Copper Magazine · Issue 56 · A free PS Audio publication
Issue 56 INDUSTRY NEWS

Debt Is Death (Sometimes)

Our focus this time in Industry News will be on a thread that connects a number of businesses that have been in the news, including mentions in this column. Businesses run on cash: that’s hardly a news flash. But how and why they get that cash can affect their ability to respond to adverse circumstances, and ultimately, to survive.

Borrowing money to take a publicly-traded company private, is not a new concept. Such transactions are generally called leveraged buyouts, or LBOs. The earliest large-scale LBO in modern America was executed by Henry Ford and his son Edsel in 1919. The Fords borrowed $75 million from a consortium of east coast banks and were able to buy out other shareholders and take the company private, and under direct control of the Ford family. The total purchase price of $106 million was considered staggeringly-large at the time; equivalent to $1.6 billion today, it’s hardly chump change, but pales in comparison to deals that we routinely see today.

The US economy had a downturn in the early ’20s, and Ford faced a cash-crunch due to the debt-load (a situation that we’ll encounter again as we go on). Enforcing stipulations of the dealers’ contractual agreements, Ford forced dealers to take more inventory, which had to be paid for. By doing so, Ford effectively transferred their singular, massive debt to hundreds of dealers, and disaster was avoided. A cautionary tale, no?

Ford went public again in 1956, and while the Ford family only owns about 2% of all shares today, they still control 40% of the voting power at the company. That 2% of shares puts the value of Ford family holdings at just under $1B, and the family’s voting power/control  is considered a major reason why the company was able to avoid bankruptcy in 2009, while the other major US automakers, GM and Chrysler, required government bailouts.

During the 1980s LBOs and the wacky world of M&A (mergers and acquisitions) went berserk, with big-money deals funded by issuance of high-risk, high-yield (if you were lucky) bonds. Old-guard financial types quickly labeled such bonds, “junk bonds”—and they were sometimes right. Private equity firm Kohlberg Kravis Roberts (KKR) were leaders in the field, and in 1988 executed the LBO of RJR Nabisco. At $25 billion, it was the largest LBO of its day (equivalent to $50B today, give or take a billion or two). [We dwelled upon KKR in The Audio Cynic some time ago, as well—Ed.]

Those highly-leveraged deals lost favor after many went kablooey. In the years since we’ve had the dot.com bubble, the real estate boom-gone-bust that led to the 2008 recession, and most recently, a likely bubble in the tech world. Have we learned anything? Maybe. Maybe not.

Looked up a stock quote on Toys R Us lately? You can’t, because the company was taken private in 2005 by KKR, the Vornado Realty Trust and Bain Capital. (Bain was until recently the owner of D+M Group, previously D&M Holdings, owners of Denon, Marantz, and Boston Acoustics, and recently sold to another holding group, Sound United. A few years back the group sold cash-cow McIntosh in order to pay down the debt incurred by buying up brands. Sound familiar?)

So how’s Toys R Us doing? Carrying $5 billion in debt, with service of that debt burning through $400M/year, the company couldn’t afford to update its properties. The worn-out, aging stores, coupled with declining market share courtesy of Amazon and Wal Mart, led to a Chapter 11 filing last fall. A weak Christmas season didn’t help, and in January the company announced intentions to shut down 182 US stores, and UK operations were sent into receivership. On Wednesday, March 14, the company announced that all 700+ US stores would close. Say goodbye to 33,000 jobs. Sadly—and perhaps ironically—Charles Lazarus, the founder of Toys R Us, died a week after the closure announcement, at the age of 94.

How about the country’s largest owner of radio stations? They’ve got to be doing well, right?

Clear Channel Radio managed to pile up $8B in debt while buying up stations nationwide, then was acquired by Thomas H. Lee and Bain Capital (are you sensing a common thread here?) by racking up another $10B in debt. Ultimately, the company, awkwardly relabeled iHeart Media, accumulated $20B in debt. As ad revenue from iHeart’s 850 radio stations declined, the company branched out into concert production and online assets. In February, the company was unable to make a scheduled coupon payment of $106M—and on March 14, iHeart Media filed for Chapter 11 bankruptcy. Odd that it occurred the same day that Toys R Us announced the shutdown of all stores: clearly a bad day for Bain.

