Current Price: $25.82
Target Price: $200 (speculative)
Upside: 670% (speculative)
Expiration date: TBD
This idea was shared by David.
This is timely although very speculative idea with potential catalysts on the 15th or 19th of April.
Sequential Brands is a highly leveraged equity stub with the possibility of multi-bagger returns in an acquisition scenario. The company owns a portfolio of mostly apparel brands (Jessica Simpson, Gaiam, Joe’s Jeans, etc). Multiple aspects suggest a possibility of an imminent sale of the company. Recent acquisitions in the sector and peer multiples indicate a potential valuation (in the most optimistic scenario) up to $200/share at 10x forward EBITDA.
A major caveat, which is responsible for the currently low valuation, is company’s high leverage – debt to market cap stands at 10x. Covid caused SQBG to trip their Debt/EBITDA covenant (7.25:1) last year, but they have been getting waivers from KKR (Wilmington Trust), with the most recent waiver expiring on the 19th of April. If the company doesn’t return in compliance by then, it could potentially be forced into bankruptcy, or another waiver will be granted. Adjusted EBITDA was $8.0m in Q4-19, and $43.7m over the last nine months through Q3-20, for a TTM total of $51.7m. Q4’20 should be close to Q3, which would result in total $62.6m EBITDA for FY20. The 7.25 covenant means net debt would need to be $453.9m or less to get back in compliance. SQBG had $453.4m total debt at the end of Q3, and $21m in cash. The company also has a $40m potential earnout on the Martha Stewart sale – due to FY20 strength in Homegoods I expecting that earnout milestones have been achieved. Due to the above, I would expect the company to be back in compliance after filing for Q4’20, which is scheduled for tomorrow, 15th of April. Peer ICON released earnings that support general industry strength Q3->Q4.
A couple of further aspects signal that bankruptcy is unlikely and that a sale of the company might already be in the works:
- KKR’s debt covenant allowed it to appoint a majority to SQBG board if not in compliance at 4/1. SQBG filed an NT-10K instead of releasing earnings on time. Despite having the ability to do so, KKR has made no board appointments in two weeks. Either one of the largest PE’s in the world is asleep at the wheel, or they aren’t going to bother because a sale is about to close. And if SQBG wanted to avoid this, they could have filed earnings in time to get back in compliance yet didn’t.
- Additionally, SQBG announced Strategic Alternatives in December and paid to buy out of an expensive HQ lease in Q4 (not something you do if worried about getting back in compliance on debt) for more than they would have owed in BK.
- The CEO resigned and was not replaced
- The CFO resigned and was replaced with a contract CFO whose prior jobs were selling a company to PE.
- The two major shareholders – Chairman Bill Sweedler and Martha Stewart (10%+ each) – have nothing to gain from a bankruptcy filing/KERP plan, neither would be needed to run the company going forward. They are strongly incentivized to monetize their stakes here and move on with their lives.
Obviously, the expectation of the imminent company sale is just an educated guess of what might be happening behind the scenes. I might easily be proven wrong and the same signs that seem to support my thesis, might also be interpreted in a completely different way – i.e. lenders are preparing to take over the company with limited recovery for equity holders. Thus, do your own due diligence before deciding one way or another.
SQBG Value
As mentioned above, the adjusted TTM EBITDA stands at $51.7m. When you look at Q2/Q3, with the lack of CEO costs and removal of the lease, run rate annual EBITDA could easily reach $75m-$80m. The company signed a lot of deals late FY19 and these have yet to impact the financial performance. Jessica (the face of one of the key brands) just hit the road on her new book tour, so expecting the trend to be solid for FY21. I view the run-rate EBITDA of $75m as safe base case estimate.
Peer valuation and recent acquisitions:
- XELB (QVC brands) trades 10x EV/Adjusted annualized Q3/4 EBITDA, however, the company has very low leverage.
