At a bankruptcy auction on Wednesday, the company’s stalking horse bidder Lion/Hendrix Cayman Ltd. emerged as the highest bidder for bankrupt men’s designer brand’s business, outdoing competition from WHP Global. It’s not clear what the winning bid was, but it’s likely in the range of $97 million, based on estimates in early court filings in the case.
The proposed transaction, which is still subject to final court approval, is the latest development in the ongoing ownership relationship between Lion and John Varvatos. The next hearing in the case is scheduled in the case for Friday morning.
The entangled affair between Lion and John Varvatos is described in various court filings in the bankruptcy.
The Lion/Hendrix Cayman entity that bid on the John Varvatos business is owned by Lion Capital Fund III Partnerships, a private equity fund formed by Lion Capital. The fund already invests in brands including AllSaints, John Varvatos and licensing company Authentic Brands Group, according to Lion Capital’s web site. Lion/Hendrix Cayman Ltd. is also listed at the top of the corporate structure of the bankrupt John Varvatos companies, according to a declaration filed in the case by John Varvatos Enterprises Inc.’s chief financial officer Joseph Zorda.
If Lion’s bid is successful, AllSaints would operate Varvatos, according to sources. AllSaints has itself been in the process of restructuring its U.K. retail operation, through the Company Voluntary Agreement process in the U.K. The AllSaints CVA also covers some 42 stores in North America and affects some stores in the European Union as well.
The Lion bid in the brand, given the Lion entities’ apparent existing ownership in John Varvatos, has caused some conflict in the case.
Like many retailers entering bankruptcy often hope to do, John Varvatos had entered its proceedings in Delaware bankruptcy court in May with a plan to sell its business as a going concern. The brand had set this in motion by striking its agreement with Lion/Hendrix Cayman Ltd. to sell its business to it.
In court filings in the case, John Varvatos has sought to clarify the distinction between the buying and selling entities, and listed the sellers of the business as “John Varvatos Enterprises Inc., Lion/Hendrix Corp., and John Varvatos Apparel Corp.,” and the bidder as Lion/Hendrix Cayman Ltd.
In general, any planned sale during the bankruptcy process requires the court’s approval, and usually involves an auction process — here, John Varvatos’ agreement named Lion/Hendrix Cayman Ltd. as the stalking horse, whose offer sets the baseline bid.
This is the point where questions about who wields leverage over the company’s future can spark conflict, particularly with unsecured creditors like vendors and landlords who face the prospect of recovering a fraction of what they’re owed.
These stakes often put unsecured creditors in tension with secured lenders, who are generally guaranteed a return of their debt, and also well-positioned to take over the company if they choose.
One way that secured lenders can do this is through what’s known as credit bidding. This practice allows secured lenders who plan to take over the company in a bankruptcy sale, to take the amount they are already owed and put it toward their bid for the company, rather than put up a substantial amount of new money.
This can be controversial if other creditors object, and this was the case in the John Varvatos proceedings. Unsecured creditors sometimes argue that secured lenders’ ability to credit bid gives them too much leverage in the sale process and discourages competing offers. The idea behind the argument is that other interested third parties may be deterred by the risk of sinking resources into developing their own bid and putting up cash to make an offer, only to be bested by a credit bid.
In this case, John Varvatos entered the bankruptcy with a stalking horse agreement that said the purchase price for the company would include a $76 million credit bid of part of Lion/Hendrix Cayman Ltd.’s loans to the company from before the bankruptcy and during the proceedings, which includes the $20.5 million in debtor-in-possession financing it provided.
The unsecured creditors committee here argued that in this case, the purported loans by Lion/Hendrix Cayman were more an “equity infusion” than a loan, considering Lion Capital’s ownership in the brand. In recent court filings, the creditors asked the court to “immediately limit” the credit bid rights of Lion/Hendrix Cayman Ltd. But ultimately, the court allowed Lion to proceed to credit bid.
At heart, the unsecured creditors’ concerns were also about what they could ultimately recover in the case. In recent court filings, the creditors committee pointed out that although the purchase agreement with Lion/Hendrix Cayman Ltd. provides a $2 million wind-down fund to cover some claims in the case, it would still leave them stranded.
The unsecured creditors here have claimed they stand to recover only $250,000 of the $26 million in unsecured trade debt they are owed by the bankrupt John Varvatos entities. The unsecured creditors committee includes a group of class-action claimants related to a gender-discrimination suit by its female sales staff that went to trial in March, as well as Vornado Realty Trust landlords, and garment manufacturers including Verde Garment Manufacturing Ltd.
Note: The story has been updated to clarify the scope of the AllSaints Company Voluntary Agreement.