Hilco and Gordon Bros fund their larger purchases, such as Borders, with short-term
borrowings. Typically these liquidations extend for six or seven weeks (Linens N Things was about seven), with the bulk of the revenues coming in early so the actual borrowing requirement is pretty short-term.
In the Borders case Hilco/Gordon paid the court 90% of the $250M purchase price immediately, and provided a guarantee – a letter of credit -- for the remaining 10% and for an estimate of the first installment of store operating expenses that they agreed pay for through the liquidation. As private companies, we don’t know Hilco’s or Gordon Bros’ cash positions, but we might assume that for a deal like this, a fair chunk is borrowed for the 30 days or so until the borrowing can be paid through liquidation revenues (the deal quickly self-funds).
Since the purchase is primarily of inventory, and everyone is relying on ‘book’ numbers, Hilco/Gordon insisted on confirmation by a physical count; they paid the tab for an independent inventory service – an outside firm agreeable to the creditors --to do this. After the physical count they’ll pay the remainder. They’ll also pay store (and certain other) operating expenses, which they agreed to pick up as part of the deal:
== The store payroll that they continue to use, including benefits and any retention bonuses they feel might be warranted;
== Store occupancy costs, broken out on a per diem basis until they turn over the stores ‘broom-clean’ to the landlords – including pro-rated rent, utilities, insurance, etc.;
== A fixed weekly amount agreed upon for IT and other incidental ‘central’ support – in this case, $50k per week.
== Their own store management staffing, which they send in to replace key Borders’ store management. These firms have a cadre of on-call, 1099-based consultants that they’ve developed over the years – including pretty much the pick of the folks they’ve identified from various liquidations over the years. They are paid for the job, with the opportunity for incentives.
This is typical for their other major offers – similar to their deals for Circuit City and Linens, for example – though the terms do vary. The liquidators express the inventory purchase in terms of a ‘percentage’ of inventory at cost (cost being the most recent purchase price for that item, unless the retail price has already been marked down below that).
Retailers typically think of their inventory levels in terms of retail ‘ticketed’ price – last week a Borders spokesperson referred to the deal as ‘$700M of inventory and fixtures’ (in addition to the inventory, Hilco paid $10M for all the store fixtures –an average of $25k per store – and while they didn’t buy the distribution center and headquarters fixtures and equipment, Hilco does get a 20% commission on any sales of that segment. The spokesperson’s estimate of $700M at retail might be bit generous -- but let’s set that aside for a moment.
At some point in the six or eight weeks, when their experience tells them it’s time, the liquidators will likely consolidate remaining inventory into their highest-traffic locations. These may be - but are by no means necessarily - the best-performing locations Borders had while operating. At that point they’ll get as many stores off their running expense tab as reasonably possible. They won’t be constantly in motion, though, as moving a lot of inventory around between stores is pretty disruptive and inefficient.
Knowing that there’s a possibility that the physical inventory count could come up slightly different from the ‘book’ numbers – apparently estimated at about to $350M as of last week’s purchase - Hilco/Gordon expressed their bid in a way that mathematically came to their $250M bid: ‘72% of inventory at cost’ ($250M/$350M). If there turned out to be more or less inventory for whatever reason, they could adjust the purchase on that basis
That ‘72% of cost’ rate was about what Hilco/Gordon paid for the Best Buy inventory; for Linens they paid about 95% of cost – suggesting perhaps a combination of (a) higher markup in the Linens inventory, and (b) an expectation that it would require less discounting to move it. Remembering that Gordon Bros has been around for a century, we can assume they have a pretty solid handle on their estimations.
With almost 400 stores Borders – like Linens N Things- is a big job. Earlier in this thread competitors in the industry – other liquidators – were identified as including SB (Schottenstein’s firm), Tiger, Hudson, Great American, and possibly Monarch (more a focus on distressed debt than actual liquidation).
For Linens, Hilco / Gordon enlisted pretty much the entire field of smaller ‘competitors’, farming out portions of the job to SB, Great American, Tiger and Hudson. For Borders, Hilco/Gordon brought all but Hudson back in for pieces (instead, Hudson’s founder returned to work at Gordon Bros). At the top levels, the industry is fairly incestuous – Hilco, Tiger, and Hudson were all founded by, or run by, Gordon Bros execs, and those firms get a fair portion of work from the pair.
The original press releases on the Borders transaction didn’t do justice to the deal – and the incentive the creditors had to choose ‘liquidation’ versus Najafi’s a thinly capitalized bid to continue operating was a bit stronger than outlined in the original post.
