J.C. Penney Co. Inc. says it has hit a wall with outside bidders for its retail business, and wants to proceed with a deal for a sale to its lenders.
At a hearing Monday in Texas bankruptcy court, where the retailer filed for Chapter 11 in May, an attorney for Penney’s told the court that its talks with three reported third-party bidders had stalled. WWD previously reported that those outside bidders included Hudson’s Bay Co., Sycamore Partners and a joint effort of Simon Property Group and Brookfield Property.
“We were in fact in the red zone, with one of the bidders, who together are the landlords for more than 160 J.C. Penney locations,” Joshua Sussberg, a partner at Kirkland & Ellis LLP, who represents Penney’s, told the court at Monday’s hearing. Sussberg did not name the bidders at the hearing, but alluded to names “widely reported in the press.”
“Over the course of the last two weeks, we’ve hit a stalemate,” Sussberg told the court.
“All while the business has suffered, as our vendors stand by with bated breath, waiting for an announcement, [and] at the same time, holding inventory, pending word that J.C. Penney will in fact be around for the foreseeable future,” he said.
“I want to make sure that your honor understands, and everyone hears clearly from me today, that we are going to do everything humanly possible to ensure that J.C. Penney will be around for the foreseeable future,” he said.
Representatives for Sycamore, Hudson’s Bay Co. and Brookfield declined to comment. A representative for Simon could not be reached for comment.
Throughout the proceedings, the retailer has outlined the reorganization it plans to execute through the court-directed process. That reorganization, supported by Penney’s lenders, would involve establishing a structure comprising a property business and an operating company, or a Prop Co./Op Co. structure, as the company’s advisers have described it in court filings and hearings.
Under this scheme, roughly 160 of Penney’s owned properties would be put into a public real estate investment trust, while its distribution centers would be put into another REIT, Sussberg told the court Monday. The operating company, which would also own properties and intellectual property, would then lease properties under a master lease agreement with the property companies, he said.
The third-party bidders had submitted bids for the operating company, while Penney’s lender group, including Brigade, H/2 Capital Partners, Sculptor Capital and others, had submitted a credit bid for the Prop Co./Op Co. structure, the retailer has said. A credit bid essentially allows secured lenders to convert their debt into equity.
The retailer is continuing to finalize the transaction with its lenders, and hopes to do so over the next 10 days, Sussberg told the court. After that point, the lender group would become the stalking-horse bid at an auction for Penney’s. In the meantime, the retailer would still continue to negotiate with interested third-party bidders who want to enter the fold.
“While it is possible that one of the bidders comes back into 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,” Sussberg told the court. “We intend to negotiate and document this stand-alone transaction over the next 10 days.”
Monday’s hearing followed a private conference earlier in August at the direction of U.S. bankruptcy judge David Jones, who is presiding over the case, who expressed concern about delays in nailing down a bidder group.
“That concern has escalated due to the lack of progress in the sale process,” Jones wrote in an Aug. 19 order. “Thousands of jobs and the very essence of the country’s infrastructure are at risk. The parties have reached the end of the court’s patience. Negotiating postures and egos will be put aside.”
At Monday’s hearing, Andrew Leblanc, a partner at Milbank LLP who represents the lenders, said the group was continuing to work with the retailer and others to consider its options.
“The bidders have been a disappointment,” Leblanc said at the hearing. “We’ve moved backwards from where we were when we talked about it all those weeks ago…we’re hoping that that changes.”
“We hope that everybody recognizes that this really is the last time we can get this done,” Leblanc added. “Failing that, we really have to explore all other alternatives.”
An attorney for the official creditors committee in the case also expressed some wariness about the company’s current position.
“We are disappointed as well that we are in the place we are,” Cathy Hershcopf, partner at Cooley LLP, who represents the official committee of unsecured creditors in the case, said at the hearing. “We do hope that these next 10 days will be productive, and are committed to helping in any way.”