- RCKY just bought HON boots biz for 9.3x EBITDA. Unlike SQBG biz this is actual manufacturing of product as well, lower margins;
- ICON trades about 10x EV/Adjusted annualized Q3/4 EBITDA. Although ICON might not be a good indicator for appropriate valuation multiple as almost the whole of EV consist of debt.
- APEX had a default looming at 3/31 and was sold for 8.6x EV/Adjusted annualized Q3 EBITDA. I get that this wasn’t at a premium to the share price, but the buyer still made the calculation it was better to assume debt here than to wait to bid in bankruptcy. Brand quality in this case was Tony Hawk and Cherokee;
- Martha Sale in FY19 was at 8x FY19 EBITDA, or 10x if the earnout is taken into account. This was SQBG’s lowest margin brand;
- VFC bought Supreme for 15x last year, which was praised as a great price and a strategic win.
- I have not found a single material, recent example of a brand transacting below 6x EBITDA, which is what it would take to wipe out shareholders here.
Hitting SQBG’s $75m EBITDA with a floor 8x multiple would result in a $600m sale price, while ignoring the value of $40m earnout, $20-30m positive working capital, and $300m of NOLs. Currently, EV is just a touch under $500m. $100m of additional EV re-rates shares to $100. If they sell closer to 10x (more likely if they unload individual brands to different buyers) and get the earnout, $200 share price comes into focus. To only be “made-whole”, shareholders would need a 7x multiple on a lower $65m EBITDA, the earnout, and no credit for AR/NOLs.
As an additional point of support, many of SQBG brands were aggressively written down in Q2-20 during Covid. Despite this, shareholders are still looking at equity book value roughly equal to the current market cap. If the brands were worth this last spring they’re likely to be even more valuable now. No further writedowns in Q3 might suggest no further deterioration in brand value. The book value of the brands (i.e. intangible assets) is at least partially supported by the prices paid for these brands:
- In 2015, SQBG paid $120m for 62.5% of Jessica Simpson’s brand. Looking at the impairments recorded since, the company has written off about half the book value. She had started a marketing blitz in March last year before Covid hit, in coordination with the launch of her book. Given her financial interest in her brand, I’m sure she’ll try to drive maximum value before selling this again. Case and point, she has been all over the news this past week marketing the paperback launch of her book. Hard to believe she’s out trying to drive results if she’s about to get wiped out in a bankruptcy proceeding. Interview on NBC (4/14) they mentioned she has a $1B line.
- In 2016, SQBG paid $150m for Gaiam, which the company wrote down about $30m at the beginning of Covid. It’s worth noting the brand was acquired while doing about $25m of revenue and 90% EBITDA margins. Given this is one of the brands that should be booming during Covid, selling this for 10x brand EBITDA should result in $200m+ proceeds.
- In 2015, SQBG paid $70m for Joe’s Jeans, which the company wrote down about $15m. This seems to be a very stable brand that should easily get its investment back or more should the sale be contemplated.
- Heelys was acquired for $63m, together with nearly $60m of cash and investments on the balance sheet. In other words, this has barely any intangible book value. How much value did their Reebok collab add this year? Who knows. But selling this one would be all upside against book.
- Similarly, SQBG paid only $3m for William Rast, and just signed a new deal for the brand. There’s no material book value there, again it’s all upside.
- Avia and AND1 were part of their Galaxy Brands acquisition, which cost $100m and 13.75M shares (pre-split). Both should be doing well during Covid. Avia is a bit interesting, as were getting $12.3m for the Avia China brand (terms in flux), but also will assign the Avia brand to a licensee after $100m of cumulative royalties are paid (approximately 5 years from now). AND1 hasn’t had any impairments and remains one of their core brands, which should easily fetch over $100m on sale. Their new deal with Foot Locker Canada did probably sound a bit better before Norm got traded to Portland, though.
