainder in 2010. Filed for bankruptcy in January 2017, after which the women’s apparel chain shuttered all its 250 stores and was liquidated.

Sun Capital portfolio company Garden Fresh Restaurant Corp., which owned Souplantation and Sweet Tomatoes. Acquired in 2005, filed for bankruptcy in October 2016. Closed many of its 124 restaurants and was sold off in pieces.

And this one Sun Capital could unload: The Mattress Firm. Acquired in 2002, at the time with about 300 stores. But in 2007, during the LBO boom, Sun Capital was able to exit via a sale to another PE firm J.W. Childs, which unloaded it in an IPO in 2011. In September 2016, Steinhoff International Holdings, a global retail empire headquartered in South Africa, acquired Mattress Firm, which by then had 3,500 stores, for $2.4 billion. Steinhoff went on to collapse spectacularly in late 2017. Mattress Firm descended into chaos amid lawsuits alleging a massive real estate scams, that pushed it into bankruptcy in October 2018. But Sun Capital had gotten out of that one years earlier. It was one of its many “successful exits.”

What’s the deal with retailers — and retail sales? I explain what big retailers want to keep secret, in my podcast… THE WOLF STREET REPORT  
 

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  97 comments for “Another Retail Chain Bought & Stripped Bare by Sun Capital Goes Bankrupt

  1. Helmut Beintner
    Jan 17, 2019 at 3:58 pm

    Peanuts…. when the Gouvernement is trillions in debt.
    And there is no one in this world is willing or even able to bail them out.
    But inflation on a grand scale will ” adjust that.

    • James Levy
      Jan 17, 2019 at 4:03 pm

      Despite the waste, the government produces military and internal security, roads and bridges, air traffic control, courts, food inspection, the CDC, and vast investment in science and technology. This activity produces wealth for the wealthy and virtually nothing else.

  2. James Levy
    Jan 17, 2019 at 3:58 pm

    This is a small example of a phenomenon with immense ramifications: all this buying and selling “contributes” to GDP, yet it produces nothing. We often euphemistically refer to this type of activity as “strip mining”, but despite the ecological devastation that activity involves, strip mining does actually produce something. All this financial manipulation and legerdemain makes a few people rich but produces no real good or service.

    Just how much of our economy, and of the so-called economic growth of the last decade, is just such unproductive activity?

    • Jan 17, 2019 at 7:49 pm

      This is the kind of “growth” repeated economic “stimulus” stimulates. Lots of stuff moving around while living standards stagnate.

      • MD
        Jan 18, 2019 at 3:59 am

        No it isn’t – you’re shifting the blame onto state intervention, entirely in the fashion you’ve been programmed to do.

        This kind of activity – existent before any recent stimulii and present since DEregulation, the glorification of greed and the casting aside of any notion of a social contract between human beings in the 80s and 90s – is due to greed and sociopathic behavior.

        Nothing else.

        As long as people such as yourself fail to acknowledge this, and instead point the finger the way the propaganda tells you to, then the said greedy sociopaths will be able to continue to increase the wealth and income gap as they will.

        • Atu
          Jan 18, 2019 at 11:21 am

          Though I agree greed and sociopathic behaviour is concerned, this facet of mankind or certain people has been around since whenever.

          Deregulation is also a government act, as much so as regulation. Why ? Because as long as there exists other regulation, the benefits of deregulation are manipulable to favour those in certain positions.

          Look at the globalist map, all the shifts in productivity are regulated by trade agreement, the currency values are regulated by centralised monetary policy such that they favour the creation of outsourced supply and new financial hierarchy. Foreign direct and indirect investment is regulated, even as it becomes deregulated. Government is regulation, if it were deregulated it would not exist but be simply a spontaneous power of whatever nature (and in some ways it is also that even within its regulatory setting).

          Ironically though, people voted for this new framework. It was an easy way forward, financially and materially rewarding in the short term. Even amongst the decline of traditional business, people still source the cheapest, still use Amazon and so on.

          No one wants to pay the cost of own effort, and government is as much this way as society.

          The sociopaths know how to succeed in this environment, and the most ruthlessly greedy also.

          You can call it a paradigm shift or whatever, but the fact is that people look for a forward escape rather than to return to a tradition that is now seen as outdated and inefficient – tedious.

          The limits that do exist though, in terms of resources, management, social cohesion and other might well define the outcome no matter what people imagine or wish for.

    • Stockolio
      Jan 17, 2019 at 7:57 pm

      Well said!

    • MF
      Jan 17, 2019 at 8:17 pm

      An oroborous comes to mind.

      • RepubAnon
        Jan 17, 2019 at 10:45 pm

        More like someone buying a farm, selling the seed corn and taking a bank loan out for 100% of the farm’s value, pocketing the money – and regretfully having the farm file bankruptcy.

        And they have the nerve to call themselves “job creators.”

