A month ago, the top American mall owner Simon Property Group (NYSE: SPG) And Brookfield Property Partners (NASDAQ: bpy) Were closing on a deal to buy Jc penny (OTC: JCPN.Q) Out of bankruptcy. Talks hit a snag in late August. It proposed selling the department-store chain to its creditors, selling it to its creditors in a final attempt to avoid liquidation.
Fortunately, cooler heads have prevailed. On Wednesday, bankruptcy attorney Joshua Sasberg announced in court that Jesse Penney had resumed his deal with Simon and Brookfield, and the parties had signed a letter of intent to retail to their top landlords. Let’s take a look at what this means.
Sales continue again to Simon and Brookfield
Sausberg announced that Simon Property Group and Brookfield Property Partners had agreed on an enterprise value of $ 1.75 billion to purchase the operations of Jessie Penney. This would be $ 100 million more than their opening bid and would correspond to the highest offer of the first round bid in July.
The actual cash contribution from Simon and Brookfield is $ 300 million, however. The majority of the enterprise value is related to financing rolled out by some of the retailer’s existing lenders.
Thanks to the favorable results of negotiations with the company’s landlords, Jessie Penney currently plans to maintain a “go-ahead” store fleet of 653 locations. While it would be less than 846 stores in early 2020, the company’s initial bankruptcy plan shrunk to 604 stores. (There is still a possibility of additional store closures in future years.)
The agreement with Simon and Brookfield also includes a working capital “earning out” provision. The parties are expected to pay Jesse Penny’s merchandise at the time of closing for $ 235 million. For comparison, average freight accounts payable has increased from $ 800 million to $ 900 million in recent years.
To the extent that new Jesse Penney recovers his balance of payments over the next two years – which will effectively free up cash – Simon and Brookfield will pay 20% of the bankruptcy estate gap. This could potentially add $ 100 million or slightly more to the recovery available to creditors.
Real estate still in the card
As part of its bankruptcy-exit plan, Jessie Penney still intends to close most of its real estate as a separate real estate investment trust (REIT). The new REIT will own 160 stores, which JC Penney’s new owners will lease back for 20 years (with five five-year renewable options). The initial base rent would be $ 121 million a year. The Master Lease contains provisions to enable REITs to repurchase for JC Penny with a higher alternative use value to remove underperforming stores from the Master Lease under certain conditions.
A separate REIT subsidiary will acquire the title for Jesse Penney’s six distribution facilities. The new operating company will withdraw these distribution centers under the same terms as the store master lease. The initial base rent will total $ 35.4 million per year.
What does all this mean?
While retaining Jessie Penney’s retail operations, Simon Property Group and Brookfield Property Partners are keeping an important anchor tenant alive. (Both mall owners have dozens of JCPenney stores in their portfolios.) The agreement would preserve around 70,000 jobs anyway.
On the other hand, the price of the bid is low relative to the scale of JC Penney’s liabilities, which stood at $ 8.5 billion in early August. JC Penney’s secured lenders should eventually recover most of their investment, but unsecured creditors are likely to wind up with token payouts at best. The shareholders are almost certain to wipe out their investments altogether.
Even as Jessie Penney shed most of its debt, the retailer’s long-term prospects are questionable. The company’s formal business plan calls for earnings before interest, taxes, depreciation and amortization, up $ 836 million by 2024 from $ 583 million the previous year. However, the retailer is believed to be able to maintain a broadly stable top line and incur annual capital expenditures of less than $ 262 million in gross capital and deduct key expenses, such as marketing expenses and payroll costs. To store
Jesse Penney’s frugal investment budget and spending cuts could lead to more revenue declines from its official business plan. However, given that Simon and Brookfield are not putting as much cash to buy the business, the downside risk for mall owners is minimal. And if Jesse Penney manages to hit his targets, the property giants can make big bucks from their $ 300 million investment.