The monitor overseeing the creditor protection process for MEC is urging the court to approve the retailer’s deal to be acquired by a U.S. private-equity company, saying it provides “the highest and best value” for the assets.
A report filed with the Supreme Court of British Columbia on Thursday by the monitor, Alvarez & Marsal Canada Inc., sheds new light on the retailer’s financial performance, as well as the terms of its proposed sale to a Canadian subsidiary of California-based Kingswood Capital Management LP. MEC’s next court appearance is scheduled on Monday in Vancouver.
Kingswood has agreed to pay an estimated $107.5-million to $110-million in cash for MEC, depending on a working capital adjustment to be calculated upon closing, according to the report. The buyer will assume liabilities including $25-million in vendor trade payables and accruals, $2-million in employee obligations and $13.2-million in obligations related to gift cards. MEC is expecting to close the deal in mid-October.
MEC has been losing money in recent years, and the court documents show that the loss has been widening. MEC has restated its results for the year ended Feb. 24, 2019, to report a larger net loss of $15.9-million on $462.4-million in sales. In the most recent fiscal year ended Feb. 23, 2020, its net loss widened to $22.7-million, on $463.4 million in sales.
In the past six months, like many retailers, MEC was severely impacted by store closings because of the novel coronavirus. From Feb. 23 to Sept. 6, 2020, the retailer recorded a net loss of $20.9-million on sales of $162.8-million, according to the monitor’s report.
MEC announced the deal with Kingswood on Sept. 14, and obtained protection under the Companies' Creditors Arrangement Act (CCAA), which could allow a sale to proceed if it receives court approval. Some members of the co-operative who objected to the deal have raised more than $100,000 in funds and hired legal representation. They plan to petition for representation in the process on Monday.
According to the monitor’s report, MEC began the process to seek out alternative investment or a buyer for the business in June, after it had failed to refinance its debt earlier this year. MEC’s financial adviser contacted 158 parties; nine of them ultimately signed a letter of intent contemplating an acquisition of most or all of MEC’s assets. All of them included a plan to make the acquisition under the CCAA process. By the beginning of September, the board reviewed four final bids and selected Kingswood’s offer on Sept. 11.
MEC did not consult with creditors, including landlords, about the sales process before it entered CCAA proceedings.
“To engage with unsecured trade creditors, landlords, the general employee base or MEC members prior to the execution of the [purchase agreement] and seeking relief under the CCAA, would have, in the Monitor’s view, created significant uncertainty and disruption to MEC’s day-to-day business and put MEC’s business operations and a potential going concern sale at unnecessary risk,” the report stated. It added that approval of the deal is urgent, partly because MEC needs to purchase additional stock to meet demand leading up to the holiday season and remain stable.
Kingswood has committed to keeping at least 17 of MEC’s 22 stores open, and to retain 75 per cent of its “active” employees. As of Sept. 7, MEC had 1,516 employees, 1,143 of whom it defined as active. Another 197 were on leave and 176 had been temporarily laid off. That means Kingswood has promised to preserve at least 857 jobs.
The report also laid out the value of the real estate that MEC owns. MEC leases 16 of its 22 stores, and has already sent notice to landlords that it is ending the leases of three additional stores. The stores MEC owns – in North York in Toronto, North Vancouver, Ottawa, Burlington, Ont., Calgary and Winnipeg – collectively have a net book value of $65.9-million. It also owns its distribution centre in Surrey, B.C., which has a net book value of $24.4-million, according to the court filing.
“MEC’s apparent insolvency appears to be the cumulative result of an unsustainable 25 store operating model, the disastrous impact on sales and cash flow of the COVID-19 pandemic coupled with inadequate financing capacity to sustain ongoing operating losses and allow for necessary investment in working capital (primarily inventory)," the report stated.
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