        • fajensen
          Jan 18, 2019 at 2:43 am

          Don’t forget to write futures on the next harvest too.

    • gRant
      Jan 18, 2019 at 7:23 am

      I do believe your first comment conflicts with your second, Mr. Levy.

      • HowNow
        Jan 18, 2019 at 8:43 am

        Not really. His first comment was a paragraph closed with a comment that referred to the article, not to the government: “This activity produces wealth for the wealthy and virtually nothing else.” He should have made a grammatical reference to the subject – “this”.
        The sad news is that Congress itself, the “government” has been bought and paid for by lobbyists who only care about their campaign contributors. The only hope for our country’s “democracy” will be through campaign finance reform. Corps. own the economy and the government. And the swamp is not being drained, unless you think that placing billionaire friends and family in govt. positions is going to end well.

  3. Chim Ritchalds
    Jan 17, 2019 at 4:00 pm

    I just left a position working for a (formerly) wildly successful supplement company that was bought by a Private Equity firm last year. The firm has made a number of catastrophically bad mistakes since their acquisition, including:

    * Appointing executives who don’t know the industry or ecommerce
    * Trying to alter the entire business model by moving it to an unpopular and unproven subscription service
    * Spending millions on a disastrous and unnecessary rebranding campaign for a brand which didn’t need it

    The result has been a major collapse in sales and the talented employees (like myself) leaving for greener pastures.

    I’m seeing A LOT of this kind of thing happening lately too. PE firms go nuts, buying up everything they can and then failing miserably to do anything productive with those businesses. My understanding is that it’s “mostly the bank’s money” that financed the buyout of my aforementioned company so the PE execs don’t care that much, but I just don’t get the rationale for any of it. This cheap money and lack of consequences for the well connected who blow it just has to end eventually…. doesn’t it?

    • Mike G
      Jan 17, 2019 at 6:23 pm

      Welcome to Mitt Romney’s world.

      • OutLookngIn
        Jan 17, 2019 at 7:22 pm

        “Welcome to Mitt Romney’s world”. ding,ding,ding.

        Exactly. Senator Romney’s former commercial role was that of a corporate cannibal. A highly successful cannibal with an insatiable appetite. Ruining many companies by hollowing them out, then tossing them to the curbside.
        Exactly what the cannibal’s at Sun Capital are doing. It matters not to them that people lose their jobs, pensions, and investments. As long as they get to sit and gorge themselves at the banquet table of consequences that they set in motion.
        This is morally repugnant.

        • Jan 18, 2019 at 1:29 am

          Legalized financial terrorism.

        • Dave
          Jan 18, 2019 at 5:02 am

          abhorrent, repulsive, disgusting, vile, detestable, abominable, deplorable, obscene……

          These parasites have no moral compass. Lives thrown into turmoil, futures destroyed and families crushed…… all so the vulture capitalists can feast.

          I am a believer in capitalism, this is unregulated crony capitalism and regulatory capture.

          We now have disaster capitalism for the working people in America and gold plated socialism for the wealthy and powerful in America.

        • HowNow
          Jan 18, 2019 at 8:46 am

          But he told us he was a “job creator”!

    • Wisdom Seeker
      Jan 17, 2019 at 6:40 pm

      Yes, it’s senseless. Much like the French and British aristocracies in the late 1700s, today’s financial elites think that because they have access to credit (which they confuse with “capital”), that they have to then “do something”, and they go around willy-nilly destroying whatever they touch.

  4. Gian
    Jan 17, 2019 at 4:44 pm

    Seems the only pensioners that are guaranteed their full pensions are the public servants, despite the crash, falling stock prices and 100’s of billions in unfunded liabilities (CA as an example – CALPERS and CALSTERS). Good thing we taxpayers have enough “discretionary money” to deliver these over-worked, underpaid sloths to the lap of luxury upon retirement. Meanwhile, private sector pensioners, learn how to do more with less.

    • Grog
      Jan 17, 2019 at 10:29 pm

      Those darn public employees that expect their pension promises to be honored. What a bunch of a-holes to expect their employer to honor their compensation packages (which often come with lower take-home pay, but retirement benefits instead).

      They need to have everything they’ve worked for strip-mined away for the 0.1% to enjoy, too. That’ll fix things. Then everyone (but the 0.1%) will be equal.

      Jealousy much? Why not fix things for everyone instead of hoping everyone gets equally screwed over by our “industrialist” overlords?

      • ZeroBrain
        Jan 18, 2019 at 11:50 am

        Your comment assumes the public employees earned the pension that they receive. Many do not and the bureaucracy is inefficient, but this is all besides the point.

        The fundamental problem is the lag time between promise (pension) and delivery on said promise by future taxpayers. The future is unknowable, so the only payment that can really be guaranteed is the payment that can be made today from current cash flow or assets. Anything else is just an attempt by the pensioner to insulate himself from this reality, on the backs of others. How can a stable pension system exist that requires a minimum compounded rate of return, when the real rate is only known in hindsight?

