J.C. Penney Hurtles Toward a Sale Process

J.C. Penney says it is here to stay.

Its attorney told a Texas bankruptcy court at a hearing on Wednesday that the company is working toward a going concern sale to continue operating under the J.C. Penney banner, with its intellectual property intact.

Following reports this week about bids for the company, Joshua Sussberg of Kirkland & Ellis LLP, who represents J.C. Penney in the proceedings, sought to emphasize to the court that the retailer doesn’t view any of the outside bids it has received so far as front-runners, and stressed that it has not entertained any discussions of liquidation.

“I want to say, unequivocally, that we’ve had not one discussion, with our lenders or any other stakeholders, about a liquidation,” Sussberg told the court. “That is simply not in the cards.”

“There has been no declaration as to what bid is in first, second, third or fourth place, there has been no discussion about any alternatives,” he added. “And I can tell you that all of the parties-in-interest are working in complete good faith to get to a resolution, and achieve what we have wanted to achieve since Day One, which is a reorganization of this 100-plus-year-[old] company.”

Penney’s plan for its going concern sale fits in with the reorganization plan that the company has described since it entered Chapter 11 in May. The reorganization has envisioned separating assets into a property company and an operating arm, which Penney’s has referred to as a Prop Co./Op Co. structure.

The division under this proposed reorganization is nuanced, but it plays into how a sale process would work.

The company’s lenders in its first lien ad hoc group, led by H/2 Capital Partners, have basically helped direct how its assets would be divided among those entities, Sussberg told the court. The Prop Co. portion would itself be split into two entities that contain the retailer’s owned and ground lease properties, as well as distribution centers, while the operating company would get its remaining assets, which Sussberg said include some real estate, as well as inventory and intellectual property.

Previously, the first lien lenders submitted a bid proposal for a transaction involving both the Prop Co. and Op Co., whereas the three additional bids Penney’s received this month were for the stand-alone operating company, Sussberg said. The retailer has said the identities of bidders and bid amounts are confidential.

The upshot of this complicated calculus is that while the company is proceeding toward a going concern sale, the make-up of the buying parties is yet to be determined. As Sussberg explained it to the court, the outside bids that have come in so far could potentially be wrapped into the lenders’ op/co and prop co structure bid, to make a combined sale bid.

The parties are still negotiating, and expect to prepare an asset purchase agreement outlining the terms of a sale by early August. The company expects to close on a sale this fall, Sussberg said.

“Whether the lenders are moving forward with an Op Co/Prop Co. credit bid on their own, or with a third party, or whether we’re moving forward with bidding procedures to move forward with one of the Op Co. participant bids, and maybe ultimately a third party, this is moving forward as a going concern sale, and it’s going to move forward incredibly fast,” he said at the hearing.

The plan for a quick going concern sale appears to have the support of unsecured creditors, a category of stakeholders inclined to rally around efforts to keep bankrupt companies alive.

“From our perspective, regardless of where you sit as an unsecured creditor in this case — you’re a trade vendor, you’re a landlord, you’re a bondholder — all interests are aligned in this company emerging from bankruptcy in a healthy, adequately capitalized and consensual path,” Seth Van Aalten, member at Cole Schotz PC, who represents the official committee of unsecured creditors, said at the hearing.

“That’s not to say we won’t have the customary issues with valuation and a piece of the pie for unsecured creditors,” Van Aalten added. “But I think those are secondary right now to making sure we have a going concern path, whether that’s the lenders themselves, or, as Mr. Sussberg said, in combination with potential investors.”

Shareholders have also been a vocal group in the proceedings, often calling into the court hearings that are still taking place over telephone conference calls during the ongoing pandemic quarantines. The ad hoc equity committee in the case, whose role is to represent the interests of shareholders, has pointed to Penney’s financials to argue their case that the company has value that shareholders may yet realize in the process.

On Wednesday, Penney’s advisers had told the court that the company’s cash balance had surpassed its earlier projections, and has a balance that is $400 million more than projected in its initial budget. In regulatory filings this month, Penney’s also listed roughly $1.3 billion in cash and roughly $2 billion in merchandise inventory among its assets.

“We know they’ve been performing above projections, that benefits everybody — unsecured creditors, shareholders,” Niko Celentano, chair of the ad hoc equity committee, told WWD after the hearing. “It gives reason for people to understand this should continue as a going concern business, because they’re going to be profitable going forward.”

A representative for J.C. Penney declined to comment.

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