Don't count the venerable - if bankrupt - department store and mall anchor tenant, J.C. Penney out just yet.
One week after we reported that J.C. Penney (docket #20-20182, in the U.S. Bankruptcy Court for the Southern District of Texas) was on the verge of liquidation after talks with its two largest landlords had collapsed, today the company's lenders reached a tentative deal with mall landlords Simon Property Group and Brookfield Property Partners to buy the bankrupt chain. The deal, valued at $1.75 billion, would rescue the beleaguered department store chain from bankruptcy proceedings, averting a liquidation that would have threatened roughly 70,000 jobs and represented one of the most significant business collapses following the coronavirus pandemic, Joshua Sussberg, a Kirkland & Ellis LLP lawyer representing the company, said during a brief court hearing Wednesday, confirming an earlier Reuters report.
The landlords are poised to put $300 million toward the rescue and have agreed to a nonbinding letter of intent with J.C. Penney, he said. The operating company they are acquiring would assume $500 million of debt. The deal also calls for new financing from existing lenders; in the end, J.C. Penney will have about $1 billion of cash to fund its business when the deal closes, Sussberg said.
The financing includes a commitment for $2 billion of new asset-based lending led by Wells Fargo, as well as $500 million of so-called takeback debt from existing first-lien lenders, he said. The deal would split J.C. Penney into an operating company and two real estate holding companies.
The restructured retailer is expected to operate about 650 stores, according to Reuters: hedge funds and private-equity firms financing J.C. Penney’s bankruptcy, meanwhile, would take ownership of 161 of those stores and separate distribution centers after forgiving portions of the Plano, Texas-based company’s $5 billion debt load, Sussberg said. These lenders, led by H/2 Capital Partners, would own those assets in two separate real estate investment trusts.
The Wall Street Journal reported earlier that the deal is valued at about $800 million, with the mall owners taking about 490 of the chain’s 650 stores. Lenders would swap some of their debt for control of another 160 locations and the distribution centers, which would be rented back to the landlords, the Journal reported.
"The transaction between the lenders, the company, and Simon and Brookfield contemplates a $1.75 billion total enterprise, plus a post-closing earn-out and a significantly negotiated working capital adjustment," Sussberg said in the hearing.
J.C. Penney plans to move at "lightning speed" to seek approval of the deal from a bankruptcy judge in early October, Sussberg said. "We are in a position to move this into the endzone,” he told U.S. Bankruptcy Judge David Jones, noting that previous talks were in the “red zone” before faltering and then gaining renewed traction.
The iconic 118-year-old retailer, which went public at the start of the Great Depression, filed for bankruptcy in a Texas court in May after the pandemic forced it to temporarily close its then nearly 850 stores. Should it survive, J.C. Penney will have withstood unprecedented economic turmoil stemming from the pandemic and bankruptcy proceedings that have felled other retailers during less fraught times. In recent years, Toys ‘R’ Us Inc and Barneys New York Inc failed to reorganize under bankruptcy protection and liquidated.
A deal is not yet completed, Sussberg cautioned. Talks with the landlords have hit roadblocks before, and the parties engaged in screaming matches as recently as Wednesday, he said. Negotiations continued during phone calls moments before the court hearing, he added.
If the tentative deal falls apart, J.C. Penney would resume its course for liquidation. Sussberg expressed optimism a deal would be codified and the judge encouraged the parties to keep working to seal an agreement.
"Time, as we’ve mentioned over and over again, is not our friend,” Sussberg said. “It is important -- for this transaciton to stay together and for all these stores to stay open and for the 70-plus-thousand employees to stay employed -- for us to move with lightning speed."
J.C. Penney’s survival has hinged on sale negotiations, which have consumed the summer and drawn urgent directives from the company’s bankruptcy judge for parties to set aside what he labeled egos and negotiating postures to consummate a deal to save the beleaguered retailer. The talks dragged on for weeks in part amid haggling over lease terms, Reuters sources said. In late August, the discussions with Simon and Brookfield reached an impasse, prompting J.C. Penney to ask lenders to take control of its retail operations in addition to the real estate investment trusts they envisioned owning. After further discussions, the company reached a deal with Simon and Brookfield to buy the retail operations.
Any deal would require approval from the company’s bankruptcy judge and potentially be subject to competing bids in a court-supervised auction. This means that private equity firm Sycamore Partners and Saks Fifth Avenue owner Hudson’s Bay may have another say in the final transaction; the two vied for J.C. Penney’s retail business earlier this summer.
So why are Simon and Brookfield doing a deal with one of the biggest clients? Because as Reuters explains, the deal reflects a dramatic shift following the pandemic that is pushing them to rescue faltering retailers occupying malls they own across the United States. The demise of large tenants such as J.C. Penney would deprive them of rent and also potentially trigger contract clauses allowing other retailers to pay them less or break their leases altogether, further darkening malls.
Simon, the largest mall operator in the United States, has already this year negotiated separate deals to rescue the two-centuries-old men’s apparel clothier Brooks Brothers and denim retailer Lucky Brand from bankruptcy. Brookfield in May said it would devote $5 billion to non-controlling investments designed to revitalize retailers struggling in the wake of the coronavirus outbreak. In effect, Brookfield is paying rent to itself to avoid even more rent shortfalls.