        Thus, the only fair thing is for taxpayers to pay today, and gov employees to manage these funds themselves and deal with the results. Or they can outsource management. But the most important thing is that they accept that the rate of return and future quality of life are not guaranteed – that government workers must not have privilege on the ladder of social insecurity.

        • EchoDelta
          Jan 18, 2019 at 3:10 pm

          government employee in a 401(e). With that to look forward to, plus the huge fees extracted by Keybank for (mis)management, and uncompetitive wages, you can quit pointing your fingers over here. Cadillac health plan is all we get because the Union took over management and it isn’t cheap on my end, either.

          Scapegoat the people who made it this way.

  5. Iamafan
    Jan 17, 2019 at 4:45 pm

    BETWEEN $1 billion and $10 billion in liabilities.
    Sounds like Chinese tricks in America. You can drive a lot of trucks through that hole. What to believe?

  6. Howard Fritz
    Jan 17, 2019 at 4:58 pm

    Those vultures!

  7. Kent
    Jan 17, 2019 at 5:02 pm

    How does a company with less than $1 billion in assets get $480 million in DIP financing? Especially when liabilities are greater than $1 billion? Does the DIP financing bank just get to be first in line and everyone else takes it even harder? Bondholders couldn’t possibly approve of losing that much.

    • Jan 17, 2019 at 5:10 pm

      DIP financing is a special deal. It gives the lender first rights to anything the company might have in terms of collateral, ahead of all creditors secured or unsecured listed in the petition, protected by the bankruptcy court.

      • HowNow
        Jan 18, 2019 at 8:53 am

        I’m puzzled. How can borrowing in a “subordinate position” get a place earlier in line than a bondholder who was given the pole position in the lending sequence already? In real estate lending, with trust deeds, the government has the primarily position, but the 1st TD holder is next. Even contractors’ “liens” are subordinate to that chain of claims against equity already in place.

        • Jan 18, 2019 at 9:46 am

          HowNow,

          DIP financing is a special form of temporary loan used only during bankruptcy court proceedings, with court approval. Normally the company lines it up before it files for bankruptcy, and once in bankruptcy protection (after filing), the lenders and the company close on the loan and the money is transferred to the company. The loan is senior to just about everything else. It allows the company to pay wages, pay suppliers, etc., and keep going. Without DIP financing, most companies would cease to function in bankruptcy and would have to be liquidated, even good companies that only suffer from too much debt.

  8. RD Blakeslee
    Jan 17, 2019 at 5:28 pm

    So far as I know, none of the Sun Capital folks is attempting to run for political office, so there’s no way the citizenry can punish them through the political process. There is one vulture capitalist, – turned – politician that I know of: The newly-minted senator from Utah, Mitt Romney, lately of Bain Capital. But apparently not enough folks in Utah read Wolf Street, or care.

    • Rowen
      Jan 17, 2019 at 5:53 pm

      Gymboree, another Bain success story, is filed BK today and plans on closing all locations.

    • Artv
      Jan 17, 2019 at 6:04 pm

      Utah? How about the U.S.: 61 million people voted for that s-bag in 2012.
      And that was only 3 years after everyone was calling for the heads of Wall Street bankers. But 61mil. people thought Romney and Bain Capital were separate from those who are destroying this country??? Amazing.

    • Mike G
      Jan 17, 2019 at 6:26 pm

      But he’s a “job creator”…uh, cremator.

      • roddy6667
        Jan 17, 2019 at 9:30 pm

        Good one. :)

    • IdahoPotato
      Jan 18, 2019 at 11:25 am

      Worry not. The list is exhaustive

      Bill Clinton (Yucaipa)
      George H.W. Bush, James Baker, Jerome Powell (Carlyle Group)
      Evan Bayh (Apollo Global Management)
      Mitt Romney (Bain)
      Newt Gingrich (Forstmann Little)
      William Weld, Rudy Guiliani (Leeds Weld)
      Dan Quayle (Cerebrus)

    • economicminor
      Jan 18, 2019 at 11:50 am

      Our culture has become obsessed with the Golden Rule. Those with the gold rule. No matter how that gold was obtained, we worship the Rulers..

      We pretend ethics. We pretend moralism. We preach Jesus and we worship Greed and Money!

      Not everyone but enough that the Sociopaths now run the place and the go along to get along followers not only go along but preach the doctrine of anti government and fear of *others*.

      This site is inhabited with people with critical thinking skills and actual morals and ethics. It is such a pleasure to read.. Thank you Wolf your contributions and insights into our world.