Risks
- Investing in leveraged equity stubs is very risky. Small changes in EV and valuation multiples result in drastic moves in equity value both up and down. Buying leveraged equity stub is not dissimilar to buying out the money option and might result in the full loss of capital.
- KKR could force the company to file for bankruptcy if they stop granting extensions. However, KKR has been able to do that for a year and hasn’t. Now that KKR is under the tent for strategic alternatives I think other risks like debt for equity swap are off the table. Their choice to not nominate a majority is consistent with an imminent deal closure, and that they’re comfortable being repaid. Of course, this is only my interpretation of the situation and the real reason behind KKR actions could be completely different.
- There’s a potential judgment from the SEC on two counts to fail to impair goodwill. The maximum combined penalty is $2m, I’m not worried about this part. No criminal charges.
- A few ambulance chaser lawsuits regarding share price decline FY16-20. Continued expansion of the class they are pursuing indicates they aren’t getting any traction. Peer ICON spent $10-20m each of the last two years dealing with charges regarding falsifying financial statements and executive fraud, much more serious than failure to impair goodwill.
- The company received a substantial amount of attention from the SA community in March and the stock is already +50% since then. Nonetheless, EV change was minimal as net debt comprises the majority of the company’s value.
SQBG Q4 results together with the 10-K are out. Adjusted EBITDA for Q4’20 stands below the David’s projections in the write-up ($13m vs $19m) but was sufficient to bring the company in compliance under its waiver as of Dec’20. Revenue was also somewhat below expectations. Performance targets for the $40m Martha earnout have not been met. Strategic alternatives review and negotiations with lender still ongoing. Shares are down after-hours.
On the waiver:
https://www.sec.gov/Archives/edgar/data/1648428/000155837021004353/tmb-20210415xex99d1.htm
I leave it for David to add further colour on this.
Thanks for posting DT. They are in compliance on the BoA loan, but the KKR/Wilmington Trust covenant is still tripped. Thoughts:
Not getting the MS earnout is surprising, given the strength in home goods during 2020. Out of SQBG’s control but obviously not the outcome you would hope for. They’ll have two more shots at this but I’m not too optimistic after missing it entirely.
A/R remains very elevated, and if they collected a meaningful portion of this during Q1 they could be back in compliance. $9.0m appears to be the remaining balance on their Avia China sale, which will be paid in remaining installments in 2021.
They cycled a $8.0m Q4-20 with $13.2m of adjusted EBITDA, and that included a $2.3m reserve for legal costs. Great seeing Y/Y strength on the final quarter before they start lapping a lot of the fashion brands impacts from Covid. Without the legal costs they would be right on the line of getting back in compliance even without the earnout.
Still no board nominations from KKR, 2/4 remain their representatives. Hard to see how this isn’t a good sign KKR trusts Sweedler to complete the process without interference.
Not from the SQBG press release, but $50m EV XELB just got a $100m line of credit yesterday for the purposes of doing a deal. Some of the smaller brands might be in play for them, or potentially they may be bidding on the 62.5% of the Jessica brand. Could be something else all together, but encouraging to see banks still underwriting a large credit facility in the space either way.
Given Q1 is already closed, and KKR would have known about what it looked like when they extended on 3/31, hard to see how they wouldn’t get another extension on 4/19 if we still don’t have a deal announcement. I’m remaining patient and holding out for a sale.
Been digging on this most of the weekend – a couple more thoughts:
If bankruptcy was a near-term likelihood I don’t think the auditors would have signed off on a 10-K, not prepared on a liquidation basis, and without forcing them to write down brands more if the bids aren’t enough to cover the debt. Defer to others on this one, but I don’t think an audit partner would put themselves in this position.
Having a hard time seeing how KKR gets a better deal by “stealing” the company. If they convert their debt to equity, that’s a change in control that should blow the NOLs, which would offset their update. BofA debt would require them to sink another $150m into the business. With $450m invested, and now paying taxes, their yield can’t be much higher than 11% and their risk is the same or worse. They would also cut some kind of deal with Martha or Sweedler/Tengram to go this route I’d expect, which further dilutes their upside or forces more cash upfront.
