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Mervyn’s Sues its Former PE Buyers
The bankrupt retailer assails PE firms over use of real estate assets in LBO, damages could reach $1 billion.
September 5, 2008
Mervyn’s, which filed in late July for Chapter 11 protection to reorganize, has filed a lawsuit against its buyers, saying private equity firms used its real estate assets to leverage its buyout, which eventually forced it into bankruptcy.
A statement by the company said “through complex and sophisticated real estate transactions, the investment consortium acquired control of the company’s considerable real estate holdings, then leased back properties to the company at substantially increased rates, which contributed to the need for Mervyn's to file for protection.”
The West Coast department store chain alleged in the suit that the former private equity owners—among them, Cerberus Capital Management and Sun Capital Partners—restructured its leases from properties it owned after the buyout to more than double its rent in order to pay off the deal’s debt. The suit states that hundreds of millions in loans were taken out against the assets, and that the company did not get any proceeds from them.
The company will proceed as planned in the terms of its $465 million DIP loan—completed in late August—to shutter 26 stores, lay off about 1,700 workers and liquidate certain assets, the source said. Wachovia Capital Finance Corp. is leading a group of lenders to provide that capital.
A source familiar with the suit said damages could reach $1 billion.
“Up to $1 billion of real estate was stripped” post-buyout, the source said. “It’s likely to be a lengthy process.”
Cerberus’ stake was sold in November for a profit; neither they nor Sun Capital Partners were willing to comment.
Others named in the suit include Target, the Goldman Sachs Mortgage Co., Lubert-Adler and Klaff Partners and several associated real estate funds.
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