Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

When it comes to retail, private equity firms sure have had some misadventures. Add Sports Authority to the pile of buyout flops.

The sporting-goods chain filed for Chapter 11 bankruptcy protection Wednesday, almost 10 years after its buyout by Leonard Green & Partners. The retailer was ultimately done in by a debt load that slowed it down as rival Dick's Sporting Goods used its freer balance sheet to speed ahead

Game Over
Sports Authority's term loan sunk to a record low after it filed for bankruptcy, meaning its private-equity backers aren't the only ones hurting.
Source: Bloomberg

Sports Authority shares the fate of other retail buyouts forged in the heady days before the global financial crisis: Apollo Global Management's 2005 buyout of Linens 'n Things ended in bankruptcy. Same with the 2004 buyout of Mervyns, led by Cerberus, Sun Capital, and Lubert-Adler, as well as the 2007 acquisition of Deb Shops by Tom Lee's Lee Equity Partners. But even Irving Place Capital's 2011 buyout of Dots met the same end.

Many of those deals were based on the time-honored retail tradition of juicing sales by blanketing the country with more locations. But if the past decade taught us anything, it's that America is over-stored, over-malled and over-retailed. 

Closing Time
Number of sports, hobby, music instrument, and book stores in the U.S.
Source: U.S. Bureau of Labor Statistucs

Just opening new stores doesn't cut it anymore. Now, retailers need to also invest heavily in e-commerce operations, online marketing, and supply chain and delivery capabilities. That can require an upfront cash plunge and take years to pay off -- something private equity-backed firms aren't always able to do because of the hefty interest payments on the debt they incurred from their LBOs. 

Window Shopping
The number of retail deals tackled by private equity firms is on the rise. Most of these shouldn't result in as much pain as some pre-crisis busts like Sports Authority.
Source: Bloomberg
*Data includes take-privates of companies in the retail, toys, apparel, home furnishings and housewares sectors. *2016 total includes reported value of KKR's purchase of Mills Fleet Farm.

Not all retail forays by private equity have ended in bankruptcy court, though. In fact, firms have big profits from backing the likes of Lululemon, Restoration Hardware, Dollar General and Burlington Stores. And while the jury is still out on Claire's Stores, J. Crew and Toys "R" Us, the most recent round of retail buyouts are likely to fare better.

For one, some private equity firms have been fishing at the bottom. Sycamore Partners bought the intellectual property rights to clothing retailer Coldwater Creek after it filed for bankruptcy and closed all its stores (it plans to be a catalog and online business for the foreseeable future).  Similarly, Hong Kong-based Sailing Capital was part of the group that bought luxury-gadget seller Brookstone out of bankruptcy, while Versa Capital Management won the bankruptcy auction for Wet Seal.

But more strikingly, the fact that debt investors have become more discerning means private equity firms can no longer get away with overburdening their buyout targets with debt. Sometimes that means deals don't even get inked: Sycamore Partners last year ended talks to buy Express after struggling to line up financing at acceptable terms. It also failed to seal a potential buyout of Chico's FAS.

Because the market has shifted, private equity firms are now writing bigger equity checks, ensuring they have more skin in the game. They also seem to have wised up to the fact that the retail landscape has changed, and have been focusing on companies with more loyal customer bases such as pet supply retailer Petco and farming and outdoor sports retailer Mills Fleet Farm. 

These aren't guaranteed successes. But the very fact that financial structures aren't as aggressive as years past should make it easier for recent (or soon to be) retail targets to stay out of bankruptcy court. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Gillian Tan in New York at gtan129@bloomberg.net
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net