Hard to believe they A. don’t have offers that cover the debt and B. KKR sees so much value (when no one else does) they’re willing to try to take over the business for limited upside. Could be wrong, but the simplest explanation to me is we should get a deal announcement soon and equity gets paid something, potentially a lot.
First sale has been announced – $11m for Heelys. This is exactly the kind of buyer we want, and twice what they paid for it in 2013.
The upside case involves selling stuff above book (check) to strategic buyers (check). I guess people thought this was a core brand and now they’re nervous? Price should be way up on this news.
Also – they closed the deal today, not LOI. So this has been under contract for a bit. Pushes back on the narrative they aren’t making progress.
Heelys sold this morning for $11M, vs. $5.5M net acquisition cost in 2013.
https://finance.yahoo.com/news/sequential-brands-group-announces-sale-140100498.html
The market doesn’t seem to like it though, down 6.5% so far today.
Any idea what the revenue and Ebitda contribution from Heelys was?
I didn’t see them break anything out by brand anywhere. Market seems to have changed its mind on that news, though. Huge day yesterday!
They published proforma numbers yesterday. Heelys was actually loss making: revenues of $879K and operating profit of -$621K in 2020 (Ebitda loss maybe slightly smaller as there might be some intangible amortisation).
https://www.bamsec.com/filing/155837021004944/4?cik=1648428&table=1
Yeah, them being able to get 12x (guaranteed minimum) revenues from essentially the only real buyer for this brand in particular, very encouraging for other sales.
Pretty sure there wasn’t much on the intangible amort since there was still $4m on the balance sheet for this one after they bought for $5.5m 8 years ago.
At this point, one more sale like this/lapping the weak Q1 adjusted EBITDA number should get them back in compliance on the debt, and then the KKR threat is gone. Should give them better leverage selling the bigger brands too.
Down 33% to $18. Sweedler resigned from board.
Is that bad?
Anyone want to guess on the inside story here? Purely speculation, but is Sweedler out because he couldn’t find a buyer at the right price?
I’m completely baffled by this. No clear idea why he would resign without reason right now.
Maybe the simplest answer is that the brands aren’t worth enough and shareholders get a 0. But why no impairments last month? How did they get such an amazing price for Heelys and somehow the other stuff is worthless?
If KKR is trying to steal the business, why would he resign uncontested, why not make them force him out so he has leverage later in any legal proceedings?
If the sales are essentially done, why would he resign and not just stick around for the conclusion?
Why would he sign off on a proxy on Friday to be re-elected chair then resign Monday? What happened over the weekend?
I guess maybe he/TCP wants to bid on a brand and can’t do that unless he leaves but that seems like a very optimistic take.
I don’t know what I’m missing but I don’t like this obviously. The Jessica leak this morning had me expecting a much different kind of day than what we got.
Yeah, I feel like it can’t be coincidence that the Jessica Simpson leak happened the same day he suddenly resigned. But I don’t imagine leaking that fairly innocuous news would ever justify firing. Maybe the powers that be expected she would be bidding soon, and the fact that she’s still raising money means the process is really far behind schedule? I’m just making stuff up at this point because none of it makes much sense.
The primary question in my opinion is whether this news is signalling bankruptcy. If not, it may be a great contrarian buying opportunity right now at ~$14.
I wish there were an options market on this. At least there are none at my broker.
Still no answer on my end, I took a bit of the table today. With KKR running the show, I would think any meaningful return for shareholders is at significant risk. Getting in at $12 might work out, with a higher cost basis things look a lot more dicey.
Okay, I’ve been thinking about this for a couple days, and consulted a couple IB/PE types. Here’s the story I think has happened:
– SQBG gets devastated by covid, violates its loan covenants, gets some waivers from lenders.
