After walking away from a planned deal to buy a majority stake in ailing lingerie brand Victoria’s Secret, Sycamore appears to have found a new acquisition target in bankrupt J. C. Penney.
If Sycamore prevails, the New York-based private equity firm could augment its department store presence, which already includes Belk. But the mass merchant should keep one negotiation factoid in mind—Sycamore has a penchant for coming back with a lower bid if its first offer is rejected. It’s a playbook the financial investor first pulled out years ago with its initial retail acquisition of women’s specialty chain Talbots. And it repeated the pattern when it made an ill-fated play for Chico’s FAS Inc.
Given the short time frame in the Penney’s bankruptcy, it may very well be that the mass retailer gets just one shot at an offer from Sycamore, if one indeed will be forthcoming. Penney’s is in talks for a possible sale in case it can’t reach a go-forward agreement with first-lien lenders by July 14, a move needed to stave off liquidation.
Sources said there’s no guarantee that a deal can be worked out because of the case’s complexities. One source said over the weekend that Sycamore would prefer to do a deal on its own. Landlords, such as Simon Property Group and Brookfield Asset Management Inc., are also part of the discussions. Penney’s lawyers have told the bankruptcy court that the retailer is talking with landlords about not paying rent for June through August. And Sycamore would want the rent issue resolved before deciding whether or not to make an offer. The issue of paying mall rent during coronavirus closures was said to be one sticking point in Sycamore’s decision to abandon the Victoria’s Secret transaction. Reuters first reported on Sycamore’s interest in Penney’s on Friday.
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Penney’s says it has reopened 475 stores, though its current plan calls for the closure of 242 locations for a slimmed-down store network of 604 doors.
How talks pan out between Sycamore and Penney’s could ultimately be determined by the chain’s landlords. There’s been speculation since the May 15 bankruptcy filing that landlords would be paying close attention to the course of Penney’s bankruptcy. Simon Property is also a member of the unsecured creditors committee in the Penney’s court case.
Some sources have cited mall lease co-tenancy clauses as a significant concern in the talks as these caveats allow other tenants to pack it up and exit leases if an anchor departs. That incentivizes landlords to take a proactive role in helping debtors find some form of going-concern solution to exit bankruptcy proceedings, as well as to stabilize its rental income. Simon took this approach when it joined forces with General Growth Properties and brand management firm Authentic Brands Group to bail out teen-centric Aéropostale from Chapter 11.
Brookfield, a Canadian real estate investment trust, is no stranger to the investment process as it owns GGP. General Growth filed for bankruptcy court protection in 2009, exited a year later and changed its name to GGP in 2017. Brookfield acquired a stake in GGP in February 2010, and subsequently acquired the shares of GGP in August 2018 that it didn’t already own.
Simon replicated that investment process earlier this year with Brookfield and ABG, when it rescued bankrupt Forever 21. Both Aéropostale and Forever 21 command sizeable mall footprints. That relatively new investment trend by landlords has fueled speculation that Simon and Brookfield may yet again join forces, this time possibly with Sycamore. David Simon, Simon’s CEO, has told Wall Street analysts on conference calls that the company routinely considers investment opportunities, while Brookfield last month said it plans to put in place a $5 billion retail-investment fund that would provide financing for distressed retailers suffering through the pandemic.
Spokespersons for Brookfield, Sycamore and Penney’s each declined comment, while Simon executives did not respond to a request for comment.
And Amazon.com, which is said to be lurking around Penney’s headquarters, is believed by some to be interested in Penney’s distribution centers.