FTI to advise on restructuring as Claire's files for bankruptcy

03 April 2018 Consultancy.uk

Teen-targetted US jewelery chain Claire’s has become the latest brick-and-mortar retailer to file for bankruptcy, with FTI Consulting reportedly advising on restructuring for the group. The company’s collapse comes just weeks after the collapse of toy store Toys R Us, which was said to have fallen prey to heightened online competition, paired with an unsustainable level of corporate debt.

Claire’s Stores has filed for bankruptcy, as the latest in a small but growing cadre of failed private equity-backed retail firms led most notably by Toys R Us, which is now liquidating its iconic stores. Acquired in 2005 by a consortium of buyout funds, including Bain Capital, KKR and Vornado Realty Trust, the new private equity owners loaded Toys R Us with $5 billion in long term loans. When Toys ‘R’ Us filed for bankruptcy in the US in Autumn 2017, it was still paying a staggering $400 million in annual debt service obligations. While the UK outfit of Toys R Us was able to limp on for a further financial quarter, the group was eventually dragged under by its larger, warehouse-style outlets, opened in the 1980s and 1990s, which had become increasingly expensive to run, placing a heavy burden on the balance sheet.

In the case of Claire’s, the company had been saddled with $2.2 billion in debt by its take-over by Apollo Global Management in 2007. Earlier in the year, Claire’s hired investment bank Lazard to restructure $1.9 billion of those debts, as the total debt load was set to start coming due in 2019. While the company said that its operations remained strong, having recorded same-store consolidated sales growth of 2.7% for the first three quarters of 2017, a drop in mall-traffic relating to the booming online retail market had already seen Claire’s complete one out-of-court debt restructuring and refinancing two years previously.

FTI to advise on restructuring as Claire's files for bankruptcy

The company’s latest restructuring efforts were also accompanied by a digitalisation drive, in a bid to head off the competition from web-retailers. Lyons Consulting Group aided Claire’s in its digital transformation, revamping the ailing brand’s website with an emphasis on the replication of the company’s ‘in-store’ experience. Ultimately, both restructuring and modernising the company’s practices did not yield the required results, and Claire’s filed for US bankruptcy filing on March 19th.

While the retailer has stated that its international subsidiaries are not part of the US bankruptcy filings, their future viability may well fall into question, as proved to be the case with Toys R Us. They will not have been aided by the news, just days after the US wing’s collapse, that Dutch health and safety authorities had ordered two types of make-up produced by Claire’s to be withdrawn from sale, after it found traces of asbestos in the powder. The inspectorate found 2% to 5% asbestos in a face powder and 0.1 to 2% of the carcinogenic substance in a contouring powder.

Despite the reassurances that Claire’s international subsidiaries are not subject to the filing, the company’s 7,500 global stores will reportedly still be jeopardised by the bankruptcy. A business plan which accompanied the restructuring announcement made clear that Claire’s plans to reduce the number of stores it has in Europe as a whole by 154 to 915 by 2022 including 74 closures in 2018. It is not clear how many of those closures, if any, might be in the UK.

Restructuring

In a statement, Claire’s Chief Executive officer, Ron Marshall, said, “We will complete this process as a healthier, more profitable company, which will position us to be an even stronger business partner for our suppliers, concessions partners, and franchisees.”

FTI Consulting is serving as restructuring advisor to Claire's. Interestingly, it was reported in 2016 that FTI Consulting had been hired to advise Claire’s Stores on its previous attempts to restructure. As the beleaguered chain worked to stave off default, FTI was brought in, according to sources close to the company, who asked journalists to protect their anonymity at the time, as the information was not public. FTI is often sought for help with restructuring, and the firm recently expanded its operations in order to meet growing demand in the US, with the acquisition of American consultancy CDG Group.

Elsewhere in the administrative proceedings, Lazard will remain in its position serving as investment banker to Claire's; Hilco Real Estate will act as the restructuring’s real estate advisor; and Weil, Gotshal & Manges is providing legal counsel to Claire's.

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.