      • kitten lopez
        Jan 18, 2019 at 1:35 pm

        “This site is inhabited with people with critical thinking skills and actual morals and ethics. It is such a pleasure to read.. Thank you Wolf your contributions and insights into our world.”

        yeah, i have to admit i feel the same way the more i find the history and current predicaments of humanity absolutely terrifying, demoralizing, but mostly heartbreaking.

        thanks, Wolf, our own local homeboy.

        • HowNow
          Jan 18, 2019 at 4:27 pm

          And I “third” the e-motion.

  9. J.M.Keynes
    Jan 17, 2019 at 5:41 pm
    • char
      Jan 17, 2019 at 8:55 pm

      Went tits up in late 2015. V&D aka Vroom & Dreesman was the biggest department store chain in the Netherlands. I find it “strange” that this is missing from their wikipedia page. All the other bankruptcies also.

      Sun Capitel also bought Neckerman, which was one of the biggest mail-order retailers the Netherlands, in 2007. In 2012 the German branch went to heaven. The Dutch/Belgium branch were sold to another private equity fund (Axivate) in 2013 and went bankrupt in 2014 and 2016

      Late 2015, early 2016 was retail apocalypse in the Netherlands. Every week a retail-chain would close. Something what is happening now in Britain. I think i read somewhere that this happened then because one of the largest banks (Rabo) stopped lending to retail.

      • Gandalf
        Jan 18, 2019 at 3:32 pm

        char,
        You can always edit the Wikipedia entry to add missing info or correct mistakes

  10. Jan 17, 2019 at 5:45 pm

    Dear Readers,

    I’ve been invited to the “Peak Prosperity 2019 Seminar” in Sebastopol, California. This is a three-day seminar, Friday-Sunday, April 26-28. I’ll be there on Friday for two events:

    The “Off The Cuff” panel, at 3:30 p.m. for an hour, along with Axel Merk, John Rubino, and Charles Hugh Smith. I know Charles personally, and I’m looking forward to meeting Axel and John. This should be fun.

    The “VIP dinner.” I also did this at last year’s Peak Prosperity Seminar. Not only were food and liquidity delicious, but I also got to meet a lot of interesting people with deep interests in our financial world. So I’m really looking forward to being there again.

    If interested in joining, you can get the details here: http://pp2019seminar.pagedemo.co/

    • polecat
      Jan 17, 2019 at 6:36 pm

      Gonna rub some elbows are ye, you hobnobber you !

      food and ‘liquidity’ .. that’s a good one, Wolf … Lets hope your fully capitalized, as in staying hydrated whilst imbibing nectar of the Gods.
      You will be sure to give us a full accounting of what transpired, right ?

      • Jan 17, 2019 at 7:41 pm

        Gotta drive home afterwards. Grrr. Last year, my wife and I stayed at a hotel nearby (nice area, Russian River Valley). This year, it’s just me, and just for the day. And then the slog back to SF. So there isn’t going to be a lot of liquidity for me.

        • roddy6667
          Jan 17, 2019 at 9:32 pm

          We should take up a collection to have a taxi waiting for you.

        • RD Blakeslee
          Jan 17, 2019 at 10:06 pm

          Don’t let those uppity folks corrupt you, Wolf.

          You are our last, best hope …

        • kitten lopez
          Jan 18, 2019 at 1:42 pm

          “Don’t let those uppity folks corrupt you, Wolf. / You are our last, best hope …”

          nah, he’s clean, RD. and not that fragile anymore if he ever was. i met him–saw his EYES– while i was dancing at carnaval here in the mission, and as i am most “animal” when i’m moving and can feel and read people on a feral animal level and he’s solid and safe, understanding respectful and KIND, and knows who his god is.

          so no one can distract him. Wolf is solid.

    • alex in san jose AKA digital Detroit
      Jan 17, 2019 at 11:13 pm

      It’s a little over $600 at the early bird price … I’d have to ride my bike up there with a tent and bedroll, and find a place to hide out to sleep at night even if I were willing to spend the $600 which I’m not, and probably can’t afford to. I have to have 20% of my gross income from 2018 on hand to pay my taxes with after all (where by taxes I mean all the payments not just income tax per se, it just feels like taxes which is why I’m all for the NHS model for the US: Raise taxes a bit and enact health care for all).

    • Jan 18, 2019 at 9:17 am

      Can’t wait to see you again Wolf!

      It’s always an amazing time, and the best part is that the people who attend are all fun, successful, critical thinkers.

      In other words, a rarity (and a treat)!

  11. Iamafan
    Jan 17, 2019 at 6:13 pm

    I love ice cream. I can’t forgive that same PE firm for closing down almost every Friendly’s Ice Cream Parlor near me. What a shame.

  12. Wisdom Seeker
    Jan 17, 2019 at 6:44 pm

    The only way to punish these guys is to boycott.

