PG usually comments at the end of a post, but given the complexity of the following story, he’ll comment upfront.
The OP talks, of course, about the bankruptcy of Toys “R” Us, a large US retailer.
If Barnes & Noble, another large US retailer, files for bankruptcy in the future, PG suspects a similar pattern of behavior may play out behind the scenes.
If PG’s concerns turn out to be well-founded, this will likely mean big losses for major publishers who have shipped books to Barnes & Noble in the months before the bankruptcy.
Under typical New York publishing contracts, if the publishers aren’t paid, neither are the authors of the books the publishers have shipped to Barnes & Noble. If publishers take big chargebacks for unsold books tied up in the bankruptcy, this may adversely impact royalty payments otherwise due and payable to authors for sales of books to other booksellers besides Barnes & Noble. PG could see an argument on the part of publishers that prior earnouts of advances paid by publishers should be reversed due to bankruptcy-related chargebacks attributable to previously-booked sales of an author’s books.
For clarity, PG has no inside information about Barnes & Noble’s current operation or any future directions the company may take. Nobody at Barnes & Noble gives PG the time of day. PG is not an expert on corporate bankruptcies and may be ignorant of bankruptcy procedures and rules which may protect authors from the consequences PG speculates about above.
While many observers, including PG, think that Barnes & Noble’s future is looking less promising all the time, PG and those who hold similar opinions could be completely wrong. For the sake of authors under contract to large US publishers, PG certainly hopes he is wrong.
From The Wall Street Journal:
When Toys “R” Us sought bankruptcy protection last September, there was good reason to believe the iconic retailer would work through its problems and emerge a leaner but viable company. Its suppliers were confident enough they continued to fill its shelves with toys.
On March 15, however, to the surprise of most people involved, the 70-year-old company announced it was shutting for good. Some 33,000 workers lost their jobs. Vendors now face at least $350 million of losses. The toy maker Mattel Inc. took a big hit to its bottom line.
Many factors contributed to the retailer’s troubles, including the costs of a leveraged buyout, competition from Amazon.com Inc. and a disastrous Christmas season. What pushed it over the edge, however, was a small group of hedge funds.
Solus Alternative Asset Management, a New York hedge fund, pressed four other Toys “R” Us debtholders to conclude that the company was worth more dead than alive, according to two Toys “R” Us directors. That was enough to halt the company’s frantic restructuring effort.
. . . .
Toys “R” Us “had real people, credible institutions, engaged in a serious discussion around potentially reorganizing the company,” said David Kurtz, head of restructuring at Lazard and an adviser to the company, at a March court hearing. There was a deep-pocketed investor talking to the company about backing the effort, he said.
Yet before the company could finish pulling together a reorganization plan, the five debtholders ran out of patience. They held a critical piece of secured debt with a face value of $668 million—a minority of the $5.3 billion of debt the company listed when it sought chapter 11 protection, bankruptcy court records show. Under the company’s complex capital structure, they had the power to essentially stop the clock on the reorganization effort. Toys “R” Us concluded it had no choice but to liquidate.
. . . .
Today, as the Toys “R” Us case shows, these kinds of creditors wield more influence than ever. Since the financial crisis, the practice of layering companies with tiers of debt has become more common, restructuring experts say, which adds to the complexities of bankruptcy filings. As hedge funds and other investors accumulate stakes in these tiers of debt, they can gain a so-called fulcrum or crucial position in restructuring negotiations.
“Secured creditors have developed greater power to control the process than Congress expected them to have when it created chapter 11, and probably more than is healthy for a system in many cases,” says Jonathan Lipson, a Temple University professor focused on bankruptcy. “Hedge funds have their own liquidity needs, their own investors looking for certain kinds of returns in certain periods. It can be hard for them to be patient with a reorganization process.”
. . . .
The chapter 11 bankruptcy system is designed to provide a transparent and fair process for resolving creditors’ claims against financially troubled companies. It sets up a pecking order among those who are owed money, with secured bank lenders generally sitting at the top, bondholders in the middle—secured, then unsecured—and stockholders at the bottom.
The $5.3 billion in debt Toys “R” Us listed when it filed for bankruptcy on Sept. 19 was a hangover from a $6.6 billion leveraged buyout in 2005 at the height of that decade’s buyout boom. Private-equity firms Bain Capital and KKR & Co., along with Vornado Realty Trust, led the buyout and have been taking heat for the retailer’s demise, partly because their deal loaded up the company with debt. The rise of online competition and the company’s outdated stores also contributed to its woes.
. . . .
The role played by Solus and the other funds in the company’s demise has attracted less attention.