– Critically, Sweedler’s intent is NOT to sell the entire business. It’s to sell off enough chunks that they can get back in compliance with the covenants. This explains why the process has moved so slowly — it takes longer to sell pieces than to sell the whole thing at once.
– The wheels begin to turn at KKR. They’re either frustrated at the slow progress, or see more value in taking over the company via bankruptcy than simply getting their money back. Missing the $40M earnout from Martha Stewart may have been the straw that broke SQBG’s back.
– Sweedler completes the Heely’s sale, but it’s not enough.
– KKR appoints Marjorie Bowen to the board (one thing I haven’t figured out is Bowen and Sweedler’s relationship — they were on the board together at Centrics Brands, and stayed on until the bankruptcy was finalized). Sweedler no longer has a majority on the board and sees KKR’s move to push to bankruptcy.
– Sweedler is pissed off and leaves in the most damaging way he can, on extremely short notice. On the way out the door he talks to the NY Post and tells them about the chaos at the company, and how they were close to a deal with Jessica Simpson. Passed through the media filter, this becomes a story about Jessica Simpson trying to buy her brand back.
What does this mean for the stock? Bankruptcy is probably imminent. If the brands have true value, another turnaround team may come by and make a bid. Sweedler might do it, if he can raise enough money quickly. I don’t think either of those things is likely.
As far as preserving the ~$40M positive book value through bankruptcy? To paraphrase my PE source, never bet against KKR getting everything it is owed, and more.
So in this view, Sweedler took a big gamble with his own 10%+ stake by trying to sell pieces at a time. When was the point of no return for his decision?
Also, could you spell out why leaking the allegedly imminent Jessica Simpson deal would be damaging to KKR? Doesn’t it increase the chance of competing bids?
Thanks for sharing this theory.
How long has Sweedler owned 10%? A long time, right? He’s down probably 90% or more. So him trying to keep the company afloat is more loss aversion than gambling.
I think Sweedler talked to the Post about how messed up the situation at SQBG was, and said they were close to a deal with Jessica Simpson. The Post decided the lead for the story was Jessica Simpson, not behind-the-scenes conflict at an obscure company.
Gotcha, thanks
Thanks, I’ve been kicking the tires in a similar way. I agree to a certain extent, but talking to people who have been following the company for years, Covid didn’t actually hit them that hard, in fact their adjusted EBITDA number for Q4-20 was almost double Q4-19 due to the new cost structure they have in place. Despite tripping the leverage covenant, they have been servicing the debt and really aren’t as “distressed” as some might expect. They signed a lot of deals in 2019 that haven’t hit yet due to Covid, that should really show off the earnings power of the structure.
I agree that Sweedler was trying to sell the pieces individually, but not that he wanted to keep this long term, just long enough to maximize the brand value. Supposedly, the prior CEO (Conn) wanted to grow the business, and when it became clear they were piloting towards a sale he left.
The more I’m looking at the Bowen appointment, I agree it’s a sign of a push toward BK and I wish I’d sold that news. I brushed it off given Sweedler was still listed as Chairman in the proxy filed 10 minutes later, but that appears to have been premature.
Leak explanation makes complete sense.
Agree a BK filing may be in the works, and that may not actually be the worst outcome if it means a public auction of the brands. I’m as confident as ever that the value is there, and I don’t think the KKR credit team wants to sink another $150m to pay off BofA to then blow most of the NOLs. They were getting 11% already on the debt, they could have struck a deal for some equity/warrants for less than 50% of the business if they really wanted some more upside without a costly BK process and without destroying the valuable NOLs.
Essentially I expect some kind of fire sale, BK or no, and unless enough interested parties bid I’d expect the operators of the licenses (i.e. BBC for Heelys, Centric for Joe’s, Elan Polo for DVS, etc) will show up and see if they can lowball as the only bidders or their pieces.
