Struggling outdoor retailer MEC considered turning to members for funding to save the business before selling it to a U.S. private equity firm, but ultimately decided the option would have been “impractical to impossible.”
The disclosure came in an affidavit filed on Wednesday by Robert Wallis, a member of the MEC board and chair of the special committee that was formally created at the end of March to seek “strategic alternatives” for the business.
MEC announced on Sept. 14 that it had reached a deal to sell the chain to a Canadian subsidiary of California-based firm Kingswood Capital Management LP. Since then, members of the co-operative who objected to the deal have raised funds and hired legal representation. They plan to petition for representation in the process at MEC’s next court appearance on Monday. MEC obtained protection under the Companies' Creditors Arrangement Act (CCAA) last week, which could allow a sale to proceed if it receives court approval.
The co-op member group has said they should have been consulted in the process, and want the chance to suggest an alternative plan. In his affidavit, Mr. Wallis said that the co-op needs significant funding to pay out its line of credit and to cover continuing losses from the stores' operations, among other expenses.
“I am aware there is discussion online about the prospect of member funding to solve MEC’s financial predicaments, which does not seem to appreciate the gravity of MEC’s financial difficulties,” Mr. Wallis wrote, adding that the board believes there is a “negligible” chance members would be able to raise sufficient funds.
The member group is aware that MEC faces financial challenges, said Kevin Harding, a representative with the “Save MEC” campaign.
“Raising capital from members can be one part of a broader strategy to engage credit unions and co-operative businesses,” Mr. Harding said in an e-mail. “...It’s just a shame that we’re trying to do this in 10 days when the sale to the American firm has been in the works for some time from when MEC began exploring alternatives.”
In another filing on Tuesday, MEC said that it is losing approximately $1.6-million a week, and predicted that it would lose more than $17.4-million between now and the end of October. It said the cash losses highlight the “urgency” of approving the sale.
MEC reported a net loss of $11.5-million on $462.4-million in sales in the year ended Feb. 24, 2019. Mr. Wallis’s affidavit stated that the chain’s adjusted losses were $31.4-million that same year and $24.5-million in its most recent fiscal year, which ended in February.
As part of the deal, Kingswood has promised to keep 17 of MEC’s 22 stores open and to offer jobs to at least 75 per cent of its “active" employees. The chain employs approximately 1,500 people.
Any “public plea” for funding from members could have had a negative impact on MEC’s business, including its relationships with suppliers and landlords and its search for new financing or for a buyer, Mr. Wallis wrote in his affidavit.
MEC’s board has said that they tried to refinance the co-op’s debt, and began exploring a sale when they were unable to do so. The special committee also tried unsuccessfully to merge with or find refinancing through other co-operatives, according to the affidavit from Mr. Wallis. A plan to sell off real estate to obtain cash flow was “not viable,” he wrote, because the value of retail real estate fell as a result of the pandemic.
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