September 8, 2008
The Myth Of "Hidden" Real Estate Values
Analysis of:
Mervyn's Sues Ex-Owners, Charges They "Stripped" It | online.wsj.com
This analysis is solely the work of the author. It has not been edited or endorsed by GLG.
Implications: As more private-equity-backed companies file for bankruptcy protection, creditors and the companies themselves are expected to increase attacks on the financial structures used in the buyout deals.
Analysis: As readers of GLG News and this writers frequent analysis are aware, the practice of "stripping" a retailer's owned real estate by selling it and leasing it back at unrealistically high rentals, is a practice that is a certain path to bankruptcy. The only ones benefited are the new owners for "recognizing the hidden value" and then pocketing the proceeds.
The writers of this article should be complimented for clearly explaining the dangers inherent in this very common practice.
When Sun Capital and Cerberus Capital Management bought Mervyn's, a troubled retailer who was owned by Target, they structured the deal in two transactions, one for the retailer's real estate and one for the retailer. As any alert industry observer could immediately tell, the owners were not interested in turning the retailer around, they were only interested in performing some financial slight-of-hand to pocket the value of the real estate and then "milk" the retailer for as much cash as possible.
No one could possibly think that Sun and/or Cerberus were better retailers than Target. No one could possibly think that they had a better chance at turning Mervyn's around by doubling their rents.
But that is what "the market" allowed to happen during the feeding frenzy brought about by cheap money and hungry deal makers willing to loan money on inflated real estate values if the unsustainable rental payments were high enough.
The scary part is that there are still many companies out there which now have (or soon will have) the exact same conditions causing their rapid demise.
GLG readers should be alerted!
Analysis: As readers of GLG News and this writers frequent analysis are aware, the practice of "stripping" a retailer's owned real estate by selling it and leasing it back at unrealistically high rentals, is a practice that is a certain path to bankruptcy. The only ones benefited are the new owners for "recognizing the hidden value" and then pocketing the proceeds.
The writers of this article should be complimented for clearly explaining the dangers inherent in this very common practice.
When Sun Capital and Cerberus Capital Management bought Mervyn's, a troubled retailer who was owned by Target, they structured the deal in two transactions, one for the retailer's real estate and one for the retailer. As any alert industry observer could immediately tell, the owners were not interested in turning the retailer around, they were only interested in performing some financial slight-of-hand to pocket the value of the real estate and then "milk" the retailer for as much cash as possible.
No one could possibly think that Sun and/or Cerberus were better retailers than Target. No one could possibly think that they had a better chance at turning Mervyn's around by doubling their rents.
But that is what "the market" allowed to happen during the feeding frenzy brought about by cheap money and hungry deal makers willing to loan money on inflated real estate values if the unsustainable rental payments were high enough.
The scary part is that there are still many companies out there which now have (or soon will have) the exact same conditions causing their rapid demise.
GLG readers should be alerted!
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