- JCPenney announced on December 7 that the sale of its retail operations to Simon Property Group and Brookfield Asset Management was complete.
- The sale came at the end of nearly seven months of tense negotiations.
- The deal preserves 60,000 jobs, but not everyone’s walking away happy.
- Visit Business Insider’s homepage for more stories.
In a hearing on August 31, Joshua Sussberg, a lawyer at Kirkland & Ellis, which was representing JCPenney in its Chapter 11 bankruptcy case, shared an update on how negotiations were going. Things were not good.
At the time, reports had been swirling that three competing bids had been submitted to take over the ailing department store, which was founded in 1902.
A hundred parties had shown interest, yet it came down to three bidders: the private-equity firm Sycamore Partners, fellow department-store operator Hudson’s Bay, and a joint venture between Simon Property Group and Brookfield Asset Management.
Then the talks stalled.
“Certain negotiating postures and egos, however, have not necessarily been set aside over the course of the last two weeks, because it’s failing,” Sussberg said. “Our drive in the red zone stalled. All while the business has suffered, as our vendors stand by with bated breath, waiting for an announcement — at the same time holding inventory — and the word that JCPenney will, in fact, be around for the foreseeable future.”
Sussberg added: “While it is possible that one of the bidders comes back to the transaction, we can no longer stand idly by and allow for negotiating postures to stand in the way of 70,000 jobs and our vendor base.”
It wasn’t the first or last time that parties with different ideas for JCPenney’s future would butt heads during the storied department store’s bankruptcy. Throughout the case, a group of shareholders objected to the company’s plans to emerge from bankruptcy under new ownership, even objecting to the idea that JCPenney’s Chapter 11 filing was necessary in the first place. Appeals are still ongoing.
JCPenney filed for Chapter 11 bankruptcy on May 15. Nearly seven months later, on December 7, the sale of its retail and operating assets to Simon and Brookfield was announced as complete, the court deciding that an arrangement with the two mall giants would be the most likely to preserve JCPenney’s legacy in the long term. Meanwhile, many of JCPenney’s stores and all its distribution centers would be transferred to two holding companies owned by its lenders.
Read more: The new owners of Brooks Brothers, JCPenney, and Pier 1 Imports reveal what makes a bankrupt retail brand worth buying, and it’s all about playing the long game
Company executives have sounded triumphant about the outcome. The retailer would live to see another day, and some 60,000 jobs that could have been lost in liquidation had been preserved. It was on track to exit bankruptcy.
“Today is an exciting day for our company, as we have accomplished our goal of putting JCPenney on a secure path for the future as a private company so that we can continue to serve our loyal customers,” Jill Soltau, then JCPenney’s chief executive, said in a press release announcing the sale.
David Simon, the CEO and president of Simon Property Group, said in the same press release that the mall giant had “always been firm believers in JCPenney” and was “very pleased to help preserve this iconic institution and save tens of thousands of jobs.”
JCPenney’s bankruptcy is emblematic of the pandemic’s effect on retail: A department-store giant that had been slow to e-commerce and struggled to grow sales was brought to its knees by shutdowns and forced to explore strategic options to survive.
And while many have cheered a deal getting done, the outlook isn’t so rosy for everyone involved.
When JCPenney filed for bankruptcy, it had more than 80,000 employees. As it exits bankruptcy, it now has about 60,000, after a round of store closures it completed in the restructuring process and a layoff at its headquarters in Plano, Texas.
At the same time there’s a sense of tremendous loss for many shareholders — some longtime employees, investors, and retirees — who didn’t recoup their money. Those shareholders have filed a number of objections in attempts to block the sale along the way.
A struggling retail icon finally brought down by the pandemic
The pandemic has been devastating for many retailers, especially those deemed “nonessential” during states’ shutdowns in the spring.
JCPenney had struggled to grow sales for years, but things were surprisingly looking up in 2018 and 2019. The company hired Soltau from Joann Stores in 2018 and had a new CFO, Bill Wafford, who joined from The Vitamin Shoppe. With new leadership and a “plan for renewal” focused on improving merchandise, building out its digital business, and fueling growth, there was optimism the company was beginning to turn things around operationally.
It had already hired Kirkland & Ellis, in the summer of 2019, to focus on liability management and find ways to create more runway for the company.