Distressed-debt investors typically buy debt at a discount to the original dollar value. It couldn’t be learned how much the five funds paid for their Toys “R” Us holdings, but court records and price data indicate that Solus bought much of its position for less than 50 cents for each dollar of face value.
. . . .
Solus, a $6.3 billion hedge-fund company founded in 2007, was among Toys “R” Us’s smaller debtholders early on. By this June, it had become the largest holder in the debt issue known as B4, with $221 million in face value of the $1 billion issued. That layer of debt became pivotal to the reorganization effort because its holders had supplied collateral for additional bankruptcy financing.
Solus contributed $31 million at the time of the bankruptcy filing for what is known as debtor-in-possession financing, which kept the retailer operating through last Christmas—money that, under bankruptcy law, is first in line for repayment.
. . . .
At Toys “R” Us, the decision by vendors to continue shipping merchandise after the chapter 11 filing meant shelves were loaded with new and in-demand goods that could be sold quickly and easily in going-out-of-business sales. That would make for a speedy payoff for creditors.
. . . .
The company and its representatives pleaded with Solus and the other B4 debtholders to waive a requirement that the company’s forecast maintain a certain level of cash flows in its operations, court records show. The funds agreed to such a waiver in January. That deal was set to expire on March 3.
Mr. Kurtz, the company’s adviser from Lazard, recalled in a later court hearing what he told the funds. “You guys really should get on board and help us support” the company’s effort to continue operating, he recalled saying, because that is where the most value will be created. He said he then described “why the management team believes that we can and will be successful.”
The company hadn’t yet put together a formal restructuring plan, which would have laid out exactly what each class of debtholders would receive in exchange for their defaulted debt. Yet certain conditions were clear, court documents show. Although Solus and the other funds wouldn’t have had to put additional money into the company, they would have had to subordinate their claims to any new investor who put in money to help the company reorganize.
. . . .
When Circuit City Stores Inc. and Borders Group Inc. sought chapter 11 protection in 2008 and 2011, respectively, vendors still had Best Buy Co.and Barnes & Noble Inc. After Toys “R” Us stores went dark in June, the industry had no dedicated big-box outlets.
Vendors who kept shipping goods to Toys “R” Us hoping for a reorganization will receive at least 22 cents on the dollar for the $800 million they are owed, according to court papers.
Link to the rest at The Wall Street Journal
The article was bopping along fine until it said Congress didn’t intend secured creditors to have control in Chapter 11. Really? So the whole court and creditor approval thing was just a sham?
Let’s cut the story down to some basics. ToysRUS got into trouble and yet “nobody” thought they would go under. Really? Actually, about 80% of the public thought they were goners. Even in Canada, which has somewhat separate operations, the newspapers were awash with ToyRUS is closing rhetoric. Chapter 11 isn’t code for “i’m on vacation”, it’s “I’m one step from circling the drain”.
So in trouble, and the big debtors who are secured lenders want their money first. They aren’t looking at your shelves to see if you have a cute toy for their kids, they’re looking at your balance sheet and income statement and how they get their money back. So they decide they won’t throw more money after potentially bad money, but ToysRUS solution is to attract gold-plated investors who would have first claim ahead of them on any assets. I can’t imagine why they wouldn’t go for that, particularly as it didn’t come with any restructuring plan to say how much anyone would get if/when it went south.
So, for me, it comes down to a retailer in trouble with a traditional big box store format, and a website that basically matches the in-store price. I see lots of press telling people that the store is in trouble, and then they go through their BIGGEST season (xmas) and it looks like a massacre. I look over at their biggest competitor for toys — Walmart with the same box format and a crappier website, and see them expanding and ramping up even more for digital over the last couple of years. And I see a management team that hasn’t put in place a strategic plan to show me the restructuring solutions that will “save everything”. Oh, and not for nothing, 90% of the stuff they sell is available on Amazon for less. .
I happened to like ToysRUS because they had more selection than Walmart, obviously, and I could physically see the stuff on the shelf to gauge quality-ish. And I knew I was paying extra for that, but I could go home with it today, when I didn’t go in knowing exactly what I wanted. Plus I avoided the insanity of Walmart or Costco.
But I wouldn’t invest in them. Would you? Crickets chirping, much like many of the cashier lines at Xmas.
P.
From what I’ve read, another contributing factor was that money that should’ve been spent of marketing and the like was instead spent on servicing the debt.
I know in the old days books moved from the publisher to the wholesaler to the retailer more or less on consignment; they remained the property of the publisher right up until the cashier rang them up and took the customer’s money. At least, that was how it was explained to me in the 1990s.
B&N is much larger, deals with publishers without intermediaries and is (or once was) big enough to dictate non-standard terms.
What I’m wondering is, “when does ownership of books change from the publisher to B&N?”