“Worn-out, aging stores”—sound like anyone else? We’ve looked at the perilous situation of Sears several times: here , here, and here.  Once the country’s largest retailer with thousands of stores, Sears also failed to keep up with the times. A merger-of-sorts (think of Daimler-Benz and Chrysler) of Sears and K-Mart took place in 2005, led by hedge fund manager Eddie Lampert, and saddled the company with major debt and created a new entity, Sears Holdings. Between them, the two struggling chains had 3,500 stores. Lampert realized that the company’s most valuable assets were its extensive real estate holdings and its brands: DieHard, Craftsman, Kenmore.

Lampert sold off much of the real estate, and shut down hundreds of stores. At this point, only about 1,000 stores remain: 570 Sears stores, 432 K-Marts. The Craftsman brand name was sold off to Stanley Black & Decker; DieHard batteries and Kenmore appliances are now sold through Amazon. Meanwhile, same-store sales dropped 14% last year compared to 2016, and overall sales dropped 25%. Sears’ last profitable year was 2010, and the company has lost $10.8B since then.

Debt? Interest payments in 2017 totaled $539M, and Standard & Poors dropped the company’s credit rating to “Ca”, the lowest level of  junk. S&P also warned that it expects Sears to begin defaulting upon its obligations.

In the midst of this doom-saying, Sears managed to post its first quarterly profit in three years—not because of a spike in sales, but because of  a $470M boost from the new tax bill. Overall, 2017 was still a disaster, with losses of $357M—almost a million dollars per day.

Another Industry News poster child is Gibson Brands, parent of Gibson Guitar and a number of audio brands—which we’ve previously looked at here, here, and here. A decade-long buying spree has left the company with a half-billion or so in debt, while the market for guitars and other musical instruments is in decline.  While CEO Henry Juszkiewicz remains confident about the company’s viability, almost no one else is.

As early as last year, fears surfaced of the company defaulting on its debt, and recently Standard & Poors downgraded Gibson’s credit rating yet again to CCC-, a low “junk” rating indicating that default is imminent.

A likely outcome is that the company will be thrown into involuntary bankruptcy by its creditors, with some companies sold off, others shut down. CEO Juszkiewicz is the only person expressing optimism regarding his continued tenure at the empire he built, as layoffs begin worldwide in  Gibson companies.

Who says business is boring?

The last five years of Sears. Eddie Lampert would be happy to take your money. All of it.

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Debt Is Death (Sometimes)

Our focus this time in Industry News will be on a thread that connects a number of businesses that have been in the news, including mentions in this column. Businesses run on cash: that’s hardly a news flash. But how and why they get that cash can affect their ability to respond to adverse circumstances, and ultimately, to survive.

Borrowing money to take a publicly-traded company private, is not a new concept. Such transactions are generally called leveraged buyouts, or LBOs. The earliest large-scale LBO in modern America was executed by Henry Ford and his son Edsel in 1919. The Fords borrowed $75 million from a consortium of east coast banks and were able to buy out other shareholders and take the company private, and under direct control of the Ford family. The total purchase price of $106 million was considered staggeringly-large at the time; equivalent to $1.6 billion today, it’s hardly chump change, but pales in comparison to deals that we routinely see today.

The US economy had a downturn in the early ’20s, and Ford faced a cash-crunch due to the debt-load (a situation that we’ll encounter again as we go on). Enforcing stipulations of the dealers’ contractual agreements, Ford forced dealers to take more inventory, which had to be paid for. By doing so, Ford effectively transferred their singular, massive debt to hundreds of dealers, and disaster was avoided. A cautionary tale, no?

Ford went public again in 1956, and while the Ford family only owns about 2% of all shares today, they still control 40% of the voting power at the company. That 2% of shares puts the value of Ford family holdings at just under $1B, and the family’s voting power/control  is considered a major reason why the company was able to avoid bankruptcy in 2009, while the other major US automakers, GM and Chrysler, required government bailouts.

During the 1980s LBOs and the wacky world of M&A (mergers and acquisitions) went berserk, with big-money deals funded by issuance of high-risk, high-yield (if you were lucky) bonds. Old-guard financial types quickly labeled such bonds, “junk bonds”—and they were sometimes right. Private equity firm Kohlberg Kravis Roberts (KKR) were leaders in the field, and in 1988 executed the LBO of RJR Nabisco. At $25 billion, it was the largest LBO of its day (equivalent to $50B today, give or take a billion or two). [We dwelled upon KKR in The Audio Cynic some time ago, as well—Ed.]