But then in March the pandemic hit, which forced the closure of all JCPenney’s stores. With no revenue to offset its cash burn, and billions in debt to contend with, the conversation quickly turned to restructuring.
“Until this pandemic struck, we had made significant progress rebuilding our company under our Plan for Renewal strategy — and our efforts had already begun to pay off,” Soltau said in a press release announcing JCPenney’s bankruptcy filing. “While we had been working in parallel on options to strengthen our balance sheet and extend our financial runway, the closure of our stores due to the pandemic necessitated a more fulsome review to include the elimination of outstanding debt.”
From the outset, it was clear the pandemic would make the process more difficult.
Judge David Jones, the chief bankruptcy judge who presided over JCPenney’s Chapter 11 case — and that of Neiman Marcus — said in an interview with Business Insider that the bankruptcy court for the southern district of Texas had already planned for the possibility of an external event that would force hearings to be held away from the courthouse. Still, Jones said he had always assumed that would be a hurricane, not a pandemic.
The court used the website join.me to host videoconferences, later upgrading to GoToMeeting. They limited audio to phone lines so that they could follow guidelines around keeping the official record even if someone’s internet connection was poor.
He held the first-day hearings in the case on a Saturday, from his kitchen table.
Later on, beginning in the summer, Jones would begin holding hearings in a courtroom that was empty except for him and one rotating member of his staff.
“It’s just the two of us in the courtroom for nine hours a day,” he said. “And that’s a really odd thing, to set out and see no one.”
The pandemic loomed large throughout JCPenney’s bankruptcy.
Early on, lawyers frequently noted the need to move through the process quickly. The spring’s store closures had put immense pressure on the retailer’s finances, and it had billions in debt that would be maturing over the next several years.
There was a lot of uncertainty over how the pandemic would progress and affect the company’s ability to have customers in stores.
“You said it’s fast but fair. I want you to know that at least my looking at it says it’s not fast enough,” Judge Jones said of JCPenney’s plan to exit bankruptcy at that first hearing. He encouraged the debtors to do whatever it would take to get the restructuring done even before the deadlines they had set.
And yet the deadlines that the lawyers had set to finalize a business plan and complete negotiations with a buyer were repeatedly missed and pushed back.
People familiar with the proceedings said that this was an extremely complex case, with thousands of pages of supporting documents. The master lease document itself went on for more than 200 pages.
“There were so many ups and downs in the negotiation, whether we were going to get to a deal, whether we weren’t going to get to a deal, whether the lenders and Simon and Brookfield were going to agree to a construct, whether Simon and Brookfield were no longer involved with it and lenders were going to agree on a standalone construct,” Sussberg said in an interview with Business Insider.
He added: “It was just so complicated because of the size of the operations and the structure of the company. But ultimately I think people agreed and got to what was the right answer.”
Bondholders, as well as a group of creditors led by Aurelius Capital Management, had also opposed the sale at different times before reaching an agreement. The size of the payout was the main concern of groups objecting to the sale.
In the meantime, Wafford testified in a November sale hearing that employee turnover had been high during the bankruptcy, and that it was taking longer to hire new employees. Some vendors concerned about the department store’s future were not shipping new merchandise to stores.
On November 9 Jones approved the sale after a hearing that reviewed all options for JCPenney’s future. The hearing had gone on for 10 hours.
Simon and Brookfield bought the department store’s retail business for $300 million in cash while assuming $500 million in debt.
On December 30 Simon and Brookfield announced that Soltau would be exiting JCPenney the next day. The department store’s new owners said they would be seeking “a leader that is focused on modern retail, the consumer experience, and the goal of creating a sustainable and enduring JCPenney.”
Breaking JCPenney into two
The final agreement essentially separates JCPenney into two distinct entities.
About 160 JCPenney stores and all six of its distribution centers are being transferred to the company’s lenders, which will hold them in two real estate investment trusts. Those lenders — hedge funds and private-equity firms that financed JCPenney’s bankruptcy — agreed to forgive some of the company’s $5 billion debt load.
Simon and Brookfield are buying the rest of the stores while continuing to operate the entire store fleet — now about 700 stores — and distribution centers. They will pay rent for the stores they do not own.