From that earlier post:
"==Gordon Bros/Hilco bid $250M for Borders’ assets, with the possibility of some upside to creditors if things go smoothly;
== Najafi (Book-of-the-Month-Club) offered $435M, $210M cash plus the assumption of $215M of existing debt"
As this was originally presented, if we were creditors might be tempted by the Najafi deal (assuming we trusted them to do as advertised). The press report were incomplete as to the terms, though.
What wasn’t noted was that the offer included a provision that once Hilco/Gordon recovered their $250M purchase price plus their expenses in the deal (as outlined above) any additional recovery would be split 50/50 with the creditors.
As the source of Borders ‘debtor in possession’ financing – providing the funding while Borders has been in bankruptcy - GE Capital has an influential position among creditors. Hilco/Gordon have, for decades, worked closely with (and frequently for ) GE Capital in these kinds of arrangements. GE and similar lenders have a track record with the pair of liquidators that may lend a confidence that the recoveries will work out relatively well, for both creditors’ and liquidators’ benefit.
This isn’t unusual: GE Capital also provided the bulk of the debtor-in-possession financing for Linens n Things, and Hilco /Gordon won that liquidation bid with that purchase at ‘95% of cost’ plus a 50/50 profit-sharing arrangement with the creditors. (Circuit City’s DIP financing was through a syndicate including BofA, GE, and Wells Fargo).
The point here is that, depending on their confidence in Hilco/Gordon recovery abilities - and probabilities - GE and the other creditors may have assigned a higher value to the bid than might first be assumed. Certainly they all have the track record together, going back awhile.
While the creditors and liquidators had the information they needed to make an assessment of all this, would outsiders like ourselves be able to at least take a stab at estimating this. Not very well, perhaps, but we can try.
Those of us looking to estimate the ticketed ‘retail’ from the financial statements – extrapolating it out by applying Borders’ gross margin percentage – might be frustrated in that the reported costs of sales also include Borders’ buying and distribution costs- elements not relevant in estimating the markup in the Borders inventory from the Hilco/Gordon perspective. Still, we're trying to take a shot at this.
Again, without having visibility into important details, including the actual ‘retail’ inventory starting point and the sales at various discount tiers, we can only take our best guess. That Borders spokesperson’s estimate of ‘$700M’ worth of inventory and fixtures likely included a generous estimate for fixtures. We might conservatively estimate the retail inventory component at a perhaps believable $600M (which would translate to a realistic 40% markup for books, with the $350M cost-to-Borders compared to the $600M ‘full retail’ [100%-$350M/$600M]). We’ll keep in mind that Hilco/Gordon’s cost was $250M.
Back in 2009, with 500+ stores, total SGA for the Borders stores was $550M for the year, or $46M/ month. Adjusting for 400 stores vs 500+ would get us to approximately $36M/month of SGA. That’s assuming a full, going-concern level of SGA, including Border’s array corporate costs.
Even using that full-rate SGA number, six weeks of that $36M/month number would translate to something like $50M of expenses for the liquidation term, assuming no benefit from an interim wind-down of stores. In liquidation mode, Hilco/Gordon’s actual store costs (plus the IT services they are paying Borders for) should be well below that historic level– but even using $50M as a conservative placeholder, adding that to their $250M cost for the inventory would get them to a $300M total cost that they’d be looking to recover, at a minimum.
Again, using these very ball-park estimates so far, $300M in revenue gets them to break even, with anything above that split with the creditors. That essentially means they’ll have to get something better than an overall ‘50% off’ the (estimated) $600M ‘original ticket price’.
This first week they seemed to be plowing right along at (mostly) 10% and 20% off. They’ll be coming down off of that pretty soon, of course, but again anything better than an average 50%-off is gravy, so to speak. A hypothetical full-liquidation averaging ‘33% off’ would yield $400M -- a $100M excess recovery to be shared. Again, this is using probably conservative liquidation expense guesses.
Potentially not a bad annualized return potential, if they can manage it. Their average investment over the six weeks is probably under $100M, considering much of the recovery is relatively early in the process, and expenses are essentially self-funded through the liquidation.
Sounds good, but as for others pulling this off –the challenge is in execution. As it is, liquidations of this scale utilize a fair portion of the resources of the industry’s several major participants. If someone were to put together a $300M pool to do this with the idea of competing with them – first they’d have to convince GE Capital and other creditors that theirs was likely the better outcome for them, and second, they’d have to avoid foundering while the folks they presumably out-bid – Hilco, Gordon, and usual their support contingency of SB, Tiger and Great American – watched.
------
The original post included a comment that holders of gift certificates and other store credits were Borders’ creditors and that they might not necessarily be honored in liquidation, depending on circumstances. In this case, it’s been stipulated that gift certificates would be honored, with the creditors absorbing the cost from their share of the recovery. That call is up to the court, and they apparently felt that the likely aggravation to the public – and to themselves – was best avoided.
borrowings. Typically these liquidations extend for six or seven weeks (Linens N Things was about seven), with the bulk of the revenues coming in early so the actual borrowing requirement is pretty short-term.
