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Things Remembered: Optimizing A Difficult Sale Process

The current M&A environment for distressed retailers is as tough as it gets when it comes to completing going concern transactions. The majority of recent retail bankruptcies have resulted in going-out-of-business (GOB) sales, liquidation, large-scale job losses, and vacant retail stores.

Things Remembered’s acquisition earlier this year by Enesco, a creator and distributor of giftware and home and garden décor, along with its sponsor, Balmoral Partners, suggests that smaller retailers with solid customer value propositions can still find success in difficult markets, even with little time to execute a sale process. These types of expedited deals can happen as long as professionals work together to streamline their efforts, stick to targeted messaging, and anticipate and address process concerns.

As a transaction with a strategic buyer, Things Remembered’s acquisition followed the course of several other retail restructuring processes, such as Gymboree and Gordmans, in which these operations found strategic buyers when little financial investor interest existed.

Sizing up the Situation

The strategic marketing process for Things Remembered faced extraordinary headwinds. Many distressed-oriented investors have elected to steer clear of the sector and its dynamics. Many other retailers have prioritized addressing their own issues over acquisitions and expansions. Like many other distressed retail opportunities, Things Remembered would be going through a restructuring process for a second time. While the case was not a “Chapter 22” because the first restructuring occurred out of court, the business was well-shopped.

Though the prior out-of-court restructuring did not afford the opportunity to reject leases, Things Remembered’s store footprint had already been reduced during that process. Over the prior year, it had only taken a few missteps for the business to experience liquidity pressures due to its tight capitalization from the first restructuring.

Additionally, the timing presented challenges—a marketing process that runs through the holidays can face competing priorities for both strategic and financial buyers. And like many other retailers, the company was approaching a real pinch point in its liquidity at the start of February, which was only weeks away. As post-holiday inventories fell, availability under its asset-based credit facility would drop. The company and its lenders would have to agree to apply cash resources against vendor deposits or paydown of the asset-based loan (ABL). Because there was no buyer in hand at the time, the lenders favored paydown and liquidation.

Things Remembered did have a number of positive attributes that suggested the business could have a productive future, despite the dreaded Amazon Effect. At shopping malls, Things Remembered provided a unique offering that distinguished it from apparel retailers. The company had developed into a credible omnichannel retailer, balancing and coordinating internet and in-store sales of personalized products featuring monograms or engraved messages, embossed or embroidered to meet customer requests. The new in-store “personalization bar” was experiencing early success with virtual imaging and ordering via tablet computers. But with limited capital and a second restructuring on the horizon, the company could not roll out this initiative fast enough.

Importantly, key stakeholders were willing to entertain a marketing process as a potentially superior path to fully liquidating the business, but only in an abbreviated time frame that didn’t further impair their investments.

Acknowledging these positive and negative attributes, the company and its advisors had to think about the best strategic marketing process to get to a transaction fast.

Tailored Messaging

To proceed in a timely manner, Things Remembered’s advisors needed to tightly tailor their messaging to all buyers about the process and the opportunity, making sure that they also accommodated individual buyers’ familiarity with distress.

The advisors could not enact a conventional solicitation—presenting a teaser, confidential information memorandum, and an open request for preliminary indications of interest by a particular date. The company’s liquidity couldn’t support a staged process with flexibility regarding buyer responses.

Buyers were asked to focus on a transaction in bankruptcy. To overcome a challenge commonly encountered in stressed processes—parties waiting until the last minute, whether opportunistic acquirers only jumping in when they recognize there is limited competition or defensive acquirers stepping in to avoid greater loss once other paths have been exhausted—messaging included Things Remembered’s desire to proceed as fast as the buyer was willing without waiting for a particular bid deadline.

For both strategic and financial buyers, framing the opportunity included highlighting the benefits of a liability-free acquisition through bankruptcy—acquiring working capital assets without matching accounts payable—and explaining the value provided for that positive working capital must exceed lenders’ recovery expectations from a liquidation. To avoid iterative guessing about those expectations by a potential buyer, Things Remembered’s advisors chose to lay out the company’s alternatives. For Things Remembered as a retailer, that meant sharing the liquidation waterfall and the recovery levels that the lenders were anticipating.

Going “cards up” like this risked buyers recognizing they didn’t have to bid much over liquidation. However, credible stressed-asset buyers would arrive at this conclusion quickly anyway. And, the cards up tactic had other advantages. First, it filtered out lowballing bidders who were looking to pay less than liquidation levels. Additionally, this level of transparency allowed the company and buyers to work together to understand and allocate the costs of a transaction that delivered a going concern and still met lenders’ recovery expectations.

Some of these costs, such as contract cures, were best allocated to the buyer, with its future buying power and need for services. The parties could arrive at a purchase price that the lenders would view as superior by starting with the baseline recovery that was likely achievable in a liquidation and then adding the costs borne by the seller in maintaining and delivering a going concern.

The transparent dialog also proved helpful late in the process when it became clear that Things Remembered would have to advance funds after signing the asset purchase agreement (APA) to have essential products shipped in time to arrive for key spring selling seasons after closing of the transaction. Once the liquidation calculations were reviewed, the buyer had an understanding of the lenders’ concerns that they receive those advanced funds back in a working capital adjustment at close.

