Following Dan’s post on Mervyns, I heard through the grapevine that Cerberus managed to score 2.5X its money on the deal. Since the firm hasn’t disclosed its initial investment, it’s not clear how much money that evens out to be. The point is that it’s a profit on a failing, near-bankrupt business.
That profit was more than likely made when the firm began selling its interest in the operating company to Sun some time last year. Its unclear if that interest has been fully completed to date. According to a source, all Cerberus now owns of the company is 15% of the real estate business. Remember, the 2004 LBO of Mervyns split the business into real estate and operating companies. (This isn’t unusual for buyout firms to do, often because buyout firms aren’t real estate experts and vice versa. Look to Toys ’R’ Us for another example.) What’s unique about this deal is that Cerberus and Sun didn’t own equal parts of the operating company. The breakdown remains unclear. They each own a small part of the real estate company; Lubert-Adler and Klaff Partners LP own part of that, too.
The key here is that Sun Capital has been buying back Cerberus’s stake in the operating company and may be left holding the bag.
And since Dan’s argument unleashed a mildly heated debate, here’s further proof that Cerberus and Sun had a “heads we lose, tails we lose” situation. In 2004, the president hired by Sun and Cerberus was quoted in Women’s Wear Daily as saying, basically, that this deal didn’t depend on the company’s success or failure:
“Everybody said it was a real estate play,” Leto recalled. “The operating company was not valued and the three owners knew they’d get their money back from the real estate. But they asked me to come out here and see what I could do.” Later in the article he says, “Everyone thought this was a straight liquidation play.”
***I’m waiting to hear back from Sun and Cerberus to see if they’ll disclose the size and breakdown of their investments in the company—will update tomorrow morning when I do.
***Rick Leto, by the way, left his post at Mervyn’s in 2007.