A person familiar with the lenders’ thinking but who was not authorized to speak publicly said it had taken months to come to an agreement about which stores would go into each entity. The hope was that each entity would be financially viable.
A similar model was used by Toys ‘R’ Us and Sears before their bankruptcies.
Still, the deal with Simon and Brookfield means that certain parties — bondholders, vendors, shareholders — won’t be getting a payout. Some uninsured retiree benefits have been erased as well, the Dallas Morning News reported.
Many shareholders remain unhappy. Shareholders are typically last in line when it comes to claims being repaid in a bankruptcy case. They may be entitled to some repayment if there is anything left over after creditors have been paid, but they often end up with nothing.
But a group of shareholders, some of whom are retirees or longtime holders of JCPenney stock, are claiming to have lost their life savings, and they have filed a number of objections along the way.
They have tried to argue that there was more value in JCPenney than the deal with Simon and Brookfield has accounted for, and that the retailer would actually be able to repay its debt if it simply restructured instead of sold itself to its landlords. Those arguments have not persuaded the court, though there’s time to appeal.
Some have filed direct claims against JCPenney executives, including Soltau and Wafford, alleging that they “did not perform their duty” and caused “emotional distress” as well as “personal loss and suffering.”
JCPenney paid $7.5 million in bonuses to four executives, including Soltau and Wafford, shortly before filing for bankruptcy, a point of contention for many shareholders objecting to the deal. JCPenney declined to comment on the bonuses.
Some shareholders have even launched personal attacks against Sussberg and others working with JCPenney, Jones said. The judge added that many of these attacks took place in the videoconferencing software’s group-chat function, which he said he shut down after a while.
Over the summer, Jones approved a shareholder motion to form an ad hoc equity committee and obtain financing to fund their legal efforts.
But Jones told Business Insider that he received a number of shareholder letters that demonstrated a lack of understanding about how Chapter 11 bankruptcy works.
As an example, he said he received a letter from a person who had put their inheritance into a thousand shares of JCPenney stock and didn’t understand why the company wouldn’t be paying them back.
“That’s just a huge gap in knowledge right there, and that’s unfortunate, man,” Jones said. “Those are the people that I just feel horrible for.”
He added that the high level of shareholder participation was something he hadn’t seen in previous cases.
“They took advantage of the fact that I just believe that people have the fundamental right to be heard. And so I made a lot of very expensive lawyers sit through hours of individuals expressing their opinions,” Jones said.
“I was very comfortable that everybody got an opportunity to be heard.”
JCPenney’s future is obstinately tied to the mall
Being acquired by one’s landlord brings about a new dynamic.
For Simon and Brookfield, the benefit is in keeping stores at their properties open. The new owners also won’t have to pay rent on JCPenney stores in properties they own.
It also gives Simon and Brookfield an inside look at how JCPenney has been doing.
It lets Simon “get under the hood of the retailer to know how they’re framing their strategy,” said Ranjini Venkatesan, who works at Moody’s and was the lead analyst for Simon Property Group. It can include what kinds of products a store provides, the size of the store, and how the store design works.
Jones, who has preceded over retailer bankruptcies in the past, said the acquisition should be understood purely as a defensive play on the part of Simon and Brookfield. JCPenney is frequently the anchor tenant in the malls where its stores are located, and having an anchor store go dark is dangerous to the health of the mall.
In addition to JCPenney and Neiman Marcus, Jones has handled the bankruptcy of a franchisor of Pizza Hut and Wendy’s this year.
“If you don’t get traffic down on that end of the mall, the smaller shops that depend on that traffic start to decline, or the leases end, or they terminate them and they file bankruptcy,” he said. “And so it just grows.”
As COVID-19 cases continue to rise in the US and lockdowns loom, the threat to retail will continue into the new year. Industry experts are expecting a large number of malls to shutter in the coming years. In August, Coresight Research estimated that about 25% of the country’s malls would close in the next three to five years.
Jones predicted that more retailers will be forced into bankruptcy around June of next year, based on publicly available information about forbearances. He pointed to energy and real estate investment trusts as two sectors that could see a lot of action.
“I just have to believe that there are others if people aren’t paying rent,” he said. “At some point, you’ve got to make your mortgage payments just like anybody else. And so that creates a problem at some point.”
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