    Time to add Sun Capital’s brands to the Corporate Hall of Shame (my personal boycott list):

    Boston Market
    Friendly’s
    Johnny Rockets
    Bonmarche (not that I ever went there)

    And many other brands – SunCap’s full portfolio list is here: https://suncappart.com/portfolio

  13. Jan 17, 2019 at 7:00 pm

    According to the Washington Post: In 2018, Sun Capital had sold off assets belonging to Marsh Supermarkets, while leaving more than $80 million in debts to workers’ severance and pensions unpaid. All of this legal or at least goes unpunished because we have a dictatorship of the elite moneyed class who rob us with laws tailored to their needs..

    • Erle
      Jan 18, 2019 at 9:22 pm

      So there are failing businesses. We all know that and can detect the downdraft if we are customers.
      The thing with these virus PE things is that they can make the crash into the abyss so much quicker and pull the wallets at the edge.
      I used to go to Shopko in my once yearly shopping trip. They had pretty good stuff in the pots and pans section. The brands were American and they were of decent quality for the money. My wife was pleased with the junk and used it for twenty years.
      My favorite trip to Shopko was when we two were going past the electronics. Some wiseguy had left a message on the screen,”yo mama ho” That was the last time that I can recall as having a good shopping experience

  14. Paulo
    Jan 17, 2019 at 7:00 pm

    This reminds me of the Sopranos episode when Tony takes control of a sporting goods store after the owner ran up some gambling debts. He stripped out every possible asset by running up huge debts. No difference, really. However, at least with Tony Soprano you knew what/who you are dealing with. These PE firms are well disguised and even carry a whiff of political cover and political protection.

    I used the word ‘whiff’, deliberately. My God, no wonder people are cynical. One day anger will awake and there will be hell to pay. And on the news old Mitt Romney exhibits a sanctimonious posture as he tisks tisks others. It makes me gag.

    • OutLookingIn
      Jan 17, 2019 at 8:37 pm

      These corporate cannibals are cut from the same cloth as Tony’s crew.
      The episode where they took control of the restaurant, ran up huge debts, sold off the high end equipment, then set fire to the place in an insurance scam.
      These people are totally devoid of any moral fiber whatsoever. If anything, they are sociopaths and deserve prosecution under the FULL weight of the law. Won’t happen. Not as long as the ignorant voters hand the power of lawmaking to the likes of Mitt Romney.

    • Mike G
      Jan 17, 2019 at 11:52 pm

      With all the guns in this country it’s a wonder these corporate vultures aren’t more frequent targets of wrath. But they invest a lot in making sure the hoi polloi stay angry at each other while they make off with the loot.

      • WheresOurTeddy
        Jan 18, 2019 at 12:55 pm

        you can always hire one half of the poor to kill the other half.

        And you don’t even need a full half, with Netflix, football, NASCAR, and TV news to let you know that your enemy is anyone but rich people.

        • 91B20 1stCav (AUS)
          Jan 20, 2019 at 6:31 pm

          @WOT. So sadly well-said. A better day to all.

  15. Richard Clark
    Jan 17, 2019 at 7:03 pm

    Wolf,
    As an avid reader, I have shared this assessment previously. I believe that sometime in the near future, when many other PE deals are subjected to greater scrutiny, there will be an ugly realuzation that most PE deals destructed value, destroyed long standing brands, and only a minority contingent will have made money, through legal, yet questionable financial dealings.

    • Javert Chip
      Jan 19, 2019 at 11:27 pm

      Richard

      Your statement I almost undoubtedly accurate, and I’d love the see that study.

      However, I believe the vast majority of companies that end up in PE-LBO-land are essentially rolling piles of corporate junk that have suffered years/decades of self-inflicted corporate mis-management. In all probability, if PE vultures (vultures gotta eat, too) didn’t finish them off, they would go bankrupt on their own. Yea, some companies may be “saved”…but not many.

      I don’t have a problem with the capitalist “creative destruction” (AKA bankruptcy). My complaint is the “LBO” component (ie: forcing an everything-but-bankrupt company to pay huge fees to PE firms). The incredible, knowable and predictable systemic risk is passed to Federally-insured banks, who, in turn sell the loans to pension funds & what-have you. Many of these down-stream buyers and beneficiaries have no realistic idea what they’ve bought.

      I have no problem if rich guys want to play this game with their own money, but not with taxpayer guarantees. It should be strictly illegal for:

      1) Federally insured banks to make these loans

      2) Corporations with payment responsibility to future beneficiaries (ie life insurance, pension funds) to invest in these products.

  16. Martin L Hoffmitz
    Jan 17, 2019 at 7:22 pm

    The Capital Group and the Senior Executives of the Acquired Company are very well taken care of, no matter what happens. The Executives, voting to support the buyout, gain from the process. How can they make unbiased decisions?? Good businesses are destroyed. Tens of thousands of jobs are wiped out. The criminals are writing the laws, or their Cronies are. We all SUFFER.

    • Jan 18, 2019 at 1:42 am

      The American Dream.

