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Bankrupt Brooks Brothers Could Have a Bidding War on its Hands

Multiple contenders are said to be circling bankrupt Brooks Brothers.

As of now, potential suitors for the American clothier are facing an Aug. 5 deadline to submit their offers, and a small but promising list of reported candidates could mean a bidding war lies ahead. Final objections and a court hearing slated for mid-August.

According to court documents, the American apparel retailer has been working with its investment banker Peter J. Solomon since early 2019 to explore a sale. Several parties submitted indications of their interest and entered into confidentiality agreements. The process continued into 2020, and the banking firm reached to those who signed confidentiality agreements in connection with the so-called stalking-horse bid, which sets the base line bidding for the auction of the company and its assets. If there are other bidders, the hope is that higher offers will be forthcoming, either for the company as a whole or a sale of its parts that in the aggregate provide the best offer for creditors.

Possible suitors

The expectation in the Brooks Brothers bankruptcy is that there will be multiple parties interested in acquiring the storied retailer.

Milan-based Giglio Group SpA is said to be forming an investor group to bid for the bankrupt company, according to a report in the Wall Street Journal. Giglio’s core operation is in helping fashion businesses build their e-commerce websites. If Giglio Group succeeds, it will keep Brooks as an Italian-owned firm. Brooks is currently owned by Italian businessman Claudio Del Vecchio, whose father, Leonardo Del Vecchio, founded eyeglass firm Luxottica. Claudio Del Vecchio acquired Brooks in 2001 from Marks & Spencer through a company called Retail Brand Alliance, a private firm that has since been renamed The Brooks Brothers Group.

Giglio is expected to see competition from at least two American brand management firms, WHP Global Inc. and Authentic Brands Group.

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WHP is the investment platform arm of Wave Hill Partners, founded by Yehuda Shmidman, the former CEO of Sequential Brands Group. Backed by $350 million in equity commitment from funds managed by Oaktree Capital Management, the firm has been aggressively on the hunt for brands to add to its portfolio. WHP’s first acquisition a year ago was Anne Klein, and this past March it acquired the Joseph Abboud brand.

Perhaps the top competitor, and maybe even leading contender, is the ubiquitous Authentic Brands Group, which has built a healthy portfolio of brands that include Nine West, Vince Camuto and Volcom, to name a few. ABG’s 50 brands do roughly $12 billion in annual retail sales worldwide. Most recently, the company acquired the bankrupt luxury specialty chain Barneys New York. ABG, along with mall operators Simon Property Group and Brookfield Capital Management are said to be contemplating a bid for bankrupt J.C. Penney & Co. Inc., if the retailer can’t get a deal done with its first-lien lenders to exit as a standalone firm. The three also worked together earlier this year in bailing out bankrupt fast fashion chain Forever 21. They are also connected to the bailout of bankrupt teen retailer Aéropostale, which included partner General Growth Properties, now owned by Brookfield.

Many see ABG as having an inside edge because it recently beat out WHP in providing debtor-in-possession financing to help Brooks fund its bankruptcy. WHP was set to provide $75 million in DIP financing, but ABG came in at the last minute with an offer of an $80 million interest-free loan. The financing was from an affiliated company called SPARC, which is backed by ABG and Simon Property, a venture that is also the stalking horse bidder for bankrupt Lucky Brand Dungarees. The affiliated firm owns and operates the retail doors of Aéropostale, Forever 21 and Nautica, many of which are in Simon’s malls. Brookfield is also said to be involved in a possible bid for Brooks Brothers.

But it’s the DIP financing that gives ABG its advantage. SPARC, which has what is called a perfected security interest in Brooks’ assets, can use the $80 million as a credit bid as part of any overall offer. The credit bid is essentially an offset to the full amount that’s being offered. Separately, Simon has also sued Brooks for $8.7 million in unpaid rent.

Chapter 11 filing

Brooks filed its voluntary Chapter 11 petition on July 8, noting at the time that it planned to shutter 51 stores. The company generates roughly $1 billion in annual volume, and has outstanding debt obligations totaling $392.1 million.

At the retailer’s bankruptcy filing, only 11 of its 244 U.S. stores and Deconic retail and factory outlet locations had reopened their doors, Stephen Marotta, senior managing director at Ankura Consulting Group and Brooks’ chief restructuring officer, noted in a document filed with the bankruptcy court. Deconic is the manufacturing arm for premium fashion jewelry under the Alexis Bittar, Carolee and Deconic trademarks, with 2019 revenues at $15 million. Brooks has more than 1,400 locations worldwide, which includes 424 retail and factory outlet stores including those operated by non-debtor affiliates, joint ventures and third-party licensees, as well as wholesale arrangements with retail partners. The North American wholesale business in 2019 totaled $23.0 million. It’s North American retail and factory stores generated $519 million in 2019, with e-commerce operations contributing $147 million. Internationally, there are 606 Brooks Brothers locations across Europe, Asia, the Middle East and Latin America, which contribute $303 million of total revenue.

Brooks saw a “steep drop in revenue, with revenues from March to June 2020 estimated to have decreased approximately 76 percent year-over-year,” Marotta said. Most of that is attributed to store closures and the drop in demand for professional attire, even at the firm’s e-commerce site, as shutdowns have office workers now working primarily from home.

The company has negotiated concessions with merchandise suppliers for agreements connected to the deferral of payments of outstanding amounts for months, as well as the reduction of the amounts payable by 35 percent. New financing would pay outstanding amounts owed and for new merchandise shipments on new and longer payment terms.

“Through such efforts, Brooks Brothers reduced its payables to its merchandise suppliers by over $100 million, subject to the terms of various agreements,” Marotta said.

A Delaware bankruptcy court hearing for Brooks Brothers is set for Aug. 3 in connection with bidding procedures. If approved, the deadline to submit bids is two days later. An auction, if more than one bidder has received notice of status as a qualified bid, will be held on Aug. 10. Anyone wishing to file objections to the sale transaction would need to submit paperwork to the court three days later. A hearing for the sale and court approval is slated for Aug. 17, with completion of the sale expected in mid-September, according to court documents.