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July 30, 2020 – The Court hearing the Lucky Brand Dungarees cases issued an order (i) approving bidding procedures for the sale of substantially all of the Debtors' assets, (ii) granting bidder protections to stalking horse bidder SPARC Group LLC (“SPARC” or the "Stalking Horse Bidder," (iii) approving an auction/sale timetable culminating in an auction on August 10th and a sale hearing on August 12th [Docket No. 251]. SPARC's opening bid is valued at $208.6mn of which $140.1mn is cash, with the balance comprised of a $61.5mn credit bid and $7.0mn of assumed liabilities. For its efforts, SPARC will be protected by a 3% break-up fee of $6.2mn (the 3% generously calculated on the total $208.6mn and not just the cash) and expenses of up to $1.0mn.
On July 27th, the auction/sale process got somewhat more straightforward, with the Debtors filing a "Notice of Waiver of Financing Contingency for All Asset Purchase Agreement" [Docket No. 185] which confirmed that SPARC had waived a financing contingency in its bid.
That contingency, which gave SPARC the right to pull out of its all assets offer in the event that it could not secure financing for inventory, had led to a structure which included a back-up, IP only, sale to ABG-Lucky LLC (a newly formed subsidiary of Authentic Brands Group LLC, "ABG") to purchase the Debtors' IP assets for $90.0mn. There is more on this dual-APA structure below, but given the waiver of the contingency, "the Debtors are seeking the approval of the Stalking Horse Purchase Agreement and SPARC, as the Stalking Horse Bidder, and are not proceeding with the IP Purchase Agreement and the IP Buyer." The financing contingency had seemed curious from the outset, given that it called into question the financial bona fides (or was it just a contrived out in the event SPARC got cold feet?) of a group that otherwise presents itself as deep-pocketed (SPARC is an entity formed by ABG and Simon Property Group) and where ABG would otherwise be coming up with $90.0mn in its unilateral role as IP Buyer.
- Bid Deadline: August 7, 2020
- Deadline to object to the Sale Transaction to the Stalking Horse Bidder: August 9, 2020,
- Auction (if necessary): August 10, 2020
- Sale Hearing: August 12, 2020
Key Terms of All Assets APA [Filed at Docket No 15.2]
- Sellers: Lucky Brand Dungarees, LLC and its affiliates that are signatory thereto.
- Stalking Horse Bidders: SPARC Group LLC (“SPARC”)
- Consideration: The closing consideration shall be (i) an aggregate cash amount equal to the sum of (A) $140,100,000, plus (B) the Specified Trade Receivables Adjustment (such sum, collectively, the “All Assets Closing Cash Purchase Price”), (ii) an aggregate credit bid (A) by the Second Lien Lenders in the amount of $50,000,000 and (B) by the DIP Lenders of all DIP Obligations (as defined in the DIP Interim Order) in the amount of $11,500,000 (the sum of sub clauses (A) and (B), the “Credit Bid”) (the sum of sub clauses (i) and (ii), the “All Assets Purchase Price”) and (iii) SPARC’s assumption of the Assumed Liabilities.
- Credit Bid: The All Assets Purchase Agreement seeks to permit the DIP Lenders to credit bid in an amount equal to $11,500,000 and the Second Lien Lenders to credit bid in amount equal to $50,000,000, pursuant to section 363(k) of the Bankruptcy Code.
- Bidder Protections: (a) the payment of a break-up fee equal to $6,222,986.53 under the All Assets Purchase Agreement (the “Break-Up Fee”), and (b) an expense reimbursement of up to $1.0mn. The All Assets APA provides the following on the calculation of the break-up fee: "means an amount equal to $6,222,986.53 (i.e. an amount equal to 3.0% of the sum of (i) Closing Cash Purchase Price [$140.1mn], plus (ii) the Credit Bid [$61.5mn], plus, (iii) the aggregate value of the Standby Letters of Credit set forth on Schedule B, plus, (iv) $7.0mn in respect of certain other Assumed Liabilities.
In a press release announcing the filing, the Debtors advised that it had: “entered into a stalking horse asset purchase agreement with SPARC Group LLC ('SPARC'), a leading global operator of lifestyle brands including Aéropostale and Nautica, for the sale of substantially all of the Company's operating assets. In connection with the transaction, ABG-Lucky LLC [the “IP Buyer”], a newly formed subsidiary of Authentic Brands Group LLC, a brand development, marketing, and entertainment company, which owns a global portfolio of entertainment, media, and lifestyle brands will acquire all the intellectual property assets of Lucky Brand. In addition to entering into the asset purchase agreement with SPARC, the Company and certain of its affiliates also entered into a 'back-up' asset purchase agreement for the sale of the Company's and such affiliates' intellectual property and certain other assets to ABG-Lucky LLC which will only come into effect if the asset purchase agreement with SPARC terminates under certain circumstances.
To facilitate the sale and reduce its debt burden caused by recent challenges, including the COVID-19 pandemic, Lucky Brand has initiated proceedings under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware. Lucky Brand has received new financing commitments from certain of its existing lenders that will provide sufficient liquidity to fund the business through the closing of the sale.”
The Debtors’ Interim CEO Matthew A. Kaness commented: "The COVID-19 pandemic has severely impacted sales across all channels. While we are optimistic about the reopening of stores and our customers' return, the business has yet to recover fully. We have made many difficult decisions to preserve the Company's viability during these unprecedented times. After considering all options, the Board has determined that a Chapter 11 filing is the best course of action to optimize the operations and secure the brand's long-term success. We remain committed to our Associates, vendors, and business partners and appreciate the continued support through this process."
