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Forever 21, Inc. – Bidding Procedures Motion Suggests Offer for for Debtors’ Assets May Be Imminent


January 30, 2020 – The Debtors filed a bidding procedures motion requesting (i) approval of proposed bidding procedures, including bidder protections, in respect of the sale of substantially all of the Debtor's assets and (ii) a proposed auction/sale timetable culminating in a February 10th auction and a February 11th sale hearing [Docket No. 802]. Numerous sources have reported over the last week that mall owner Simon Property Group and Authentic Brands Group are considering a joint offer to buy and operate the stores and the brand.

The truncated auction/sale timetable (bids due by February 7th) is not the only indicator of an imminent announcement as to a stalking horse bidder, the Debtors also note that they intend to file an asset purchase agreement substantially identical to a "form" APA now filed and to do so in advance of a February 4th Court hearing. That form APA also includes several surprisingly included "notes to self" footnotes as to the prospective Buyer's position on several outstanding issues (eg "FN2 Buyer Note to Draft: Sellers to confirm whether any domain names are owned by local JVs" and "FN12 Buyer Note to Draft: As discussed, please provide dates for milestones. Outside date to be discussed"). What is interesting about the footnotes, beyond the fact that they exist and include presumably sensitive references to employee treatment and "Ex-US antitrust filings," is that they don't suggest any major stumbling blocks to finalizing a deal.

One potential hiccup is that based on existing arrangements with their debtor-in-possession ("DIP") lenders, the turbocharged timetable might not be fast enough, the Debtors pointing out that a current forebearance period under DIP financing arrangements is set to expire on February 8th. Again, tucked in a footnote: "While the Debtors have previously reached agreement with the DIP Agents in respect of recent defaults under the Debtors’ postpetition financings, the DIP Agents have not yet consented to the Debtors’ currently proposed timeline, which is outside the current forbearance period that expires on February 8, 2020. The current Forbearance Period… is set to expire no later than February 8, 2020. As of the filing of this Motion, the Forbearance Period has not been modified, and the DIP Agents and DIP Lenders have not yet consented to the relief sought herein."

The motion states, “In order to advance these chapter 11 cases toward the Debtors’ ultimate goal — a going concern transaction — the Debtors, in close coordination with the Committee and the DIP Lenders, intend to conclude a process that began in the summer of 2019 to maximize the value of their estates. The Debtors and their advisors have solicited proposals for all transaction forms in an effort to deliver the best available recoveries for the estates. Now, the Debtors are engaged in substantial, round-the-clock negotiations concerning a going concern Stalking Horse Purchase Agreement while simultaneously developing bids for alternative transaction structureThe Debtors believe that this Motion presents the best available path forward in terms of maximizing the value of these estates under the present facts and circumstances…The Debtors intend on entering into and filing a Stalking Horse Purchase Agreement, a substantially final form of which is attached hereto as Exhibit C, subject to Court approval, in advance of the hearing on this Motion [ie February 4th]. Although time is of the essence, the Debtors will nonetheless continue to entertain and develop any proposal that, in their business judgment, could maximize the value of the estates."

Bidder Protections

The motion provides: "The Debtors also request approval of the Bid Protections (as defined in the Bidding Procedures). In accordance with the terms of the Stalking Horse Purchase Agreement, the Debtors request authority to provide the Stalking Horse Bidder with an allowed superpriority administrative claim in the Debtors’ chapter 11 cases in an amount equal to the Breakup Fee and Expense Reimbursement, the priority of which shall be junior to (x) the Carve-Out (as defined in the DIP Order), if applicable, and (y) Claims arising under the DIP ABL Financing Agreement and DIP Term Financing Agreement (including Claims of the DIP ABL Agent and DIP Term Loan Agent provided for pursuant to the DIP Order).  The Bid Protections that may be granted to a Stalking Horse Bidder fall well within the range of bid protections typically approved by the bankruptcy courts in the Third Circuit. In the event the Debtors elect to enter into a Stalking Horse Agreement, the Bid Protections will likely consist of an Expense Reimbursement in an amount not to exceed $1,000,000, and the Breakup Fee not to exceed an amount equal to 3.0% of (i) the Purchase Price (as defined in the Stalking Horse Purchase Agreement) plus (ii) the aggregate value of the Standby Letters of Credit (as defined in the Stalking Horse Purchase Agreement) identified in the Stalking Horse Purchase Agreement." Although it hard to extrapolate too much from its presence in the form APA, the "Overbid Increment" has been set at $1.0mn.

Marketing Efforts

The motion provides: "Simply put, the Debtors have conducted a robust marketing process for their assets over the past several months. The Debtors contacted more than 115 parties soliciting proposals to recapitalize the Debtors and otherwise maximize recoveries for their creditors. Among other things, the Debtors have explored raising additional debt through a variety of structures, raising additional capital through an equity raise, and selling the Debtors’ assets. The DIP Lenders have agreed to provide the Debtors with certain runway to realize on those prior efforts. The proposed sale process will help drive these chapter 11 cases to a value-maximizing conclusion.

With the backing of its DIP Lenders and the Committee, the Debtors’ investment bank, Lazard Frères & Co. LLC ('Lazard'), launched an extensive marketing process in early November 2019. At that time, Lazard commenced a widespread outreach to potential bidders, including a broad universe of traditional banks, alternative investment firms, private equity firms, and strategic investors. Initially, Lazard contacted 80 potential lenders and investors; more than 50 such parties signed NDAs and received access to diligence materials. Following this initial outreach, Lazard identified 14 parties they believed most likely to provide exit financing. Lazard received 13 debt-financing proposals—six proposals to provide an exit ABL facility, and seven proposals to provide an exit term loan. Lazard also received two proposals that contemplated investments from new secured debt or new equity. Meanwhile, as described in the Forbearance Motion, the Debtors’ access to liquidity under the DIP Facilities came under pressure in mid-December. The Debtors and their advisors accelerated their engagement with parties in interest during this period and further expanded their outreach to find investors and buyers. In the aggregate, Lazard reached out to more than 115 potential investors."

Proposed Key Dates:

  • Bid Deadline: February 7, 2020
  • Auction (if applicable): February 10, 2020
  • Sale Hearing: February 11, 2020

The Debtors' requested a hearing to consider the motion for February 4, 2020, with objections due by February 3, 2020.

About the Debtors

Founded in 1984, Forever 21, Inc., headquartered in Los Angeles, California, is a fast fashion retailer of women’s, men’s and kids clothing and accessories and is known for offering the hottest, most current fashion trends at a great value to consumers. Forever 21 delivers a curated assortment of new merchandise brought in daily. 

As of the Petition Date, the Debtors operate 549 stores across the United States, and 251 stores are operated internationally by non-Debtor affiliates. Of the 251 international stores, 181 are owned and operated exclusively by the non-Debtor affiliates, 54 are franchises, and 16 are operated as joint ventures. The Debtors also maintain a substantial online presence, with their e-commerce platform accounting for approximately 16 percent of all sales. In addition to the 534 stores operated under the Forever 21 brand, the Debtors formed a beauty and wellness brand, Riley Rose, in 2017, which operates 15 stores in the United States.

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