Brookstone Plans $147 Million Bankruptcy Sale to Spencer

Brookstone Inc., the retailer of luxury gadgets, filed for bankruptcy to pursue a $147 million sale to Spencer Spirit Holdings Inc. as the business has struggled to adapt to an evolving retail landscape where online competitors rule and consumers cut back on non-essentials.

Brookstone, which was taken private in 2005 by a group including Singapore’s Temasek Holdings Pte, will continue to operate with current employees and managers, according to a statement today. The Merrimack, New Hampshire-based company said its bondholders support the sale. Spencer, a novelty retailer, would pay $120 million in cash and $7.5 million in new notes and assume about $18.5 million in liabilities.

“This agreement will leverage the brand recognition and resources of our two companies,” Chief Executive Officer Jim Speltz said in the statement. “The retail industry continues to evolve and staying ahead of the curve is critical.”

Brookstone listed debt and assets of as much as $500 million each in Chapter 11 documents filed today in U.S. Bankruptcy Court in Wilmington, Delaware.

The company owes about $51.1 million on its senior secured credit facility, according to court documents. It has $34.1 million outstanding on its revolving facility, $12.3 million on its term loan and $4.7 million in letters of credit. The retailer owes about $137.3 million on its 13 percent second-lien notes due Oct. 15.

Term Loans

Brookstone plans to borrow $96.3 million in two term loans of $60 million and $36.3 million to help fund operations while in bankruptcy, according to court filings.

The financing, which will be provided by certain noteholders, would also be used to pay debt, according to court documents. The company would use $43.4 million to pay the outstanding obligations on the senior secured credit facility and $30 million of the second tranche would be used to replace noteholders debt giving them a higher priority of repayment.

The company said in court papers the proposed financing is crucial to its restructuring effort because it ensures the noteholders will back a reorganization plan based upon the sale. More than two-thirds of the noteholders have pledged support for the proposal, which should be filed in about 20 days. Brookstone would also hold a competitive auction to test Spencer’s offer.

‘Key’ Executives

The retailer wants to implement a bonus plan of about $1.3 million for 33 “key” employees. Brookstone will also seek court permission to pay bonuses to four executives determined by scaled targets related to the sale and liquidity.

Brookstone, known for products such as $4,600 massage chairs and $3,000 “Pac Man” arcade systems, was plagued by the same afflictions that sank Sharper Image Corp. in 2008.

Online merchants such as Inc. now offer products that once made the two companies the leaders in the hard-to-find item market, Robert A. Del Genio, managing member at turnaround and restructuring firm CDG Group LLC, said in a phone interview before the bankruptcy filing.

“Sharper Image and Brookstone were places that you went to for unique products. Now you can find it on the Web,” said Del Genio, whose firm managed Sharper Image in its bankruptcy, which ended in liquidation. “That was their niche.”

Pragmatic Consumers

As online competition increased, the recession made consumers more pragmatic, according to Del Genio. While Brookstone offered unique products, they were discretionary, he said. “People are more conscious about how they spend their money.”

Net sales fell 7.4 percent to $481.3 million for fiscal 2013 from the prior year resulting in adjusted earnings before interest, taxes, depreciation and amortization that plummeted about 42 percent to $10.7 million from 2012, court papers show.

Brookstone said in a court filing that it plans to expand its number of airport stores to 85 from 47 by the end of 2016. Airports accounted for almost half of the company’s profit last year, Brookstone said. Most of its 242 locations in the U.S. and Puerto Rico are in malls.

Brookstone started as a catalog business in 1965, offering “hard-to-find tools” before opening its first store in 1973 in Peterborough, New Hampshire, according to its website. Brookstone said in court papers it will honor customers’ gift cards which have an outstanding value of $6.1 million.

The company went private nine years ago in a $422 million deal backed by Temasek, Singapore’s state-owned investment company, along with OSIM International Ltd. and JW Childs Associates LP. Singapore-based OSIM, Asia’s biggest maker of massage chairs, sells its products through Brookstone stores.

‘Iconic Brand’

“Brookstone is a well established iconic brand that has stood the test of time,” Spencer Chief Executive Officer Steven Silverstein said in today’s statement.

Spencer operates 644 stores in the U.S. and Canada selling novelty and pop-culture gifts. It also runs more than 1,000 seasonal Halloween stores under the Spirit brand.

Brookstone’s 13 percent callable bonds rose less than 1 cent to 54.688 cents on the dollar today according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Financial adviser Jefferies Group LLC and law firm K&L Gates LLP are helping Brookstone restructure its debt. The 30 largest unsecured creditors are owed about $4.7 million, according to court documents. Tempur-Pedic Inc. is the biggest, with a claim of $961,815.

The case is in re Brookstone Holdings Corp., 14-bk-10752, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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