The best outcome for shareholders would be someone showing up and making a per-share bid for the whole business to set a floor, and then force anyone who wants a piece to pay market value. I don’t know how likely this is, but I’m hoping there’s at least one wrinkle left in this story.
Default waiver until June 7
https://www.sec.gov/Archives/edgar/data/0001648428/000110465921064296/tm2115853d1_8k.htm
“The amendment, among other matters, extends a waiver of existing defaults under the Credit Agreement through June 7, 2021.”
I think there was a trading halt on the rapid price increase.
More shares already traded today than O/S, seems like the day traders are playing with it
David or Dendrite, do you have updated views on the odds or what’s going on, given the recent waiver? Obviously seems bullish but I could use a counterpoint.
I’m waiting to see what they do tonight with the earnings being due, otherwise really tough to say. If they’re back in compliance on the debt, huge positive. Otherwise I’m still worried about KKR pushing them into BK or taking them out at the market price.
“In recognition of their valuable services to Sequential Brands Group, Inc. (the “Company”), Mr. Chad Wagenheim, President, and Ms. Lorraine DiSanto, Chief Financial Officer, will receive one-time cash retention bonuses of $900,000 and $630,000, respectively, (each a “Retention Bonus”) to be paid in full within five days of their execution of a letter agreement. The Retention Bonuses are being paid in consideration of their continued full-time employment with the Company in good standing and their continuing best efforts in performing services for the Company, including in connection with any strategic transaction, restructuring, liquidation, wind-up or other significant corporate event involving the Company.”
More wording-tea-leaves to ponder.
https://www.sec.gov/Archives/edgar/data/1648428/000110465921068932/tm2116894d1_8k.htm
This really seems to be heading towards a completely unnecessary Chapter 11 filing. Very disappointing.
Do you regarding this 8-K as evidence of that?
If there’s so much value here, why force bankruptcy? I keep going back to your earlier arguments David, about how the bankruptcy route doesn’t look very lucrative for the lenders.
I don’t know why they would keep touting restructuring in their filings unless that’s where this is headed, you don’t purposely make something look distressed if you want to sell it at a premium.
I don’t think there’s much to be gained from filing for it, but that’s what the signs on the ground say. Maybe they really want to own the brands? Thought that was unlikely but maybe they do.
Why did these guys need retention bonuses now that they didn’t need before? When was the last time PE controlled a public company in distress and did right by shareholders? Sweedler was the firewall against that concern, and he’s gone….
Quarterly report delayed once again until June 4th.
https://www.sec.gov/Archives/edgar/data/1648428/000110465921071203/tm2117404d1_8k.htm
I think the waiver got extended by 1 day, to June 8th. Strange that it’s such a minor extension.
https://www.sec.gov/Archives/edgar/data/1648428/000110465921072824/tm2117691d1_8k.htm
Still no earnings, Martha sold 1.5% of her holdings today, and we just got a waiver extension to July 8th. Such a weird combination of events.
Waiver extended once again until July 8th.
https://www.sec.gov/Archives/edgar/data/1648428/000110465921077645/tm2119031d1_8k.htm
Some color on the situation in Bloomberg’s article – which has likely driven the recent share price drop.
https://www.bloomberg.com/news/articles/2021-06-09/jessica-simpson-owner-preparing-to-sell-assets-in-bankruptcy
Waiver of defaults of a different loan (I think) until June 24th, in two days. If quarterly documents are filed by then, the waiver will be deemed permanent. (This refers to specific events of default, not any others and certainly not any future ones.)
https://www.sec.gov/Archives/edgar/data/1648428/000110465921083196/tm2120060d1_8k.htm
“On June 22, 2021, Mr. John Dionne resigned as a director of the board of directors of Sequential Brands Group, Inc. (the “Company”). The resignation did not involve a disagreement with the Company on any matter relating to its operations, policies or practices, or any performance related issues. The Company thanks Mr. Dionne for his time as a director of the Company.”
