Sycamore’s tough tactics help it survive a brutal retail sector
Sujeet Indap April 9, 2019 3:00 am
Private equity
Private equity firm won its Nine West battle and scored $1bn dividend from Staples
US retail has been a tough business for years. But one private equity firm has made a name for itself as a savvy investor in the struggling sector. Sycamore Partners, a New York-based group founded by Wall Street veterans Stefan Kaluzny and Peter Morrow that manages $10bn, has carried out a series of canny buyouts, spanning fashion banners, such as Talbots and Hot Topic, to the $7bn acquisition of Staples, the office supply chain.
Sycamore seems to be enjoying another success with Staples, which last month announced a refinancing that will see it pay its private equity owner a $1bn dividend. Such “dividend recaps” load up indebted companies with even more leverage so a private equity owner can take money out for themselves. It is only the latest example of the clever financial engineering which has made Sycamore, which declined to comment for this article, feared as well as admired.
In one of its ugliest fights so far, Sycamore was pitted against creditors of Nine West, a collection of consumer and retail brands for women. Nine West bondholders took the private equity firm to court, arguing that it perpetrated a $1bn fraud in 2014 when Sycamore acquired Jones Group, a portfolio of retail brands including Nine West and promptly broke it apart. Three brands — Stuart Weitzman, Kurt Geiger and Jones Apparel — were sold to other Sycamore affiliates. The “Remainco”, which became known as Nine West, was saddled with $1.5bn of debt which ultimately it could not repay, forcing a bankruptcy filing in early 2018. Sycamore denied wrongdoing.
But in a surprise, before the inflammatory charges could be resolved in court, Nine West, Sycamore, and various creditor groups settled their disputes earlier this year. It showed another Sycamore skill: the ability to divide and conquer between different creditor interests held by various distressed debt hedge funds and other asset managers.
While creditors groups had their concerns about Sycamore’s asset sales, they had varying positions in the capital structure. Those kinds of divergent interests were rife for exploitation. Sycamore went as far as to threaten that should creditors continue to pursue fraud allegations, another one of its portfolio companies, a department store called Belk, would stop buying Nine West merchandise.
The most senior Nine West creditors had a $400m chunk of secured bank loans and were set to be repaid in full in cash. The next tier had $300m worth of unsecured loans and stood to take most of the new Nine West’s equity and were ready to move on expeditiously. Both of these groups might not have liked Sycamore’s tactics, but had little reason to prefer an extended fight that would have drained value from the reorganised company.
At the bottom stood $700m of unsecured bonds. The restructured Nine West left those holders with just a fraction of their claims and so they were most motivated in chasing wrongdoing charges at Sycamore. Using a provision of bankruptcy law, they forced Nine West to spend more than $20m investigating the private equity firm’s actions in carving up the company at the time of the buyout.
But in the end, with little support from other creditors and an uncertain path for their legal grievances, the bondholders had little choice but to fold. Unusually, Sycamore and its co-investors threw in $120m of its own money to be distributed to junior creditors. That contribution is hardly trivial. However, for the junior bondholders it equated to just 20 cents on the dollar for their claim. In exchange for coming up with that cash, Sycamore received legal releases for any liability related to its conduct in the buyout. The creditors, reluctantly, all came on side. Sycamore declined to comment.
There was one last stumbling block for Sycamore: the US Securities and Exchange Commission stepped in to object to the liability release, arguing it was not appropriate. But ultimately a judge approved the deal. Nine West has re-emerged as a new company called Premier Brands Group.
Sycamore’s $120m of equity from the original buyout was wiped out. It spent another $120m in the settlement. On the other hand, it made undisclosed profits in its controversial side acquisitions in 2014. Given the gravity of the allegations it faced, recognising the faultlines between its various adversaries to strike a favourable deal counts as another success. Retail is a brutal business at the moment. Whether it is $1bn dividends or fiendishly complicated creditor battles, Sycamore is showing it has a method, if a ruthless one, to make money.
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