Goldman's German Revolution

Companies that went bankrupt were always liquidated -- until the firm took over Ihr Platz

Anxious employees at Germany's huge retail drugstore chain Ihr Platz (Your Place) were braced for the worst a year ago. The $840 million company, based in Osnabrück in northern Germany, had seen its sales shrink by over 40% in five years and losses mount as a new generation of family managers blundered and successive chief executive officers failed to stem the decline. The 125-year-old retailer was technically insolvent -- a condition that would normally doom a German enterprise to liquidation.

But an unlikely rescuer appeared on the scene: Goldman Sachs Group Inc. (GS ), the U.S. investment-banking giant. Ihr Platz's woes had hit the radar screen of Goldman's London-based restructuring group, a 30-strong team formed two years ago to develop a European business investing in distressed debts and turnarounds. By January of this year, a Goldman-led consortium had snapped up all of Ihr Platz's $144 million in bank debt and, working with the shareholders' trustees, sent in experts from Alvarez & Marsal, a New York turnaround specialist. When discussions with other creditors bogged down, Goldman bought out the remaining bank debt and in May pushed Ihr Platz into insolvency.

Goldman's maneuver would hardly raise an eyebrow in New York or London. But in Germany, it was revolutionary: The American firm is pioneering Germany's first large case of a Chapter 11-style restructuring under a little-used 1999 law -- a test case that could well spur many more such workouts and galvanize industrial overhauls in Germany. "American and British hedge funds use insolvency as a strategic tool to implement a turnaround. Unlike Germans, they don't see bankruptcy as a stigma but as a viable alternative if out-of-court restructuring fails," says Leo Plank, an attorney and restructuring advisor at Broich, Bayer, von Rom in Frankfurt, noting that the sale of distressed debt has soared in the last 12 months.

With a speed that has astonished German insolvency experts, Ihr Platz's restructuring is now headed for final creditor approval on Nov. 17. The vote, less than six months after the May 31 insolvency filing, will put the company back on solid financial footing, end the insolvency proceedings, and save 8,100 jobs out of 9,000.

Bouncing back from insolvency under Chapter 11 of the U.S. bankruptcy code may be a well-trod path for troubled American companies. But bankruptcy laws across Europe don't grant companies protection from creditors in order to restructure. So a legal declaration of insolvency typically ends in liquidation. Germany modified its law in 1999 so insolvent companies could work out revival plans with creditors and keep management running the company instead of losing control to a court administrator -- a clause similar to Chapter 11.


No one dared to try such a workout strategy, however. Germany lacks turnaround experts with experience in complex bankruptcy restructurings. And given banks' and entrepreneurs' traditional reluctance to admit insolvency and suffer the stigma of failure that it carries, most German bankruptcy cases are not filed until it is too late to rescue the company. "It makes me furious, because I know a lot of companies could be saved," says Horst Piepenburg, president of the Insolvency & Restructuring Division of the German Bar Assn. and a co-manager in Ihr Platz's restructuring. He figures that at least 15% of Germany' s 40,000 annual insolvencies could emerge intact from insolvency, saving thousands of jobs.

Global capital markets may finally be triggering a change. As Germany's banks grow increasingly eager to unload their distressed debt -- they traded $30 billion of it last year -- and investors scout out the kind of premiums that restructuring offers, players such as Goldman are lining up to engineer turnarounds in exchange for private-equity type returns of at least 15% to 20% -- and up to 100% or higher in some cases, experts say. "Germany is going to be one of the strongest markets for restructuring in Europe for the next few years," says Simon Mansfield, managing director for Goldman's London-based restructuring group.

It was clear from the start that Ihr Platz could survive, says Alvarez & Marsal senior director Michael F. Keppel, now chief financial officer of Ihr Platz. He and Sankar Krishnan, managing director of Alvarez & Marsal's London office and currently CEO of the retailer, saw a strong brand they could revive by shutting profitless stores, overhauling inefficient logistics, and boosting sales.

Before the May 31 insolvency filing, however, talks among creditors bogged down and labor leaders resisted shuttering the 80 of 813 stores that Krishnan and Keppel wanted to close. "There was a lot of skepticism," recalls Heiko Waldmann, Ihr Platz's personnel manager. "We had seen a lot of consultants. They earned a lot of money and didn't perform."

But once Ihr Platz filed for insolvency, the restructuring moved into high gear. A court order allowed Krishnan and Keppel to close quickly 80 stores and a warehouse. Squabbling suppliers agreed within six days to sell their debt to Goldman, paving the way for fresh credit lines. Germany's bankruptcy code also includes state coverage of workers' salaries for a three-month interim period. That allowed Ihr Platz to channel cash to vital creditors.

Krishnan also paid close attention to image-making. In May, left-leaning politicians had kicked off a national uproar by accusing international investors of preying on German businesses like "locusts." So Krishnan hired a London public relations firm to get the word out to employees, creditors, customers, the mayor of Osnabrück, and even the Prime Minister of Lower Saxony that Ihr Platz meant to save jobs instead of liquidating. "I told them: 'Don't use the word insolvency, use the word restructuring,"' says Krishnan. The agency prepared letters, Web-site material, a hotline, and television and radio interviews to spread the message.

Beyond closing stores and managing PR, Krishnan and Keppel worked on new products, alluring promotions, and improved presentation. Krishnan, a retail turnaround specialist, buffed advertising circulars and offered lifestyle-driven promotions such as artists' supplies or backyard grill equipment. Krishnan is also rolling out a line of organic cosmetics and foods.

Krishnan and Keppel are now aiming to match 2004 sales this year, hit breakeven by yearend, and turn a profit in 2006. Goldman, which aims to hold on to the retailer for a while before selling out, is eager to find more candidates for restructuring. The rescue of Ihr Platz won't erase the German aversion to insolvency overnight. But it's likely to spur a slew of imitators.

By Gail Edmondson in Osnabrück

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