More drama
https://www.sec.gov/Archives/edgar/data/1648428/000110465921084189/tm2120375d1_8k.htm
Dionne got voted out at the annual meeting, seems to be a token move by shareholders to show their displeasure with KKR board. Given they still control 2/3 seats doesn’t mean anything.
Given the BofA letter, we should either be getting Q1 in the next 24 hours or a BK filing due to BofA default. Curious if they’re trying to get BofA to force them to file so it doesn’t look like KKR forced the issue…
No quarterly report yesterday; 8K today saying SQBG is negotiating a waiver extension with BoA.
Could someone explain what the big deal is with publishing the quarterly report? Is there some legal issue with publishing it if bankruptcy is on the cards or something? To the uneducated eye it just looks like laziness or stupidity.
There are tremendously different accounting techniques that must be used if a business is near bankruptcy (has a “going concern” warning). Without a BoA waiver, no accountant or auditor would sign off on SQBG without a going concern warning and consequent accounting changes.
The thesis is clearly working out in the wrong direction than outlined in the write-up. Assets sales to reduce leverage have not materialized, the key man and shareholder who was supposed to be instrumental for the turnaround has been fired/resigned and the company seems to be moving closer to bankruptcy.
Due to this we are removing this from the active ideas and marking 68% loss in 2.5 months.
David, please share if you see this differently.
Your timing is impeccable, dt
:^)
But I have no clue why SQBG is up like crazy. Anyone else?
Price just doubled today, with nearly 6m shares traded (vs <100k normally). No apparent news, but I'm sure a big one's coming.
The price pop the last 3 trading days – as high as $28, as much as 28million shares last Friday. I was wrong, seems no big news is coming, but a more powerful reason – social media! In this case, we might still reach our original $200 target, ha-ha!
Yeah, thank god for social media. I took the opportunity to sell my principal, and left my gains in there. Now I won’t feel bad staying on the ride.
Got a notification of a Form 4 filing by Martha Stewart, but I don’t see the document on sec.gov…
https://sec.report/Document/0001209191-21-044907/
https://www.sec.gov/Archives/edgar/data/1103637/000120919121044907/xslF345X03/doc4.xml
Seems it was just an opportunistic sale of 10,000 shares around $22/share
Wonder why she just sold 10k shares? Not all 191k? Probably regretting not doing so now.
Bit of an update. On July 2, Bank of America extended their default waiver to August 10, 2021:
https://www.sec.gov/Archives/edgar/data/1648428/000110465921088987/tm2121409d1_8k.htm
There is also additional language in this 8K in the “Other events” section, about how they aren’t sure they can meet their debt obligations, etc. To my non-expert eye, this looks like legal preparation in case of bankruptcy. The next 8K refers to this new language as well.
There is another creditor, Wilmington Trust, which also extended their waiver of existing defaults to August 10, 2021:
https://www.sec.gov/Archives/edgar/data/1648428/000110465921090202/tm2121725d1_8k.htm
Then we got another 8K about the appointment of Sherman Edminston III to the board, and specifically to the “Audit Committee of the Company.” https://www.sec.gov/Archives/edgar/data/0001648428/000110465921090656/tm2121905d1_8k.htm
Notably, “Mr. Sherman was recommended by KKR to the Board pursuant to the terms of the Company’s Fourth Amendment to Third Amended and Restated Credit Agreement…”
A quick perusal of Edminston’s LinkedIn (https://www.linkedin.com/in/sherman-edmiston-iii-a51122148/#) shows he’s often acting as some kind of manager who deals with creditors. He was involved in a bankruptcy in the past for a specialty generic drug subsidiary of Mallinckrodt:
“Further, on August 30, 2019, certain boards of directors of the Specialty Generics Debtors, acting by unanimous written consent in lieu of a special meeting, appointed Marc Beilinson and Sherman Edmiston III as disinterested managers (the “Disinterested Managers”) of the Specialty Generics Debtors. The Disinterested Managers were subsequently appointed to additional boards of directors of the Specialty Generics Debtors. On December 17, 2019, the Disinterested Managers engaged legal counsel, Katten Muchin Rosenman LLP (“Katten”), to render legal services at the direction of the Disinterested Managers. ”
I tried to see whether he got involved before or after bankruptcy was clearly in Mallinckrodt’s future. It appears there was some uncertainty regarding opioid litigation that caused Mallinckrodt to cancel a planned spinoff: https://www.sec.gov/Archives/edgar/data/0001567892/000156789219000035/mnk8-k080619.htm
“On August 6, 2019, Mallinckrodt announced that based on current market conditions and developments, including increasing uncertainties created by the opioid litigation, the Company is suspending for now its previously announced plans to spin-off the Specialty Generics company.”