If they still belong to the publisher, then they’re unsold inventory; they might be recovered and sold elsewhere.
If they belong to B&N, they’re assets in a bankruptcy proceeding, the authors are hosed?
Going by the Borders proceedings, it isn’t technically on consignment. They’re 90(?) day net sales with return-for-credit rights so the books are considered store inventory and subject to the bankruptcy court terms.
In the Borders case, Borders had been buying essentially zero books for months on end: they ordered books and “paid” for them by returning earlier orders for credit. During the proceedings there was a proposal to keep some 220 stores open by selling them and their inventory at a discount but that would have reduced the payment to the publishers for the rest of the books and kept the stores’ inventory on their books as normal sales. They crunched the numbers and decided that blocking all restructuring and forcing the liquidation of Borders would result in more money to them that quarter. (Presumably because books sold in a liquidation sale could be bookkept as deep discount with zero or near zero royalty payments.)
At the time, the BPHs assumed that since 75% of Borders stores were within a mile of a B&N, the bulk of the Borders customers would go to B&N, fortifying it against “tbe Amazon threat”. That proved not to be the case. The net result was a massive boost to Amazon pbook market share. Apparently, most of the people shopping at Borders did so because they didn’t like shopping at B&N and instead gave their business to Amazon. B&N might have gained some Borders customers but they were less than the B&N customers “defecting” to Amazon.
This time around the BPHs probably won’t be able to rationalize forcing B&N into liquidation unless the bidder for the corpse is Indigo.
Without the buyout in 2005, they would likely have closed much sooner. I had a lot of detailed financial information for the 2005-2007 time period and it was possibly survivable, but troubled then. However, the private equity clearly did not get toys and baby products (by that time baby products from Babies R Us was about half their revenues and more than that of profits). The PE had no desire to understand the categories or the brand, but they did have TVs blaring financial news channels throughout the open spaces in the HQ in New Jersey.
Would they have closed or just reorganized?
As recently as last november they were looking to reorganize until the money managers forced the liquidation. That was similar to the Borders implosion, where everything was set for a reorg and downsizing until the creditors (the BPHs in that case) forced a liquidation.
So far, the big box chains that remained wedded to the big box format have faded while the ones that adjusted their format and accepted online have survived.
They probably would have closed. They either weren’t profitable or were close to unprofitable and headed there fast in 2005. The threats they weren’t dealing with well at that point were mass discounters, particularly Walmart and Target. taking ever more of their toy and baby goods volume.
From retail perspective, they kept their prices too high and they ignored large parts of the toy and games markets that could have been profitable.
I suspect Bezos worries far more about a swarm of smaller innovators who see his margin as their opportunity than he does about one large company knocking Amazon off its perch.
Also, anyone remember how big publishing was so large and powerful that nothing could dent its market share? (Anyone follow Shatzkin?) Forecasts of future innovation are routinely terrible. The things we know about are probably not a danger to Amazon. The things we don’t know about are classified under “innovation,” and since we don’t know anything about them, it’s hard to say Amazon is safe from them.
Exactly.
Whoever finally dents Amazon isn’t going to come from the publishing world or the retail ranks. And they won’t be flinging themselves head on against Amazon’s strengths; they’ll be coming from a different business, going after a market Amazon doesn’t see, sees as not worth pursuing, or one they tried and failed to get a toehold.
It won’t be an enemy they can see because if they could see it, they could counter it.
It will happen but it won’t be soon.
I figure it will take ten years, maybe more.
Amazon is too entrenched and when it comes to books their biggest haters are their best asset. With enemies like those you hardly need friends.
We haven’t even seen peak Amazon.
Too much wishful thinking at the slightest breeze.
@ Chris
“I DO think that to take market share away from the perch Amazon rests on, Walmart-Kobo will need dynamite.”
Too bad all they sell is those little party poppers …
@ J R Tomlin
“Amazon is big, but they can still only dream of having Walmart’s deep pockets.”
Ah, but having deep pockets and doing anything with what’s in them is two different things. I don’t think Jeff is too worried right now, he’s still working on day one and growing his little business and Walmart is just standing there, leaning against the wall with their hands in their deep pockets …
What makes you think Walmart is serious about e-books this time?
From the comments I’ve heard the roll out hasn’t made a splash at all nor has it been without its share of hiccups.
I don’t expect (or think) perfection is required.
I DO think that to take market share away from the perch Amazon rests on, Walmart-Kobo will need dynamite. 🙂
“The $5.3 billion in debt Toys “R” Us listed when it filed for bankruptcy on Sept. 19 was a hangover from a $6.6 billion leveraged buyout in 2005 at the height of that decade’s buyout boom.”