Conveying the right message also required accommodating the buyers’ level of familiarity with distress. Things Remembered’s strategic process drew serious interest from two private equity portfolio companies, two family offices, and a publicly traded company. The advisors needed to consider both organizational and individual familiarity with distressed processes to navigate this wide range of experience.

A strategic buyer’s limited experience with distressed acquisitions can create a new level of complexity and risk, as it did in this case. The strategic buyer was stuck between considering public reporting requirements and concern over public investors’ reception to the transaction announcement. However, these buyers can’t be dismissed—they may be most able to incorporate the assets into their operations and derive both revenue and cost synergies.

And while a financial buyer or investor may have considerable experience around distress, the principal leading the process may be unfamiliar with the limitations of a debtor in the bankruptcy process. Things Remembered’s advisors needed to consider all these factors when communicating with interested parties. While other parties continued due diligence, Enesco was able to move rapidly. The process lasted 22 days from initial diligence to signed documentation.

Sequencing and Placeholders

In the race to complete a transaction, Things Remembered’s advisors had to recognize some transactional and operational matters that were best addressed once a buyer was selected and the company had filed for bankruptcy.

The team recognized that Things Remembered’s buyer would be best suited to negotiate go-forward relationships with vendors and certain landlords. The buyer was better positioned than the estate and its professionals to convey a long-term and larger commercial commitment. For example, Enesco resolved a large prepetition outstanding balance with Google using its broader relationship with the internet company to fashion a settlement that all parties could support.

Buyers and debtors can also work together to support the buyers’ negotiating position. An example of that support was the minimum store count specified in the asset purchase agreement. Though Things Remembered’s go-forward business plan contemplated 128 stores, the asset purchase agreement allowed Enesco to acquire as few as 50 stores, which enhanced Enesco’s bargaining position in negotiating go-forward leases with landlords. Armed with that flexibility, Enesco received concessions on a broad set of stores. In the end, the new Things Remembered occupied and operated 178 stores.

Transferring customer information became another source of uncertainty, one that could only be addressed definitively once Things Remembered filed for bankruptcy. Though retailers’ policies differ, most keep customer data private and neither share nor sell it in the ordinary course, creating a hurdle in bankruptcy. Through Sections 332 and 363(b)(1), the Bankruptcy Code explicitly covers the protection of consumers’ personal information and the transfer of these assets. The court must appoint a consumer privacy ombudsman (CPO) to assess whether the transfer of information satisfies code requirements.

At the time a prepetition stalking horse asset purchase agreement is negotiated, however, the CPO generally has not been chosen, so an empty seat remains at the table. Subsequent conditions in the APA that mandate a certain course of action for the CPO might initially be comforting to the buyer, but they will be counterproductive to receiving the relief from transfer prohibitions that the parties are requesting. The parties must become comfortable that the CPO will get to a position they all can accept. In Things Remembered’s case, the advisors elected to consult with several potential CPOs to familiarize them with the situation and receive feedback. The investment in time was helpful to receiving CPO support on a timely basis later.

The CPO was not the only critical participant arriving late to the process with the potential to derail the Things Remembered transaction. Quick and dispositive support from the unsecured creditors’ committee was critical to court approval for the 28 days between filing with a stalking horse bidder to the closing of the auction.

On the evening after the committee was appointed, the restructuring team prepared and delivered a comprehensive package of information to the committee’s professionals. Fortunately, the transaction was well received. Enesco’s decision to continue to operate stores was a strong reason for the committee, which included landlord representatives, and the committee’s professionals to carefully consider and concur with the debtors’ accelerated timeline.

Conclusion

The Things Remembered sale process—completed in under 80 days from start to close—was rapid because there was no other option. Sector trends would have suggested success wasn’t likely. Liquidity impacted the process and determined what could be delivered to the buyers, what was available for case costs, and what could be provided as recoveries. The expectation of a full recovery on the company’s ABL commitment should a transaction not appear limited the front-end marketing process to less than eight weeks.

However, careful and tailored buyer communications and thoughtful sequencing of some of the most challenging tasks to enlist buyer collaboration led to a transaction that overcame tough odds and produced great results.

James Doak

James Doak

Miller Buckfire

James Doak is a co-head and managing director of Miller Buckfire. His experience includes M&A, financing, and restructuring transactions on behalf of clients in a variety of sectors, including municipal/sovereign, gaming, transportation, telecommunications, distribution, home goods, information technology, textiles, and power generation and transmission. He has also represented creditor constituents in various restructuring transactions. Doak holds an MBA with high distinction from Harvard Business School; a law degree cum laude from Harvard Law School; and a bachelor’s degree magna cum laude from Harvard University.

Michael Kollender

Michael Kollender

Miller Buckfire

Michael Kollender is a managing director and head of Consumer & Retail and Diversified Industrials in investment banking at Stifel. He oversees the groups’ strategic direction and is involved in public offerings, private placements, M&A, restructurings, and financial advisory activities for clients. Kollender’s primary industry focus in the consumer sector includes specialty retail, brand management, consumer services, and consumer products, and he has completed numerous transactions across virtually all major industry sectors and consumer subsectors. He holds a bachelor’s degree from Syracuse University.

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Retail
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