In the Borders case Hilco/Gordon paid the court 90% of the $250M purchase price immediately, and provided a guarantee – a letter of credit -- for the remaining 10% and for an estimate of the first installment of store operating expenses that they agreed pay for through the liquidation. As private companies, we don’t know Hilco’s or Gordon Bros’ cash positions, but we might assume that for a deal like this, a fair chunk is borrowed for the 30 days or so until the borrowing can be paid through liquidation revenues (the deal quickly self-funds).
Since the purchase is primarily of inventory, and everyone is relying on ‘book’ numbers, Hilco/Gordon insisted on confirmation by a physical count; they paid the tab for an independent inventory service – an outside firm agreeable to the creditors --to do this. After the physical count they’ll pay the remainder. They’ll also pay store (and certain other) operating expenses, which they agreed to pick up as part of the deal:
== The store payroll that they continue to use, including benefits and any retention bonuses they feel might be warranted;
== Store occupancy costs, broken out on a per diem basis until they turn over the stores ‘broom-clean’ to the landlords – including pro-rated rent, utilities, insurance, etc.;
== A fixed weekly amount agreed upon for IT and other incidental ‘central’ support – in this case, $50k per week.
== Their own store management staffing, which they send in to replace key Borders’ store management. These firms have a cadre of on-call, 1099-based consultants that they’ve developed over the years – including pretty much the pick of the folks they’ve identified from various liquidations over the years. They are paid for the job, with the opportunity for incentives.
This is typical for their other major offers – similar to their deals for Circuit City and Linens, for example – though the terms do vary. The liquidators express the inventory purchase in terms of a ‘percentage’ of inventory at cost (cost being the most recent purchase price for that item, unless the retail price has already been marked down below that).
Retailers typically think of their inventory levels in terms of retail ‘ticketed’ price – last week a Borders spokesperson referred to the deal as ‘$700M of inventory and fixtures’ (in addition to the inventory, Hilco paid $10M for all the store fixtures –an average of $25k per store – and while they didn’t buy the distribution center and headquarters fixtures and equipment, Hilco does get a 20% commission on any sales of that segment. The spokesperson’s estimate of $700M at retail might be bit generous -- but let’s set that aside for a moment.
At some point in the six or eight weeks, when their experience tells them it’s time, the liquidators will likely consolidate remaining inventory into their highest-traffic locations. These may be - but are by no means necessarily - the best-performing locations Borders had while operating. At that point they’ll get as many stores off their running expense tab as reasonably possible. They won’t be constantly in motion, though, as moving a lot of inventory around between stores is pretty disruptive and inefficient.
Knowing that there’s a possibility that the physical inventory count could come up slightly different from the ‘book’ numbers – apparently estimated at about to $350M as of last week’s purchase - Hilco/Gordon expressed their bid in a way that mathematically came to their $250M bid: ‘72% of inventory at cost’ ($250M/$350M). If there turned out to be more or less inventory for whatever reason, they could adjust the purchase on that basis
That ‘72% of cost’ rate was about what Hilco/Gordon paid for the Best Buy inventory; for Linens they paid about 95% of cost – suggesting perhaps a combination of (a) higher markup in the Linens inventory, and (b) an expectation that it would require less discounting to move it. Remembering that Gordon Bros has been around for a century, we can assume they have a pretty solid handle on their estimations.
With almost 400 stores Borders – like Linens N Things- is a big job. Earlier in this thread competitors in the industry – other liquidators – were identified as including SB (Schottenstein’s firm), Tiger, Hudson, Great American, and possibly Monarch (more a focus on distressed debt than actual liquidation).
For Linens, Hilco / Gordon enlisted pretty much the entire field of smaller ‘competitors’, farming out portions of the job to SB, Great American, Tiger and Hudson. For Borders, Hilco/Gordon brought all but Hudson back in for pieces (instead, Hudson’s founder returned to work at Gordon Bros). At the top levels, the industry is fairly incestuous – Hilco, Tiger, and Hudson were all founded by, or run by, Gordon Bros execs, and those firms get a fair portion of work from the pair.
The original press releases on the Borders transaction didn’t do justice to the deal – and the incentive the creditors had to choose ‘liquidation’ versus Najafi’s a thinly capitalized bid to continue operating was a bit stronger than outlined in the original post.
