Time is running out for Forever 21, but the bankrupt retailer might still be weighing its options.
Currently in the driver’s seat is the consortium of licensing company Authentic Brands Group and landlords Simon Property Group and Brookfield, which has put in an $81.1 million stalking-horse bid to purchase the fast-fashion retailer as a going concern. Under that agreement, the deadline for competing bidders is tight — any rival offers would need to come in by Friday evening, and competing bidders would duke it out at an auction that would take place next week, though in practice there could be some flexibility on timing.
Meanwhile, the family of Forever 21’s founders, the husband-and-wife duo Do Won Chang and Jin Sook, is rumored to be putting together a bid, sources said Thursday. An attorney and a representative for Forever 21 did not respond to requests for comment. A representative for ABG and an attorney for the unsecured creditors’ committee declined to comment. Efforts to reach the Chang family on Thursday were unsuccessful.
Even for a family potentially seeking to keep control, it would be no easy task to beat the stalking-horse offer. For one, Simon Property Group and Brookfield command significant leverage, as they own roughly 187 leases between them, about 42 percent of Forever 21’s domestic store leases, according to a court filing this month by the creditors committee. Their deal with ABG in the stalking-horse bid likely factors in any rent savings negotiated as part of the offer, observers said.
“It gives them a structural advantage in their bid,” said Patrick Collins, a bankruptcy partner at Farrell Fritz P.C., who is not representing anyone in the case, and spoke generally. “It’s unclear whether another bidder would, in a short amount of time, be able to reach the same terms, to get to the same place.”
A representative for Simon could not be reached for comment, and a representative for Brookfield declined to comment.
There are also other hurdles for any would-be competitors. Though the $81.1 million stalking-horse purchase price is seen as a steep discount for a large international retailer that was once a $4 billion enterprise, it will take some muscle to beat. In this case, any competing bid would have to be higher than the $81 million bid, plus a $3.1 million break-up fee under the agreement, a $300,000 overbid amount, and some $1 million in expense reimbursement for the legal and professional fees incurred by the stalking horse for its work in putting together the bid.
On top of all that, competing offers will also have to factor in the value of other obligations the stalking-horse bidder has agreed to take on. Here, the ABG, Simon and Brookfield team has agreed to take on liabilities including up to $53 million in trade debt owed to certain vendors, up to $30 million in post-petition claims, and the retailer’s rent for February.
“It’s not a matter of beating the [stalking horse] bid by a buck,” said Collins.
The outcome of the bidding will determine not just the future of a retailer that is still running nearly 450 stores in the U.S., but also that of its 22,000 employees, and vendors who have yet to be paid for goods. Since its Chapter 11 petition in September, the retailer owes more than $100 million in post-petition payables to creditors including vendors. Without a going-concern sale, Forever 21 may wind up in liquidation, a more catastrophic prospect for stakeholders.
“The judges are put in a difficult position, where they have to weigh what is best,” said Jon Pasternak, bankruptcy partner at Davidoff Hutcher & Citron LLP. Pasternak is also not representing anyone in the Forever 21 bankruptcy, and spoke generally on the dynamics at this stage.
“On one hand, we have a stalking horse who claims to be willing to keep stores open, that keeps jobs, and results in monies that will pay down at least some of the secured debt,” he said.
“The alternative is complete closures, the loss of jobs, diminished payouts to secured creditors, and an absolute guarantee of no returns for these post-petition creditors.
“It gives the judge an awful lot of reasons to approve a sale like this,” he said.