Amazon (AMZN) is said to be in talks with acquiring JC Penney (JCP, JCPNQ), what does this mean for investors? Let’s find out!
Amazon.Com Inc. (AMZN) is said to be interested in snapping up debt-strapped J.C. Penney Co. Inc., (JCP) in a deal that would bolster the online retailer’s apparel business, Women’s Wear Daily reported.
Shares in J.C. Penney plunged another 23% to $0.18 before being halted on Monday. The report comes after the U.S. apparel and home retailer on Friday filed for bankruptcy protection proceedings.
As part of its “renewal” plan, the Plano-based company said it will to cut its debt, streamline operations, close stores and spin off a real estate division in a move to come back in a stronger position. It has about 850 stores across the U.S. and Puerto Rico.
“There is an Amazon team in Plano as we speak,” according to the WWD report. “There is a dialogue and I’m told it has a lot to do with Amazon eager to expand its apparel business.”
J.C. Penney has $500 million in cash on hand as of the Chapter 11 filing date, the retailer said in a SEC filing. In addition, the company received commitments for $900 million in financing from its existing first lien lenders, which includes $450 million of new money.
JC Penney’s (JCP, JCPNQ) bankruptcy
A look at bankruptcy
Years of struggling has been painful for J. C. Penney and its shareholders. Although big-box retail is more or less on the way out in the US, management made what changes they could in an effort to revitalize the brand and preserve shareholder value. The final straw, though, according to management, was the emergence of COVID-19. This last blow sent stores across the nation closing, leaving the retailer with no significant inflow of capital that it could use to stay afloat.
This isn’t to say that death wouldn’t have occurred without COVID-19. In fact, it has been an almost certain expectation for years. Every year for at least the past five years, revenue at the company has declined, dropping from $12.63 billion in 2015 to $10.72 billion last year. Net losses over this time frame have been persistent, and with EBITDA of only $583 million last year, the company’s net leverage ratio of 5.8 was lofty. Free cash flow has been positive, but with the exception of 2016, it has ranged consistently between $111 million and $213 million. Last year, the figure was $145 million. Just enough, perhaps, to stay afloat, but sales can only fall for so long before cash flow slides as well.
As of this writing, there’s still a lot not known about the bankruptcy package the company is working on. Who gets what is still not entirely sorted out. A review of the firm’s RSA (restructuring support agreement) reveals that its ABL creditors and holders of any hedge claims might be the only parties unimpaired during the bankruptcy process. Even first lien holders are likely to be impaired to some degree. One thing the filing makes absolutely certain is that common shareholders will be wiped out entirely. It specified that they will see ‘no recovery.’
What Amazon (AMZN) could get for buying JC Penney (JCP, JCPNQ)
The retail and cloud giant is exploring a potential bid for J.C. Penney, the distressed clothing retailer that filed for Chapter 11 bankruptcy last Friday. J.C. Penney is the third major U.S. retailer to file for bankruptcy in recent weeks.
Amazon has shown a particular interest in apparel in recent years, however. It’s launched more than 100 private label clothing, shoes and jewelry brands in recent years. According to an analysis by CFRA, though, Amazon’s private label brands lag behind other brands sold on Amazon in customer satisfaction, suggesting that Amazon has room to evolve in selling apparel.