The word “bankruptcy” or similar do not appear in Mallinckrodt’s 10-Q filed August 6th, 2019. In their next 10-Q filed Nov 5th, 2019 (after Edminston’s appointment), “bankruptcy” is mentioned in the context of ongoing opioid-related lawsuits. It wasn’t until this 8K (https://www.sec.gov/ix?doc=/Archives/edgar/data/0001567892/000119312520047142/d894295d8k.htm) filed Feb 25, 2020, that I saw Chapter 11 would likely be sought related to opioid litigation settlements. Although in a later filing which mentions Edmiston’s name (https://www.sec.gov/Archives/edgar/data/1567892/000119312521198872/d167792dex991.htm), it says he engaged legal counsel as early at Dec 17, 2019.
All this is to say that there is at least one past case where Edmiston’s involvement was a precursor to bankruptcy.
I haven’t looked into what Edmiston was brought on to do at any of his numerous other appointments. Would be relevant to know whether he’s ever brought on to steer a company *away* from an imminent bankruptcy.
SQBG sold their 65% interest in DVS Footwear for $2mm.
https://www.sec.gov/Archives/edgar/data/0001648428/000110465921094410/tm2122807d1_8k.htm
David, any idea whether this was a good price? I see some years ago (~2012) they bought DVS for about $8.5mm, but not sure if it was just 65% interest, or whether it was 100% which they sold a portion of later.
SQBG sold some more stuff for $20mm, $19.6mm of which went to paying down debt.
https://www.sec.gov/Archives/edgar/data/0001648428/000110465921100793/tm2124270d1_8k.htm
Sorry for not checking back in a while. Prices for DVS, ET, and CJ are okay, less than what they acquired them for, but not core brands. Less impressive than the Heely’s price.
Notable is the refiling of last Q3 and Q4 financials, and the commitment that they intend to file Q1 still and then pro-formas for the divestitures. This seems less likely to be a move by the company preparing for bankruptcy, although that remains a distinct possibility. I have a small position in the event they announce a deal similar to what ICON got.
Thanks David. I have a position too, but it’s “house money.” In it till kingdom come.
Is $1 house money worth less than $1? Haha, I feel the same way, but it’s completely irrational, to say it politely to myself!
Any story I can tell myself which removes my frequent (and probably dumb) sell decisions from the equation is meta-rational. :^)
Chapter 11 filed. Stalking horse bids for all but Jessica and Rast coming in at ~$375m.
KKR provided DIP of $150m to get BofA out, and is providing $227m of financing and taking $50m of equity for the active brands from buyer (p.270-280). In other words, KKR wants to own this stuff.
Implied credit bid for Jessica of $75m is laughably low, but need someone to probably come significantly over the top to matter for common, litigation could eat up any small surplus.
Now that chapter 11 is filed, is this a good short with the shares at about 5.23?
Bad idea, Michael. I know based on hindsight, up 50% today Sep 1. Ha-ha! Seriously, interesting that 49 million shares traded today, maybe knowledgeable buyers?