Sunday, July 20, 2008

Private Equity Follies
Here is an article on Mervyn's problems. It was bought by several private equity firms in 2004 and the seller was Target. The retail executives at Target must have laughed their a#$ off dumping dog Mervyn's to the brilliant private equity financiers. The private equity firms did one thing correct when they bought Mervyn's:
That is because when they bought the company they structured the $1.2 billion deal as two separate transactions -- one for the retailer and a second one for the retailer's real estate.

The real-estate arm has been a lucrative investment, according to people familiar with the deal. It leased many of the stores to Mervyn's and has sold and leased certain properties to other retailers. And through sale-leaseback transactions and the appreciation of real-estate values over the past several years, the buyers have more than doubled their money on the real-estate investment. Those profits have far exceeded losses on the retailer, according to these people. In a bankruptcy of the store operations, the real-estate arm would become a creditor.

Not to get philosophical, but I do not see how the private equity purchase improved the business. The firms that bought Mervyn's were supposed to be a turnaround specialists but appear to have been better financial engineers than retail experts. The stores are going to close and employees are going to lose their jobs. Mall owners and other tenants will be hurt. Wal-Mart will benefit, but it likely already has. Other private equity acquisitions of retailers have also soured, and expect more to come.

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