Should have gone after the people that made money on that bit …
In B&N’s case there’s only one guy in control that seems to want to see how far he can drag it until the wheels come off – how he plans to jump off we have no idea …
Hmm, 2005 was about the last time when a big box retailer could get away without a properly integrated online sales operation.
If instead of playing financial leverage games the Toys-R-us folks had leveraged their brand and goodwill with online sales, big data, and better logistics they might have survived the Walmart Amazon squeeze.
https://www.forbes.com/sites/barbarathau/2012/11/21/toys-r-us-ceo-wal-mart-target-amazon-have-nothing-on-us-this-black-friday/#30379b34f7be
So far, Best Buy and Target seem to be hanging on, as two examples.
I remember Montgomery Wards being wiped out by similar games. Some genius decided to split the stores from the land they owned, and suddenly the stores could not stay in business and pay the rent. A few years ago they tried to do the same to Olive Garden, but were stopped.
I watch Nightly Business Report and they babble about RETs and Malls. The Malls are dying because the RETs keep raising the rent. Those RETs are on the stock exchange so they have to keep showing “growth” to keep their stock value high. The need to keep the stock high is driving the business, rather than setting rents appropriate for the area.
It’s not just the Mall, I’ve watched this year how a ton of places moved from where they’d been for decades to just down the street in a new building. It was cheaper for them to write off new construction than it was to renew their lease.
These are a few trailers that I tracked down to movies that are similar. Notice the first has him buy the company to jazz up and sell. The other two are minority investors that force the majority to gut the company.
If you know of any other fun movies, please add to the list. Thanks…
Cash McCall – Trailer (1959)
https://www.youtube.com/watch?v=hSaK2JQsQHs
Other People’s Money (1991) Official Trailer
https://www.youtube.com/watch?v=oOTlqs_j4IE
Barbarians at the Gate trailer (1993)
https://www.youtube.com/watch?v=F3DWpuISBas
PG’s analysis is yet another reason to eschew Trad Pub.
One might come to that conclusion, James.
No, it wasn’t just Amazon.
In fact, a bigger impact was made by WalMart seasonal sales.
When giants clash the biggest damage is to the bystanders.
B&N should take note in case WalMart is really serious about ebooks this time around.
What makes you think Walmart is serious about e-books this time?
From the comments I’ve heard the roll out hasn’t made a splash at all nor has it been without its share of hiccups.
I don’t expect (or think) perfection is required.
I DO think that to take market share away from the perch Amazon rests on, Walmart-Kobo will need dynamite. 🙂
Roll outs have hiccups but Walmart does not put something it is not serious about at the top 1/4 of its homepage. They don’t need to knock Amazon ‘off its perch’ but it can take a market share AND expand the size of the ebook market by targetting non-Amazon shoppers.
Amazon is big, but they can still only dream of having Walmart’s deep pockets.
And it will take those deep pockets and a long term commitment to make a dent.
As is, they’ll be denting B&N long before Amazon even notices they’re out there.
Don’t overvalue Walmart’s intent here; they have bigger fish to fry than dumping money hand over fist to try to hurt Amazon. For one thing, the ebook market isn’t big enough and the share in play isn’t worth a big investment. (Taking the quick-n-cheapie way of a partnership with Kobo is the first sign they’re not taking it to the mattresses.)
Eh? Amazon doesn’t have deep pockets? What is the capitalization of both companies? (Too lazy to look it up on the phone.)
Plus, the Walton’s are “preservationists,” Bezos is an innovator and experimenter.
Neither Walmart nor Kobo had to do very much to make this deal happen.
Kobo already has the technology in place to skin their website and allocate a portion of sales to a partner – they do that all the time with bookstores. Walmart is just getting the same sort of deal.
https://www.kobo.com/retailpartners
All Walmart had to do was to set aside a few feet of space for those cards and a sample device, and distribute materials and signage to their stores. That’s one of the reasons for the cards – no matter how much they work on their website, Walmart’s DNA is still all about people going into stores and coming out with physical objects. As Nate has mentioned on his blog, the cards are a three-times failed retail strategy.
If B&N, or Amazon books, or Half Price books stopped selling books, their stores would have to close. They are bookstores. As far as Walmart goes, their pbook or ebook space could disappear one day and people might not hardly notice.
Deep pockets, Schmeep pockets. They are not committed.
Walmart doesn’t care, no.
The thing to remember about ebooks is that the entire ebook market amounts to a rounding error for Walmart. It has revenues in the range of $500 billion. Furthermore, its print book sales have been falling (according to annual data from NPD).
This is a market where two of the segments are either dominated by Amazon (indie pub) or locked down with price controls.
So the market is small by Walmrt’s standards, and it faces fierce and competent competition.
No, i don’t think Walmart cares much.