MEC’s sale to a U.S. private-equity company has been approved, ending a bid by a group representing some of its co-op members to try to come up with another plan for the retailer.
The group, calling itself “Save MEC,” had asked for a two-week adjournment in the court approval process for the sale to pull together a plan that would keep MEC operating under its current co-operative structure.
That request was dismissed in the B.C. Supreme Court on Friday.
The sports and outdoor recreation retailer had been loaded down with debt after a move in recent years to grow quickly and open more stores. After MEC was unable to refinance its loans earlier this year, it began looking for a buyer and announced on Sept. 14 that it had struck a deal to be sold to California-based Kingswood Capital Management LP.
The same day, it announced that it had obtained protection under the Companies' Creditors Arrangement Act (CCAA), which allowed for a sale to proceed without approval from the co-op’s members, as long it received court approval. The 49-year-old co-operative has 5.7-million members.
Kingswood has agreed to pay approximately $150-million for MEC, including cash that will go toward paying its lenders and other creditors. The amount also includes the assumption of liabilities such as $25-million in vendor trade payables and accruals, $2-million in employee obligations and $13.2-million in obligations related to gift cards.
The deal swiftly attracted criticism from members on social media, and a group soon formed to raise legal funds to challenge the sale.
“We knew from the very beginning that it would be an uphill battle – well, an uphill climb is probably a nicer word for it,” said Kevin Harding, a spokesman for the Save MEC group. “This wasn’t a fight over where we buy our hiking shoes; it was a fight for the very idea of a co-op. … MEC became disconnected from its membership.”
Kingswood and MEC argued in court this week that the transaction should be approved quickly because the retailer is continuing to lose money – to the tune of an estimated $17.4-million from late September until the end of October – and because the new owners need to move quickly to stock the stores for the crucial holiday shopping season.
However, the member group faulted the buyers and MEC for creating urgency by not informing members of the deal sooner in the sales process.
“They set the timetable when they entered into this transaction. And they did it full well knowing that members weren’t going to like this, members were going to try to do something about it, so we’d better not give them much time. And they didn’t,” Peter Reardon, a lawyer for Save MEC, said during his submission.
Kibben Jackson, a lawyer representing Kingswood, objected to the claim that the buyer had “manufactured urgency” to avoid dealing with opposition to the deal and said his client had expected an enthusiastic response to the offer, which promised to keep 17 of MEC’s 22 stores open. “This is a success story,” Mr. Jackson said.
Kingswood is a well-capitalized company that will provide liquidity that MEC will need until its continuing losses can be reversed, argued Howard Gorman, a lawyer representing MEC. He decried the rancour on social media, where he said that board members had been depicted in altered pictures with horns and devils’ tails.
“We understand the iconic brand that MEC is,” Mr. Gorman said during his submission. “… We need to save as much of the going concern, the jobs and the locations as we can.” Finding an alternative buyer could take months, he added.
MEC also did not consult with creditors, including landlords, about the sales process before it obtained CCAA protection.
Two of MEC’s landlords also opposed the deal, which would see their leases dropped for stores in Calgary and Saskatoon that have not yet opened. Both said they had spent money developing or altering those properties for MEC.
Other landlords that have leases on MEC stores, including First Capital Realty, RioCan, Oxford Properties and others, said they were not opposed to the deal, although some said they were not yet aware whether their leases would be assumed by the new owners.
MEC has said that it considered turning to members for funding to save the business, but ultimately decided that this option would have been “impractical to impossible.” The special committee appointed to look for alternatives for the business also tried to merge with or find refinancing through other co-operatives, including approaching credit union Vancouver City Savings Credit Union and U.S.-based outdoor retailer REI.
MEC had been losing money even before the novel coronavirus led to store closings that gutted retail sales. MEC reported a net loss of $15.9-million on $462.4-million in sales in the year ended Feb. 24, 2019. Its losses have widened more recently; it reported a net loss of $22.7-million on $463.4-million in sales for the year ended Feb. 23, 2020.
Although e-commerce sales got a major boost during the pandemic – including for MEC, which sells the kind of outdoor gear that was in high demand – they were not enough to make up for lost in-store sales. In the first seven months of its current fiscal year, MEC had already lost nearly as much as it did last year, reporting a net loss of $20.9-million on sales of $162.8-million, according to a report filed last week by the monitor overseeing the CCAA process.
Kingswood has promised to retain 75 per cent of MEC’s “active” employees. As of Sept. 7, MEC had 1,516 employees, 1,143 of whom it defined as “active,” according to the monitor’s report. Another 197 were on leave and 176 had been temporarily laid off.
“The sale strengthens MEC’s finances and core operating business, preserves jobs, retains the vast majority of MEC’s locations and guarantees members continued access to authentic advice and high-quality products at competitive prices,” MEC said in a statement on Friday.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.