      • OutLookingIn
        Jan 18, 2019 at 1:00 pm

        Yes.
        As the late great, George Carlin noted in one of his routines:
        “They call it The American Dream,
        because you have to be asleep to believe it”.

  17. California Bob
    Jan 17, 2019 at 7:30 pm

    I bought 5 pairs of name-brand running shoes from ShopKo online a few years ago (I go through them pretty quick). When I got them, I discovered they were ‘seconds;’ missing shoestring holes, etc. I suppose it was in the fine print somewhere, but they really should have had a prominent disclaimer (I like to think I’m astute shopper).

    Last year, on my annual road trip, we stayed a night in a small town in Montana (east of the Rockies, not scenic or glamorous but extremely windy). The was a ShopKo close to the hotel, and it looked like a lot of locals were shopping there. I suspect the closing of that store will be quite a hardship, as there wasn’t a WalMart, Target or similar anywhere to be seen.

    • Colorado Kid
      Jan 18, 2019 at 10:18 am

      Interesting that you mention the Shopko in Livingston, Montana. I’ve lived there, and that store is the only place you can shop unless you drive the 25 miles to Bozeman over a mountain pass that’s frequently a real PITA in the winter. That is definitely going to hurt that town.

      • Wisdom Seeker
        Jan 18, 2019 at 11:19 am

        Only until someone else sets up shop there. Per the article, the retail real estate isn’t owned by ShopKo, so someone will be looking for a new tenant.

      • California Bob
        Jan 18, 2019 at 11:42 am

        Actually, it was Shelby, MT. Probably even worse for the locals because there isn’t another large(r) town within at least 50 miles (guessing, don’t know the area).

        • Erle
          Jan 18, 2019 at 9:27 pm

          You can always take Amtrak to Shelby, but you have to wait a day for the trip back.

  18. Citizen AllenM
    Jan 17, 2019 at 8:39 pm

    I am simply amazed at how The Private Equity charade has continued.

    I am also surprised that nobody has paid the ultimate price for immiserating immense numbers of people.

    When the modern version of Star Chamber Trials or https://en.wikipedia.org/wiki/Revolutionary_Tribunal begin, I hope a lot of people remember whence comes the anger, for it is growing immense.

    Apres moi, le deluge….

    • California Bob
      Jan 18, 2019 at 11:46 am

      “I am also surprised that nobody has paid the ultimate price for immiserating immense numbers of people.”

      Too much of the populace allows themselves to be distracted by ‘god, guns, gays and abortion’ to realize how badly their pockets are being picked.

      • Javert Chip
        Jan 19, 2019 at 11:39 pm

        California Bob

        I suspect you VASTLY over-estimate the ability of the average “populace” to manage their own financial affairs. Bright, shiny objects will always be a distraction.

        But free people get to do what free people want to do (financial management isn’t high on the list).

        I’m not so sure about your ‘god, guns, gays and abortion’ comment, but mowing the lawn, getting junior to graduate high school, planing the next vacation, paying for the last vacation, and taking the dog to the vet have to come in there somewhere.

  19. Ed
    Jan 17, 2019 at 9:21 pm

    Sun Capital — everything that’s wrong with capitalism.

    • Gershon
      Jan 18, 2019 at 8:20 am

      What we have isn’t capitalism. It’s a grotesque caricature called crony capitalism.

      As long as ‘Muricans keep voting for the Oligopoly’s captured Republicrat duopoly, they are going to getting getting plundered by the financialization of the economy and concentration of all wealth and power in the hands of a corrupt and venal .1% in the financial sector.

      • economicminor
        Jan 18, 2019 at 12:05 pm

        Least you forget that a lot of this started down the steep slope when Clinton signed the repeal of Glass Steagall and signed the Commodities Modernization Act.. Plus the beginnings of the consolidation of the major media. These Sociopaths come in both colors is why there are more Independent voters than either party can claim. Yet the two parties still control WHO we get to vote for.

  20. Gershon
    Jan 18, 2019 at 8:18 am

    I can’t wait for the post-collapse tribunals to begin, when our corrupt and complicit policymakers, regulators, and enforcers might finally be held accountable for their looting of the productive economy and swindles against the middle and working classes.

  21. GP
    Jan 18, 2019 at 9:03 am

    Something doesn’t add up in the Shopko purchase.

    How much debt did Shopko already have?

    Why would Wachovia lend $1.2b if Shopko was worth only $877m? If the bank assessed company’s assets to be $1.6b, why the bidding war only yielded $877m?

    • Jan 18, 2019 at 9:54 am

      The buyer also assumed $300 in debt (when buyers buy the shares, they always assume whatever comes with the corporate entity, including debts). But in terms of the theoretical deal “value” — or more correctly “enterprise value” as it used to be called — this makes it about $1.2 billion.

      There were several hedge funds at the time that claimed that the purchase price was too low, and they tried to attack the deal but failed.

