Retailer Eddie Bauer yesterday filed for Chapter 11 bankruptcy protection, and agreed to be acquired by CCMP Capital for $202 million. So we have 5 Question for Jonathan Lynch, a managing director of CCMP Capital who worked on the deal:
1. Your firm took a hard look at Eddie Bauer five years ago, when you were still known as JPMorgan Partners. Why did you pass back then?
Very simply, it was a company that was going in the wrong direction. They were focused on a segment – women’s casual apparel – that a lot of other people were focused on, but it was antithetical to what the Eddie Bauer brand was known for. So it was the wrong direction with the wrong management team, which meant we were not compelled to do it.
I always tell people that, in order to engineer a successful change in direction, you need to do four things: recognize the problem, set strategy to fix that problem, have the right people in place and then execute really well.
Eddie Bauer is three of those four steps into that process right now, and that’s very different than where the company was in 2004. Back then, management didn’t even recognize the problem, so they certainly couldn’t execute against it.
2. The outdoor retail sector has also changed a bit in five years, moving more toward big-box retailers like REI or Bass Pro Shops. How do you compete with that from shopping mall locations?
We look at how they compare from a merchandising standpoint. Being in a mall, you’re not going to sell a lot of massive tents or large scale hard goods. Instead, Eddie Bauer focuses on selling apparel and outerwear which is a perfect fit for its mall-based, 4-wall footprint.
What differentiates Eddie Bauer is that they control their distribution. Most brands in the outdoor market go through less controllable channels like department stores or other retailers that have a different brand name than the goods they carry. Eddie Bauer has 371 stores with its brand on them, and virtually no other brands are sold alongside EB merchandise. Eddie Bauer also sells direct on the Internet and through catalog.
3. CCMP is the stalking horse bidder, but there could be other offers from existing Eddie Bauer lenders or other equity sponsors. Do you expect competition?
We know it’s an attractive property, so it wouldn’t surprise us at all if there were others looking at it. We know what it’s worth to us, and we’ll see what happens. To the extent that someone wants to pay more, we’ve shown in the past that we’re willing to bid only what it’s worth to us.
Our core strategy is operational enhancement, and have always considered ourselves as price-makers instead of price-takers.
4. So, does that mean $202 million is your final offer, or could there be flexibility?
We’d never comment on that. Clearly there’s an option for others to come in and visit that price. We’ll assess where we are if that happens.
5. CCMP has said that its core strategy is “operational enhancement.” Doesn’t that mean you could have had more impact back in 2004, when you identified key operational deficiencies in the company’s strategy?
We’re investors, which means that we’re always looking for favorable return relative to risk. As we looked at the business previously, we absolutely could have moved in the direction Neil has taken the business over the past two years. But we also looked at the risk profile (complete change in strategic direction, new management team, etc.) in getting there, and it wasn’t as attractive as it is now. Remember, the company has now gone through three of those four steps I talked about earlier, whereas it had been at zero back then.