By Mike Spector
NEW YORK (Reuters) – The survival of J.C. Penney Co Inc hangs on whether the department store chain can reach a complex deal within days to sell itself to an alliance of retail mavens and distressed-debt investors.
The 118-year-old retailer blew through a Friday deadline from lenders to sort through bids that would take the company out of bankruptcy proceedings that were commenced in May after the pandemic forced it to temporarily close all its 846 stores.
The Plano, Texas-based company, already facing concerns from U.S. Bankruptcy Judge David Jones that its restructuring is not moving fast enough, is racing to reach agreement on a sale that would carve the retailer into three pieces.
The company is hoping to file court papers as soon as this week disclosing details of a deal, though the timing could slip, said a person familiar with the matter. The retailer declined to comment.
J.C. Penney has lost money for years, grappling with consumers shifting to online shopping and competition from discount retailers. It is among a cascade of retailers undone by the pandemic, including Brooks Brothers and Lucky Brand Dungarees, now attempting to withstand unprecedented economic turmoil and stay in business through bankruptcy sales.
Some J.C. Penney vendors are demanding cash-on-delivery before shipping merchandise, the person familiar with the matter said, an onerous term for a retailer with strained finances accustomed to paying for goods later.
“For this to work, we are going to need to move with complete and deliberate speed,” Joshua Sussberg, a Kirkland & Ellis LLP lawyer representing J.C. Penney, said during a Wednesday court hearing.
He said progress on negotiating a sale rendered Friday’s deadline a “red herring.” A liquidation, which would close J.C. Penney’s doors for good and lay off all its more than 80,000 employees, is “not in the cards,” Sussberg said.
The company is sitting on $1 billion of cash, $400 million more than expected, after reopening stores, he said. Still, challenges loom with current coronavirus outbreaks and potentially more this fall, he added.
On July 22, J.C. Penney received three separate bids for its operating business from private-equity firm Sycamore Partners, Saks Fifth Avenue owner Hudson’s Bay Co and a duo of mall owners comprising Simon Property Group Inc (NYSE:) and Brookfield Asset Management Inc, people familiar with the matter said.
Sycamore’s $1.75 billion bid was the highest, though J.C. Penney expects revised offers from suitors soon, one of the people said. Some bidders could team up or offers could change in other ways, the person said. The bidders declined to comment or did not respond to requests.
On July 20, hedge funds and private-equity firms financing J.C. Penney’s bankruptcy proposed forgiving debt owed to them in exchange for owning the retailer, Sussberg said in court. These lenders are led by H/2 Capital Partners and other distressed-debt investors that also hold portions of J.C. Penney’s $5 billion of total debt.
J.C. Penney is negotiating with the other bidders to “slot into” that deal by purchasing the retailer’s operating business while the lenders take over two property companies that would hold stores and distribution centers, respectively, he said.
A deal hinges on whether the lenders accept one of those offers, people familiar with the matter said. They otherwise face the choice of owning J.C. Penney’s operations themselves or attempting to recover money in a liquidation, the people said. A lawyer for the lenders did not immediately respond to a request for comment.
During less fraught times, other retailers such as Barneys New York Inc and Toys ‘R’ Us Inc have failed to reorganize under bankruptcy protection and liquidated.
Sussberg said during Wednesday’s hearing that the company has “not had one discussion” with lenders about a liquidation.