Committee decided against the possibility due to ‘the magnitude of initial and ongoing funding’ required
Author of the article:
The Logic & Aleksandra Sagan
Sep 25, 2020 • • 5 minute read
VANCOUVER — The leadership of embattled outdoor retailer MEC considered asking the co-operative’s more than 5.7 million members for funding before making an acquisition deal with an American private equity firm, but decided that approach was “impracticable to impossible,” newly released court documents reveal.
Members hoping to prevent the deal from closing and instead bail the co-op out themselves fail to recognize just how much money the retailer needs, said the chair of the special committee that recommended Kingswood Capital Management privatize the retailer.
The special committee of MEC’s board — composed of board chair Judi Richardson and members Matthew Handford and Robert Wallis — considered a member-funded model, according to court documents.
The committee decided against that possibility due to “the magnitude of initial and ongoing funding” required. That included paying out its credit facility, covering “significant operating losses” and other expenses.
The co-op owed about $74 million on its credit facility when it entered into creditor protection to facilitate the sale.
Any member-funded model would have required that “all or virtually all active members participate,” it says. Additionally, the committee worried about “the negative impact that a public plea” would have on its business, “including with respect to its suppliers and landlords, and other refinancing or potential sale or investment transaction,” the document reads. It decided not to recommend the approach, deeming it “impracticable to impossible.”
MEC did not immediately respond to The Logic’s request for comment.
Since the co-op announced last week it had entered into the deal with Kingswood, opponents of the move have been organizing.
A group calling itself Save MEC has raised more than $90,000 over six days for a legal fund, nearly doubling its initial goal of $50,000. They plan to use the funds to represent members’ interests at the creditor-protection court proceedings, and have retained Victory Square Law to represent them. An online petition has so far garnered more than 130,000 signatures.
Save MEC noted on its crowdfunding campaign page that it is “exploring” refinancing the retailer and plans to set up a second fundraising campaign for that purpose in the future.
However, special committee chair and MEC board member Wallis rejected the notion that such an effort could offer an alternative to the Kingswood deal.
“I am aware there is discussion online about the prospect of member funding to solve MEC’s financial predicaments, which does not seem to appreciate the gravity of MEC’s financial difficulties,” Wallis stated in an affidavit made Sept. 22.
Not only does MEC require the credit facility to be paid, he said, it needs a “significantly higher” amount to cover future operating losses and other capital expenses to improve infrastructure in an effort to save costs in the future. He pegged last year’s losses at about $24.5 million.
“For the reasons noted above, the negative impact of a public plea for funding on MEC’s stakeholders was too great given the negligible chance that sufficient funding would be obtained.”
The committee also debated “the merits of marketing certain real estate assets” to help with cash flow and refinance the business, according to the documents.
MEC owns the real property at six stores — in North Vancouver, B.C.; Calgary; Winnipeg; and Ontario’s Burlington, North York and Ottawa — and a distribution centre in Surrey, B.C. That option did not pan out, either, thanks to the spread of COVID-19. “The value of retail real estate was negatively impacted by the pandemic,” the court documents say. The committee’s efforts to refinance or merge with other co-operatives were also “unsuccessful.”
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It looked at applying for the federal government’s Large Employer Emergency Financing Facility, which provides emergency funding during COVID-19, and the Business Development Bank of Canada’s mid-market financing program, which also offers relief from the pandemic downturn.
“But MEC either did not meet the conditions of such programs or the costs of such programs were prohibitive,” the documents read.
In the end, after exhausting all alternatives, the committee searched for a buyer and selected Los Angeles-based Kingswood Capital Management — a relatively small player in the American private equity scene with four prior acquisitions to its name.
Its founder, Alexander Wolf, and his handpick to lead MEC after the acquisition, Eric Claus, reached out to frustrated members this week in an open letter: “We hear you. We understand…. All we ask is that you hear us out and give us a chance to earn your trust.”
Their turnaround plan focuses on stores, products and e-commerce. They teased a loyalty program, and priority access to events and rentals in an effort to “treat our customers like the co-op members [they] have been.”
Save MEC rejected the gesture. “Kingswood misses the point entirely — members aren’t upset about points or programs, it’s that they’re trying to take our co-op from us,” said Kevin Harding, a spokesperson for the group, in a statement.
Meanwhile, MEC wants the sale process to move quickly.
Approval “is a matter of urgency,” said Wallis in his affidavit, adding that an extension or delay in approval or closing “may have serious and detrimental consequences.” He pointed to MEC’s ongoing weekly operating losses and the importance that any buyer can close “in sufficient time to take advantage of the coming holiday sales period.” The retailer is losing about $1.6 million a week in net cash-flow losses, and projects it will lose more than $15 million next month and $17.4 million over the next 11 weeks, according to court documents.
A spike in coronavirus cases presents “a real and unpredictable risk” of sales deteriorating even further and jeopardizing MEC’s access to interim financing or ability to meet closing conditions. If the sale fails to close, MEC’s members and customers may feel a loss, too, according to the documents, as Kingswood plans to assume liability for warranties and more than $15 million in gift cards.
MEC stresses the deal was made according to due process. Wallis’s affidavit states everything “was conducted in a fair, transparent and thorough manner.” It also dismisses what it calls “baseless rumours and allegations online” and confirms that no MEC board members “are receiving any incentives or compensation in respect of the Transaction” aside from their standard director fees to which members agreed at the co-op’s last annual general meeting. The next court date in the creditor-protection process is scheduled for Thursday.