      The purchase price was a well above the share price before the deal rumors started, and it was raised during the bidding war. So for shareholders, the price represented a hefty premium and was a petty good deal.

      • GP
        Jan 18, 2019 at 2:56 pm

        If Shopko shareholders were pleased with the sale price, perhaps the company was not doing well to begin with? Losing money? No solid plans to return to profitability?

        If that’s the case, PE perhaps just expedited the inevitable?

        • Jan 18, 2019 at 3:49 pm

          So this wasn’t a dotcom startup or something with explosive revenues… but a fairly solid profitable retailer that had been around for decades.

          Revenues were about flat in 2004 and 2005 ($3.2 billion). Net income (GAAP) rose from $39 million in 2004 to $43 million in 2005. Earnings per share rose from $1.33 to $1.46 over those two years.

          Shares went from about $11 in Q1 2003 to about $20 in early 2005. Then the bidding for the retailer drove shares to $29 at the acquisition date. So the premium was something around 45%.

          (All data from the SEC filing I linked)

  22. Harold Busch
    Jan 18, 2019 at 9:20 am

    Let’s call this what it is: an old school “BUST OUT.”

  23. MBA Dan
    Jan 18, 2019 at 10:31 am

    I wonder if the CEO of Sears is going to sell the company off to the private equity vampires? Then Sears will be slowly drained of resources instead of killed cleanly by the Amazon lion.

    They’ll be case studies in every business school in America in a few years: “How to run a company into the ground- Sears style”.

    I really have no idea why no one’s had the bright idea to fire Mr. Lampert and hire someone qualified to run a major retailer.

    • Javert Chip
      Jan 19, 2019 at 11:43 pm

      Sears has been owned by what you call a financial vampire ever since his purchase in 2004.

  24. Jan 18, 2019 at 12:57 pm

    Nobody likes a vulture, esp a financial vulture

    • California Bob
      Jan 19, 2019 at 10:13 pm

      In nature, vultures perform a gruesome but necessary function. The financial ‘vultures’ should perhaps be compared to hyenas.

      • Javert Chip
        Jan 19, 2019 at 11:52 pm

        CB

        Don’t know how this fits into bad-financial-dude taxonomy, but having returned from an African safari, my experience is vultures smell better (not to be confused with “good”) than hyenas( both from 50 ft upwind). Just saying.

  25. Mike Earussi
    Jan 18, 2019 at 2:56 pm

    Theft is always the easiest way of making money. LBO companies have it down to a fine art.

    • Javert Chip
      Jan 20, 2019 at 12:04 am

      Mike

      Unfortunately this definitely is not theft. The only thing preventing the “rational investor” from buying what in fact is obviously grossly over-priced, knowable and predictable systemic risk is sheer greed & stupidity (which investors have lots of) – I’m taking about you crypto, Uber and Tesla investors.

      • char
        Jan 20, 2019 at 2:16 pm

        This is not theft in the legal definition but it is in the more broader definition used in normal life as in obtaining something in a morally wrong way.

  26. WSKJ
    Jan 18, 2019 at 4:18 pm

    “Peak Prosperity Conference”; the last Peak Prosperity that I experienced was back in the 50’s …LOL….congrats on your invitation, Wolf. Counting on you to speak truth.

    I am sorry to read that Shopko is going down. They were my go-to pharmacy for a number of years; they were good people and looked out for their customers. HIPAA really hurt them: the floor plan of the pharmacy area was not set up for HIPAA compliance, and they had a tough time trying to jury-rig line-up areas etc. to meet the reg’s.

    One of my ongoing projects is trying to figure out alternatives to plutocratic solutions to national crises. (Example: to some extent, the FDIC prevents depositors from losing their Bank-held wealth in an economic crash, thus obviating the need for Central Bankers to direct triage to the Banks.

    Likewise, consider once- and-future? laws/reg’s that prevent corporations from taking on debt to buy back shares….)

    Wolf, are there or have there ever been, regulations that work to prevent leveraged buy-outs? While I am, in general, against Big Government, and over-regulation, in some cases it seems as if well-crafted regulation may be the cleanest, best way to prevent Abuses.

    • Jan 18, 2019 at 6:58 pm

      To my knowledge, there are/were no regulations actually preventing LBOs. But there are many rules and securities regulations that impact them. But experts know how to deal with them.

      The issue here is that investors (buyers of junk bonds and leveraged loans) and banks like LBOs because they make a lot of money on them. Once some of those investors and banks get burned, the appetite wanes. And this has happened. LBOs stopped in late 2008 and after the Financial Crisis have been just a shadow of their former magnificence. Most of the fall-out I’m writing about is from pre-Financial Crisis LBOs.

