Private Equity Pulls Mervyn's Department Store Out of Bankruptcy
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Private Equity Pulls Mervyn’s Department Store Out of Bankruptcy

October 30, 2012

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Four years after filing for bankruptcy, Mervyn’s department store is finally being salvaged by three private equity firms that have swept in to pay its creditors, according to a CNN report.

Sources say that three private equity firms, as well as several banks, have agreed to a bankruptcy settlement that would pay the department store’s creditors about $166 million.

The settlement comes after years of legal wrangling that saw the creditors accuse the private equity firms of taking fraudulent profits and intentionally driving Mervyn’s into bankruptcy, according to sources.

That debate, however, seems to be over, although it did arise from curious circumstances. In 2004, the firms purchased Mervyn’s from Target for $1.25 million in a heavily leveraged deal.

After the debt-laden purchase, the private equity companies saddled the department store with an additional $800 million in debt, all while paying themselves $200 million in fees between 2004 and 2006, according to sources.

The creditors, which included several clothing companies, were particularly upset with the buyers’ decision to split Mervyn’s into a real estate firm and a retail chain. This required each store to pay rent to a separate entity.

After performing this feat of financial subterfuge, the private equity firms were able to significantly raise the rent at every location and gain quick short-term profits.

According to Howard Davidowitz, the chairman of a retail consulting firm, the investors’ purchase of the company and subsequent decision to dramatically increase rent was a "shocking thing to watch" and ultimately spelled the "death knell for the company."

Davidowitz believes that, before Mervyn’s was artificially loaded with large amounts of debt, the department store still had a shot at a financial turnaround. But by 2009, the private equity firms had already liquidated 175 stores and laid off 18,000 Mervyn’s employees.

To be fair, the recession heightened the department store’s financial troubles. Several large retailers owned by private equity firms, including Linens N Things and KB Toys, also filed for bankruptcy around the same time.

And despite the widespread criticism of the firms, the private equity industry is only growing more aggressive in purchasing large retail chains.


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