Archive for the 'Bankruptcy' Category

RockTenn (RKT) and Smurfit-Stone (SSCC) Agree to Merge

Posted on January 23, 2011, 11:07 pm. Closed

Via DealBook, “2 Top Package Companies to Merge”:

The merger will combine two of the biggest names in packaging, creating a company with 9.4 million tons of production capacity. It will also expand RockTenn’s business in the Midwest and West Coast. The combined company will keep RockTenn’s headquarters in Norcross, Ga.

The deal appears in some ways to be a bet that consumers will increase their buying and need for shipping products.

It also comes about two years after Smurfit-Stone filed for bankruptcy during a wave of big Chapter 11 filings. Through the bankruptcy process, the company shed billions of dollars in debt.

Under the terms of the deal, RockTenn will pay 0.30605 of its own shares and $17.50 in cash, or $35 a share at Friday’s closing price, for each Smurfit-Stone share. The price represents a 27 percent premium to Smurfit-Stone’s Friday closing price of $27.52. RockTenn will also assume $1.8 billion of Smurfit-Stone’s debt and pension liabilities.

This just goes to show that post-reorg companies can be a great opportunity. No matter how crappy they were before or that they’re still in a crappy industry, bankruptcy is inevitably a cleansing process. Upon emergence, the company has been scrubbed and scrutinized, which paves the way for outperformance in the public markets or makes the company more attractive to potential acquirers.

Performance of Companies Post-Chapter 11

Posted on March 10, 2010, 11:27 am. Closed

Last week I finished reading Corporate Financial Distress and Bankruptcy by Edward Altman, the man who created the z-score. The book was published in 2005 and is pretty much a compilation of a lot of data and studies on pretty much every aspect of the distressed debt investing world. It was interesting, but it’s definitely not a good “how-to” book.  The following are notes I took on the various aspects of post-Chapter 11 performance which you might find interesting.

Outcomes of Chapter 11 Cases

Some facts:

  • estimated confirmation rates for cases do not exceed 45 percent in any year since 1990
  • many confirmed plans are liquidating plans
  • there is a strong correlation between the amount of assets listed by the debtor and the confirmation rate

Additionally, there are some large companies that have many related filings. An extreme example is Footstar in 2004 whose case had about 2,510 separate filings—about 20 percent of all Chapter 11 cases expected to be filed that year. This problem can lead to an overstatement of confirmation rates.

A large proportion of companies do emerge from Chapter 11, though not all remain publicly registered. The most important firm characteristic related to whether firms successfully reorganized rather than liquidated was firm size, measured by the prepetition assets of the company. Availability of debtor-in-possession financing to large companies is also an important determinant of the reorganization versus liquidation outcome.

Postbankruptcy Operating Performance

Some key data from studies:

  • over 40% of firms emerging from bankruptcy (“BK”) continued to experience operating losses in the three years following BK
  • larger firms have somewhat better performance based on accounting measures (e.g., ROA and profit margins)
  • industry conditions are an important determinant of the frequency of BK and economic decisions like asset redeployment in BK
  • based on cash flow returns, emerging firms at best perform as well as the market overall
  • involvement of “vulture investors” is strongly related to post-BK success
    • percentage of firms experiencing negative operating income in the year following BK is 31.9% for firms with no evidence of vulture involvement, versus 11.7% when a vulture has been involved in the restructuring
    • when the vulture remains active in the governance of the firm post-Chapter 11, the % of firms experiencing operating problems drops to 8.1% (just look at Eddie Lampert with Kmart and Wilbur Ross with International Steel)

Cash Flow Projections of the Reorganization Plan

Not surprisingly, firms on average fail to meet their projections, which are often too optimistic. There is an important distinction here: pre-BK managers projections have a larger negative forecast error while mangers that come in post-BK tend to have a smaller forecast error.

Incidence of Subsequent Distressed Restructurings

  • In a 1995 study, it was found that 32% of firms restructure again either through private workout, a second BK, or an out-of-court liquidation. Subsequent studies have confirmed a similar rate.
  • Continued involvement of original management is strongly associated with the likelihood of post-BK failure.

Interesting fact: there has only been one “Chapter 44″ case (i.e., a firm that has gone through Chapter 11 four times) and that is TransTexas Gas Corporation.

Post-BK Stock Performance

  • only one published academic study on this topic
    • there are large positive excess returns in the 200 days following emergence
    • average cumulative abnormal return over the first 200 days is 24.6% (median is 6.3%)

Steve & Barry’s: It’s cheap. It’s chic. Is it worth it?

Posted on July 14, 2008, 8:56 pm. Closed

“It’s cheap. It’s chic. Is it worth it?” That’s the question a fashion article in The News & Observer asks regarding a $9 little black dress from discounter Steve & Barry’s. The story observes not even Walmart has a dress for that kind of price.

The reason why I’m even delving into the subject of female fashion is because Steve & Barry’s has recently filed for Chapter 11 bankruptcy and news stories have reported that Sears is interested in either the whole company or in just a selection of some of the brands.

Getting back to the original question, I think it could apply just as well to the company. A bankrupt company can certainly be had on the cheap. I’m willing to trust that its fashions are fashionable. You have celebrities like Sarah Jessica Parker and sports stars like Venus Williams and Stephon Marbury on record as backers of the store. But is Steve & Barry’s worth it?

Well, in the fashion article, the author deems the $9 little black dresses she tried on definitely worth the money. She even thought about getting two dresses and some other stuff while she was in the store. This point definitely stuck out to me as a big positive. I think most shoppers know they can’t expect a lot for a $9 dress, and when the store and clothing surpasses those expectations, shoppers will keep coming back and buying more.

Right now, there are reportedly 276 stores open. An article from Business Week leads me to believe that what got Steve & Barry’s into trouble was a focus on unreasonable and unsustainable growth. The article suggests that Steve & Barry’s could have been in a better position today than bankruptcy if it had not pushed for opening nearly 300 stores — almost ten times the number of stores it had five years ago — in such a relatively short time. “If the company had focused more on design and quality at super-low prices … instead of the number of stores, perhaps it could have found itself in a different position today.”

After learning a little bit more about this discount fashion retailer, I’m starting to believe that an acquisition by Sears (SHLD) would be worth it and also would be yet another indication that Sears is serious about becoming a retailer. As if trying to prove that it wants to be a retailer, Sears today named Craig M. Israel, a veteran retail executive, as senior vice-president and president of apparel, responsible for men’s and women’s clothing as well as the children’s and cosmetics divisions.

If the largest problem with Steve & Barry’s was simply that it focused too much on growth, I feel that Eddie Lampert and Sears management could turn Steve & Barry’s and its brands into a much more profitable enterprise.