      But recently, the appetite has perked up again. And we had some huge ones, including the mega-LBO of Refinitiv, here…

      https://wolfstreet.com/2018/09/18/just-how-exuberant-is-the-junk-credit-market/

  27. secant
    Jan 18, 2019 at 5:42 pm

    vulturism – “behavior or character typical of a vulture, especially in the figurative sense of being rapacious” (rapacious = aggressively greedy).

    Wolf – How is capitalism not considered vulturism? If I was to attend your panel discussion, that would be my sole question, as I struggle with the concept myself. Having started in the bottom of society and moved up to the top personally, I’ve lived both spectrums of capitalism and have a diversified understanding of what 70-80% of the wage & debt “cog in the wheel” population endures on a daily basis, while the top 20% of us promote capitalism as our main religion to cure all human ills (as we sit on top of income producing assets and get “something for nothing” as central banks remove the “time value of money” and exponentially inflate our assets, seemingly indefinitely…until rinse and repeat again and again and again…).

    One quick example is the trillion dollar company Apple. Who has impacted society, as a whole, in the most positive way as CEO of Apple, Steve Jobs or Tim Cook? Steve Jobs, according to interviews, was “mean” to his employees, his kids, wife, etc. Steve dreamed up genius ideas and changed the world in the process, charging a somewhat reasonable price for his products. Tim Cook, on the other hand, is “nice” to his employees, a pleasant person by all normal definitions of human engagement and traditions. Yet Tim Cook has no issue selling less innovative products to a cult like following for an enormous 64% gross margin on the $999 iPhone X (while sitting on $130ish billion in cash…with no real idea what to do with such ludicrious profits). Many of the device buyers are college age and those of limited means. As many of 50% of the teen age buyers have admitted to be screen time phone addictions, according to numerous recent surveys on teen screen addiction. Multiple employees of the company do not even allow their own offspring to use the products they design and promote. To further the vulturism, Tim Cook has now decided it wise to enact a rent to own model, for the first time, as a way to “enable” said cult buyers to purchase the product ” at a reasonable $1 per day rate” over 2 to 4 years. Rent to own is as vulturism as capitalism gets, similar to pawn shops and payday loan services via negative societal financial impact. So who was a better person for American society now, Steve Cook or Tim Jobs? And how can we, as investors, not be part of the vulturism culture Time Cook seems happy to promote on a daily basis (at fast money with Jim Cramer and friends)?

    I do not know the answer, but I do believe we will find out in the next decade or so as the political winds shift drastically and the pendulum swings from a vulturism zero sum game of capitalism to “something else”…

    Sorry so long…love your web site, along with dozens of other intelligent and creative bloggers I visit daily. Voices of sanity in an otherwise insane “vulturistic” world… =)

    Thank You,

    secant

  28. Ryan
    Jan 18, 2019 at 8:24 pm

    I own a pawn shop and it’s always a bummer to be called a vulture. We provide loans when no one else will and quicker than anyone. I do agree that our rates are high but they should be when you consider 30% of our loans fail. The industry average for a pawn shop loan is less than 150 bucks. The amount of cost for writing these loans and storing the collateral is very high. I imagine you don’t no anyone that needs 150 dollars to buy groceries but I do and many times I’m the only person standing between them and a hungry night.

  29. JSM
    Jan 19, 2019 at 12:03 am

    Start a lineup of these crooks. Put faces to these atrocities.

  30. Shane From Melbourne
    Jan 19, 2019 at 3:53 am

    “Retirees that had paid into the Marsh pension plan likely got hit with a big haircut in their payouts, as is usually the case when the PBGC takes over. And the PBGC said that it will itself run out of funds within a decade.”

    The Multiemployer Program is expected to become insolvent by FY 2025 – 2026, while the Single Employer Program is better financial health

    https://www.pbgc.gov/sites/default/files/fy-2017-projections-report.pdf

  31. vpp
    Jan 19, 2019 at 1:30 pm

    Many businesses have gone from startup to a surging business with research , development and debt, yes debt is the key to growth. This is a factor why so few risky takers get no where.
    Apple sure had it, now they have revenues but the crowd doesn’t like it the tides change and fast. The weed companies have massive debt but the crowd likes it ,,,or so far.

  32. C
    Jan 20, 2019 at 12:29 pm

    Why do lenders lend credit to LBO’s, since so many of them seem to result in bankrupt companies that are no longer worth their collateral value?

  33. B Wilds
    Jan 25, 2019 at 8:09 am

    Retail stores closings have become so common they go often go unnoticed. Recently the last Sears store in my city shuttered its doors. It was the third anchor store in the mall near my office to exit in 2018. Last year more than 7,000 stores closed their doors, more than twice the amount of stores that opened in the same time period.

    The costly bill resulting from online retailers assaulting our brick and mortar retailers will come in many forms including defaults on loans and bonds as well as reduced property taxes for local communities. We can also expect a slew of empty buildings blighting our landscape and driving down the value of properties across the nation.

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