Running for the Borders
Board: Berkshire Hathaway
The Borders liquidation news is interesting from a number of perspectives, not the least because it once again gives us a glimpse into that dark underworld of liquidators. Again, the same two names --Gordon Bros and Hilco – appear.
These two privately owned firms have executed pretty much every major liquidation in memory. Linen’s n Things, Sharper Image, Circuit City, Boater’s World, you name it. Those harsh yellow signs with black letters have shown up everywhere.
What’s interesting to spectators, however, is not that these firms are executioners hired to do the deed – it usually doesn’t work like that – but in each case this pair of liquidators ended up as the high bidders (sometimes apparently the only credible bidders) in major court-administered auctions, beating out everyone, including management-led groups and private equity firms that might want to purchase these companies as going concerns.
As I understand the arrangement, the Hilco/Gordon duo is purchasing the remaining assets of Borders today – as usual, they aren’t simply hired hands--and as acquirers they’ll be looking to maximize ROI on this transaction (more on that in a moment). It will be interesting to see the actual court documents in this purchase as they are available.
What seems to have happened is that:
== Gordon Bros/Hilco bid $250M for Borders’ assets, with the possibility of some upside to creditors if things go smoothly;
== Najafi (Book-of-the-Month-Club) offered $435M, $210M cash plus the assumption of $215M of existing debt;
== Creditors rejected that competing bid when Najafi refused to assure them that it wouldn’t liquidate Borders themselves immediately after the deal was signed least—apparently putting a cloud over that assumed debt.
The creditors are certainly looking to maximize their risk-adjusted outcome with all this, so in passing up the chance at $435M – including $210M immediately -- in favor of a sure $250M suggests that they didn’t have sufficient faith in Najafi’s ability to execute its reorganization plan, to actually accept it.
Gordon Bros / Hilco. Gordon Bros has been around over a century; Hilco a few decades. Hilco’s COO is a former Gordon Bros. exec. Hilco has the capabilities to handle the fixture dispositions and with Borders’ large number of location they’ll need the staffing resources of both firms to quickly get their arms around this.
The court approval for the sale is supposed to come today. What this likely means is that immediately, Hilco and Gordon Brothers will assume the costs of operating the locations during liquidation. The existing store employees, and likely the occupancy costs of the stores and facilities, will be on the new owners’- the liquidators’- dime, plus whatever central costs they feel they need for their operation – for example, IT functions, or basic distribution wrap-up.
The liquidators will assume management of their purchase. Starting Friday there will be a real race against time – not just with the appearance of those yellow and black ‘going out of business’ banners and signs - but balancing discount levels against store traffic, the rate of inventory depletion, and daily operating costs, with an eye toward maximizing the overall net return on that $250M investment.
A frequent criticism of shoppers is that the discounts really aren’t that great through these liquidations. The liquidators know that there will be an increased level of sales activity just around the massive publicity, and they won’t be giving the store away, so to speak – at least not while the traffic is there. Again, the pricing (and discounting) won't likely be as blunt as the public saw in the struggling business' final days, but geared toward short-term maximization.
The liquidators aren't getting paid a salary, so to speak. They’re basically earning whatever they can make on the transaction (again, net of expenses) beyond their $250M purchase price. They have more 'skin in the game' than the previous, employed managers of the business. And again, these folks are purchasing assets and – unless the purchase stipulates otherwise – not liabilities (eg, holders of, for example, gift certificates or other credits would probably categorized as creditors and have to go through the courts for relief, unless the deal is otherwise, which is also possible).
A decade or so back, when these firms bought a now-defunct warehouse club’s assets for liquidation, observers were surprised by their extremely high recovery rate. Their first step was simply to open the formerly member-only stores to the non-membership-paying general public. Rumor had it at the time that they recovered at least 100 cents on the retail dollar, suggesting they were aggressive (aggressive as in high-priced, in this case) in even cranking up some previous everyday prices into the liquidation.
The bulk of the liquidators’ actual staffing will be a cadre of highly compensated contract workers who go from liquidation to liquidation, working seven days a week on a per diem basis non-stop until the job is done -- with job-by-job bonus potential depending on the overall profitability of the deal.
The news releases noted that there’s an additional $35M potential payment to creditors. In their purchase offer the liquidators apparently included a kicker to the creditors if the sale yield hit certain level – a sort of profit-sharing bonus to the creditors. Everyone’s interests will be aligned towards the liquidator’s success rather than, say, having disgruntled groups causing any kind of problems or presenting obstacles.
Again, an impressive aspect of all this is that Hilco and Gordon Bros always seem to ‘win’ in the bidding for the really large jobs, versus virtually everyone else. Apparently no one can match their level of confidence in execution or their sharpness in their original appraisal of realizable value.
This is a gutsy business – potentially (and often actually) an extremely high ROI undertaking – and there’s nobody else with their scale or track record. Anyone can bid on these potential liquidations if they have the money – but nobody seems to beat these guys and presumably think that they can still make money.
And, as they say with the Ginsu commercials ‘there’s more!’ These two – Gordon Bros especially – have been quietly pocketing the brand names of the companies they purchase, for possible future use after the assets are long gone. Gordon Bros owns the rights to such names as Sharper Image, LinensNThings, Polaroid, Halston, Ashley Stewart, and a stable of other still-memorable brands, for possible future sale (they recently sold Bombay) or in case they ever want to revive them through, say, an internet-based operation or something.
These guys have had quite a run these past few years. Through all this, they seemed to emerge as the only competitors capable of handling the scale of their modern-day acquisition targets.