Those highly-leveraged deals lost favor after many went kablooey. In the years since we’ve had the dot.com bubble, the real estate boom-gone-bust that led to the 2008 recession, and most recently, a likely bubble in the tech world. Have we learned anything? Maybe. Maybe not.

Looked up a stock quote on Toys R Us lately? You can’t, because the company was taken private in 2005 by KKR, the Vornado Realty Trust and Bain Capital. (Bain was until recently the owner of D+M Group, previously D&M Holdings, owners of Denon, Marantz, and Boston Acoustics, and recently sold to another holding group, Sound United. A few years back the group sold cash-cow McIntosh in order to pay down the debt incurred by buying up brands. Sound familiar?)

So how’s Toys R Us doing? Carrying $5 billion in debt, with service of that debt burning through $400M/year, the company couldn’t afford to update its properties. The worn-out, aging stores, coupled with declining market share courtesy of Amazon and Wal Mart, led to a Chapter 11 filing last fall. A weak Christmas season didn’t help, and in January the company announced intentions to shut down 182 US stores, and UK operations were sent into receivership. On Wednesday, March 14, the company announced that all 700+ US stores would close. Say goodbye to 33,000 jobs. Sadly—and perhaps ironically—Charles Lazarus, the founder of Toys R Us, died a week after the closure announcement, at the age of 94.

How about the country’s largest owner of radio stations? They’ve got to be doing well, right?

Clear Channel Radio managed to pile up $8B in debt while buying up stations nationwide, then was acquired by Thomas H. Lee and Bain Capital (are you sensing a common thread here?) by racking up another $10B in debt. Ultimately, the company, awkwardly relabeled iHeart Media, accumulated $20B in debt. As ad revenue from iHeart’s 850 radio stations declined, the company branched out into concert production and online assets. In February, the company was unable to make a scheduled coupon payment of $106M—and on March 14, iHeart Media filed for Chapter 11 bankruptcy. Odd that it occurred the same day that Toys R Us announced the shutdown of all stores: clearly a bad day for Bain.

“Worn-out, aging stores”—sound like anyone else? We’ve looked at the perilous situation of Sears several times: here , here, and here.  Once the country’s largest retailer with thousands of stores, Sears also failed to keep up with the times. A merger-of-sorts (think of Daimler-Benz and Chrysler) of Sears and K-Mart took place in 2005, led by hedge fund manager Eddie Lampert, and saddled the company with major debt and created a new entity, Sears Holdings. Between them, the two struggling chains had 3,500 stores. Lampert realized that the company’s most valuable assets were its extensive real estate holdings and its brands: DieHard, Craftsman, Kenmore.

Lampert sold off much of the real estate, and shut down hundreds of stores. At this point, only about 1,000 stores remain: 570 Sears stores, 432 K-Marts. The Craftsman brand name was sold off to Stanley Black & Decker; DieHard batteries and Kenmore appliances are now sold through Amazon. Meanwhile, same-store sales dropped 14% last year compared to 2016, and overall sales dropped 25%. Sears’ last profitable year was 2010, and the company has lost $10.8B since then.

Debt? Interest payments in 2017 totaled $539M, and Standard & Poors dropped the company’s credit rating to “Ca”, the lowest level of  junk. S&P also warned that it expects Sears to begin defaulting upon its obligations.

In the midst of this doom-saying, Sears managed to post its first quarterly profit in three years—not because of a spike in sales, but because of  a $470M boost from the new tax bill. Overall, 2017 was still a disaster, with losses of $357M—almost a million dollars per day.

Another Industry News poster child is Gibson Brands, parent of Gibson Guitar and a number of audio brands—which we’ve previously looked at here, here, and here. A decade-long buying spree has left the company with a half-billion or so in debt, while the market for guitars and other musical instruments is in decline.  While CEO Henry Juszkiewicz remains confident about the company’s viability, almost no one else is.

As early as last year, fears surfaced of the company defaulting on its debt, and recently Standard & Poors downgraded Gibson’s credit rating yet again to CCC-, a low “junk” rating indicating that default is imminent.

A likely outcome is that the company will be thrown into involuntary bankruptcy by its creditors, with some companies sold off, others shut down. CEO Juszkiewicz is the only person expressing optimism regarding his continued tenure at the empire he built, as layoffs begin worldwide in  Gibson companies.

Who says business is boring?

The last five years of Sears. Eddie Lampert would be happy to take your money. All of it.

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