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Mall Owners Simon and Brookfield to Rescue J.C. Penney -- Update

09/09/2020 | 04:34pm EDT

By Suzanne Kapner and Alexander Gladstone

Mall owners Simon Property Group Inc. and Brookfield Property Partners LP agreed to acquire J.C. Penney Co. out of bankruptcy for $800 million, keeping the beleaguered department-store chain alive amid the coronavirus pandemic.

Simon and Brookfield, J.C. Penney's landlords, have reached an agreement in principle to buy the chain, which filed for chapter 11 in May after the pandemic shut down nonessential shopping across the country.

If approved in bankruptcy court, the deal will prevent the closure of hundreds of locations across malls and shopping centers that face rising vacancies due to Covid-19 restrictions.

A group of lenders including H/2 Capital Partners LLC, Sculptor Capital Management Inc., Brigade Capital Management LP and Sixth Street Partners have signed on, betting that Penney can make money selling clothing, cosmetics and cookware despite the stark challenges facing American retail.

The landlords will own about 490 of Penney's remaining 650 stores outright, a person familiar with the matter said. They will lease 160 other stores plus distribution centers from the lenders, which will own those assets in return for forgiving some of Penney's $5 billion in debt. The company had about 850 locations at the time of its bankruptcy filing and has closed some for good.

Since the coronavirus began spreading, brick-and-mortar retailers have been among the hardest hit as authorities limited social gatherings and shoppers stayed home fearing contagion. Combined with competition from Amazon.com Inc., the pandemic hastened a reckoning for many retailers struggling to adapt to changing shopping habits.

Retail bankruptcy filings quickly piled up this year as apparel companies including Penney, Neiman Marcus Group Ltd. and J.Crew Group Inc. turned to chapter 11, hoping to restructure their debts and weather the downturn. Others, such as New York & Co. and Lord & Taylor, are liquidating.

Penney had struggled long before the health crisis as various leaders shifted strategies. In its heyday, it was known for good quality and value, and was the place middle-class consumers went to buy a prom dress, first suit or home décor.

"For many years, J.C. Penney was America's department store," said Ken Hicks, the retailer's former president and chief merchandising officer. "But they fell off the map."

Loyal Penney shoppers said they were overjoyed the chain will stay in business.

"There is not one thing that store has that I don't need," said Cherie Corso, who visits the Penney store near her home in Pelham, N.Y. at least once a week for shoes, dresses, towels, sheets and makeup. "I'm so happy they aren't going out of business."

Penney's deal means continued employment for most of its 70,000 employees. It also marks Simon's third acquisition in four years of a bankrupt tenant in partnership with Brookfield after the property owners teamed up to purchase apparel retailers Forever 21 Inc. in February and Aéropostale Inc. in 2016.

In recent months, Simon, in particular, has been active in bankruptcy acquisitions, teaming up with brand licenser Authentic Brands Group LLC to buy apparel retailers Brooks Brothers Inc. and Lucky Brand Dungarees LLC out of chapter 11.

Simon, the biggest U.S. mall owner, and Brookfield are paying roughly $300 million in cash and assuming $500 million in debt, Penney lawyer Joshua Sussberg said during a hearing Wednesday in the U.S. Bankruptcy Court in Corpus Christi, Texas. The department-store chain will exit bankruptcy with an enterprise value of $1.75 billion, he said.

The Wall Street Journal reported in August that Simon and Brookfield were the leading contenders to acquire Penney in a bankruptcy auction. They beat out competition from private-equity firm Sycamore Partners Inc. and Saks Fifth Avenue owner Hudson's Bay Co., according to people familiar with the matter.

Wells Fargo Bank NA has agreed to supply $2 billion in exit financing to help lift Penney out of chapter 11, Mr. Sussberg said. The company was flirting with collapse as recently as late August when talks between its landlords and lenders broke down.

The company dressed middle-class American families for more than a century but ran into problems over the past decade. Penney never regained its footing after a failed makeover by former Apple Inc. executive Ron Johnson did away with discounts and popular in-house brands. Former Home Depot Inc. executive Marvin Ellison, who is now CEO of Lowe's Cos., brought back appliances when he took the reins at Penney and lost focus on apparel, the chain's core business. Jill Soltau, who has been CEO since 2018, has refocused on apparel.

Penney entered bankruptcy proposing to split its retail operations and its real-estate holdings into separate businesses. The company was seeking bidders to take control of an operating company that would hold Penney's intellectual property and most of its stores. That is in essence what happened, with Simon and Brookfield taking control of the operating company and the lender group owning some properties.

--Andrew Scurria and Miriam Gottfried contributed to this article.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com and Alexander Gladstone at alexander.gladstone@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
BROOKFIELD PROPERTY PARTNERS L.P. 1.39% 18.94 Delayed Quote.29.09%
OLD COPPER COMPANY -1.31% 0.121 End-of-day quote.-17.97%
SIMON PROPERTY GROUP, INC -1.20% 130.62 Delayed Quote.55.03%
06/23SIMON PROPERTY  : Truist Securities Adjusts Price Target on Simon Property Group..
06/22SIMON PROPERTY  : Stifel Adjusts Price Target on Simon Property Group to $125 Fr..
06/21SIMON PROPERTY  : Lifts Quarterly Dividend by 7.7% to $1.40 a Share, Payable Jul..
06/21SIMON  : Property Group Announces 7.7 Percent Increase in Second Quarter 2021 Di..
06/13Mall owner Washington Prime files for chapter 11 bankruptcy protection
06/13CBL & ASSOCIATES PROPERTIES  : Mall owner Washington Prime files for chapter 11 ..
06/13EXCLUSIVE : Washington Prime to file bankruptcy as soon as this week - sources
06/11SIMON PROPERTY  : Morgan Stanley Adjusts Simon Property Group PT to $150 From $1..
06/11APOLLO GLOBAL MANAGEMENT  : to Add Five More Members to the Board of Directors
06/10BROOKFIELD PROPERTY PARTNERS L P  : Jewelry retailer Alex and Ani files for Chap..
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Financials (USD)
Sales 2021 4 631 M - -
Net income 2021 1 572 M - -
Net Debt 2021 25 760 M - -
P/E ratio 2021 29,2x
Yield 2021 3,99%
Capitalization 43 436 M 43 436 M -
EV / Sales 2021 14,9x
EV / Sales 2022 14,4x
Nbr of Employees 2 850
Free-Float 95,1%
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