From that earlier post:
"==Gordon Bros/Hilco bid $250M for Borders’ assets, with the possibility of some upside to creditors if things go smoothly;
== Najafi (Book-of-the-Month-Club) offered $435M, $210M cash plus the assumption of $215M of existing debt"
As this was originally presented, if we were creditors might be tempted by the Najafi deal (assuming we trusted them to do as advertised). The press report were incomplete as to the terms, though.
What wasn’t noted was that the offer included a provision that once Hilco/Gordon recovered their $250M purchase price plus their expenses in the deal (as outlined above) any additional recovery would be split 50/50 with the creditors.
As the source of Borders ‘debtor in possession’ financing – providing the funding while Borders has been in bankruptcy - GE Capital has an influential position among creditors. Hilco/Gordon have, for decades, worked closely with (and frequently for ) GE Capital in these kinds of arrangements. GE and similar lenders have a track record with the pair of liquidators that may lend a confidence that the recoveries will work out relatively well, for both creditors’ and liquidators’ benefit.
This isn’t unusual: GE Capital also provided the bulk of the debtor-in-possession financing for Linens n Things, and Hilco /Gordon won that liquidation bid with that purchase at ‘95% of cost’ plus a 50/50 profit-sharing arrangement with the creditors. (Circuit City’s DIP financing was through a syndicate including BofA, GE, and Wells Fargo).
The point here is that, depending on their confidence in Hilco/Gordon recovery abilities - and probabilities - GE and the other creditors may have assigned a higher value to the bid than might first be assumed. Certainly they all have the track record together, going back awhile.
While the creditors and liquidators had the information they needed to make an assessment of all this, would outsiders like ourselves be able to at least take a stab at estimating this. Not very well, perhaps, but we can try.
Those of us looking to estimate the ticketed ‘retail’ from the financial statements – extrapolating it out by applying Borders’ gross margin percentage – might be frustrated in that the reported costs of sales also include Borders’ buying and distribution costs- elements not relevant in estimating the markup in the Borders inventory from the Hilco/Gordon perspective. Still, we're trying to take a shot at this.
Again, without having visibility into important details, including the actual ‘retail’ inventory starting point and the sales at various discount tiers, we can only take our best guess. That Borders spokesperson’s estimate of ‘$700M’ worth of inventory and fixtures likely included a generous estimate for fixtures. We might conservatively estimate the retail inventory component at a perhaps believable $600M (which would translate to a realistic 40% markup for books, with the $350M cost-to-Borders compared to the $600M ‘full retail’ [100%-$350M/$600M]). We’ll keep in mind that Hilco/Gordon’s cost was $250M.
Back in 2009, with 500+ stores, total SGA for the Borders stores was $550M for the year, or $46M/ month. Adjusting for 400 stores vs 500+ would get us to approximately $36M/month of SGA. That’s assuming a full, going-concern level of SGA, including Border’s array corporate costs.
Even using that full-rate SGA number, six weeks of that $36M/month number would translate to something like $50M of expenses for the liquidation term, assuming no benefit from an interim wind-down of stores. In liquidation mode, Hilco/Gordon’s actual store costs (plus the IT services they are paying Borders for) should be well below that historic level– but even using $50M as a conservative placeholder, adding that to their $250M cost for the inventory would get them to a $300M total cost that they’d be looking to recover, at a minimum.
Again, using these very ball-park estimates so far, $300M in revenue gets them to break even, with anything above that split with the creditors. That essentially means they’ll have to get something better than an overall ‘50% off’ the (estimated) $600M ‘original ticket price’.
This first week they seemed to be plowing right along at (mostly) 10% and 20% off. They’ll be coming down off of that pretty soon, of course, but again anything better than an average 50%-off is gravy, so to speak. A hypothetical full-liquidation averaging ‘33% off’ would yield $400M -- a $100M excess recovery to be shared. Again, this is using probably conservative liquidation expense guesses.
Potentially not a bad annualized return potential, if they can manage it. Their average investment over the six weeks is probably under $100M, considering much of the recovery is relatively early in the process, and expenses are essentially self-funded through the liquidation.
Sounds good, but as for others pulling this off –the challenge is in execution. As it is, liquidations of this scale utilize a fair portion of the resources of the industry’s several major participants. If someone were to put together a $300M pool to do this with the idea of competing with them – first they’d have to convince GE Capital and other creditors that theirs was likely the better outcome for them, and second, they’d have to avoid foundering while the folks they presumably out-bid – Hilco, Gordon, and usual their support contingency of SB, Tiger and Great American – watched.
------
The original post included a comment that holders of gift certificates and other store credits were Borders’ creditors and that they might not necessarily be honored in liquidation, depending on circumstances. In this case, it’s been stipulated that gift certificates would be honored, with the creditors absorbing the cost from their share of the recovery. That call is up to the court, and they apparently felt that the likely aggravation to the public – and to themselves – was best avoided.