Proposed Sales and APA(s)
On June 9, 2020, the Debtors received a single non-binding LOI (the “Stalking Horse LOI”) from SPARC, ABG, each of the DIP Lenders, and the Second Lien Lenders (collectively, the “Stalking Horse Parties”). Each of the Stalking Horse Parties already had considerable experience with, and understanding of, the Debtors' businesses which the Debtors expect will allow for an accelerated sales process. That optimism is somewhat undercut by the apparent need for a "back-up" stalking horse should SPARC fail to come up with the necessary financing for its going concern purchase, leaving ABG to plow forward with a $90.0mn, IP only, bid.
The Renzi Declaration (defined below) states: "As a result of the active engagement by both ABG and SPARC in the November 2019 Refinancing transaction and the 2019 Marketing Process and these parties’ considerable retail market and industry knowledge, these parties, working with the Second Lien Lenders, were in a position to move quickly to provide a stalking horse bid that will set the baseline for an expedited sale process. The Company, with the assistance of Houlihan, continued to work closely with potential bidders to explore and address transaction structure, timing, and process considerations but the Debtors ultimately did not receive any other LOI or IOI.
On July 3, 2020, the Debtors entered into the Stalking Horse Purchase Agreements which contemplate a going concern purchase by with a "back-up" sale of IP assets should SPARC not be able to access the financing necessary to purchase inventory. The Renzi Declaration continues: "Based on the information available, the All Assets Bid includes cash in the amount of $140,100,000, the Specified Trade Receivables Adjustment, an aggregate credit bid equivalent to approximately $51,500,000, plus other consideration.
The All Assets Purchase Agreement preserves the Company’s business as a going concern, including (i) preserving much or all of the Debtors’ current store footprint, (ii) contemplating the employment of many of the Company’s store and other employees, (iii) continuing to source merchandise from the Company’s vendor base, (iv) maintaining ongoing relationships with many of the Company’s other contract counterparties and assuming certain liabilities related thereto, and (v) providing cash consideration sufficient to repay or satisfy all amounts due to the Debtors’ First Lien Lenders, and provide certain wind down costs in accordance with an approved budget to facilitate the orderly winding up of the estate and confirmation of a chapter 11 liquidating plan; provided, however, that the funding of such wind-down costs shall not guarantee or otherwise ensure that such funds will prove to be sufficient for the Debtors to fund and confirm a chapter 11 plan.
Pursuant to the All Assets Purchase Agreement, the All Assets Bid is contingent on SPARC’s ability to obtain financing for the purchase of inventory.
In the event that prior to 11:59 p.m. Pacific Time on July 27, 2020, SPARC does not obtain financing (or waive) its financing contingency, then the sale will 'toggle' to a sale of the Debtors’ intellectual property and certain other of the Acquired Assets (the 'IP Bid' and together with the All Assets Bid, the 'Stalking Horse Bid') to the IP Buyer as specified in the All Assets Purchase Agreement (the 'Toggle'); in such event, the Company will sell and/or liquidate its remaining assets in the manner that best maximizes value to the Debtors’ estates under the circumstances.
Based on the information available, the IP Bid has a purchase price of $90,000,000, plus the option to purchase inventory related to the e-commerce and wholesale business (with retail inventory, accounts receivable, and other remaining assets to be sold or otherwise liquidated)."
About the Debtors
Founded in Los Angeles, California in 1990, Lucky Brand is an apparel lifestyle brand that designs, markets, sells, distributes, and licenses a collection of contemporary premium fashion apparel under the “Lucky Brand” name. The Company’s products, designed for women, men, and children, include denim jeans, pants, woven and knit tops, outerwear, and accessories.
The Renzi Declaration adds: "Lucky Brand is globally recognized for innovative, trendsetting denim jeans and apparel. Lucky Brand sells directly to consumers in the United States in Company-owned Lucky Brand stores, to a network of wholesale accounts that include department stores, selected specialty retailers and boutiques, and through the Company’s e-commerce site, www.luckybrand.com.As of May 2020, the Company operated 112 specialty retail stores and 98 outlet stores in North America. In addition, Lucky Brand selectively provides licenses to third parties to use the Company’s various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods."
SPARC is a leading apparel company operating under the Aeropostale and Nautica brands owned by ABG and Simon Property Group, which is one of the Company’s key landlords. The press release declines to point out those rather key facts, preferring: "SPARC is a leading apparel company operating under the Aeropostale and Nautica brands owned by ABG and Simon Property Group, which is one of the Company’s key landlords SPARC is a global enterprise which designs, sources, manufactures, distributes, and markets women's, men's, and kids' apparel and accessories. A full-service retail operator, SPARC delivers product and commerce innovation through a multi-brand platform which supports 2,600-plus retail doors and shop-in-shops, robust eCommerce, and leading wholesale accounts in North America, South America, Europe, and Asia Pacific. As the dedicated operating partner for the Aéropostale and Nautica brands, SPARC supports over $2.7 billion in global retail sales annually."
About Authentic Brands Group
Authentic Brands Group ("ABG") is a brand development, marketing, and entertainment company, which owns a portfolio of global media, entertainment, and lifestyle brands. Headquartered in New York City, ABG elevates and builds the long-term value of more than 50 consumer brands and properties by partnering with best-in-class manufacturers, wholesalers and retailers. Its brands have a global retail footprint in more than 100,000 points of sale across the luxury, specialty, department store, mid-tier, mass, and e-commerce channels, and more than 5,500 freestanding stores and shop-in-shops around the world.
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