NEW YORK — The bidding for bankrupt G&G Retail has yet to be approved by the courts, and already The Wet Seal Inc. has a rival for the retailer’s assets: BCBG Max Azria.
Documents filed with a Manhattan bankruptcy court last week indicate that BCBG’s offer will surpass Wet Seal’s $15.2 million bid for the assets of G&G.
Wet Seal’s bid involves an affiliate of Prentice Capital, a major investor in Wet Seal, providing $10 million in debtor-in-possession financing to G&G along with a $5.2 million payout to G&G’s estate.
BCBG’s offer involves $15.2 million in cash. BCBG will also deliver to G&G, at closing, a 5-year promissory note of $22 million. The note, with set installment pay dates, will enable G&G to pay the bankrupt retailer’s court approved unsecured claims, something that is not part of the Wet Seal bid. The high-end designer brand, which operates its own stores, also said it will rehire more than half of the employees let go by G&G.
As reported, G&G filed for bankruptcy court protection last week. Documents filed with the bankruptcy court included a purchase agreement from Wet Seal, which includes the continued operation of 450 stores. But whether BCBG will become the successful bidder remains unclear.
“The BCBG bid contains one potential deal breaker, though. It appears to seek to bypass the normal Chapter 11 [bankruptcy] auction process,” observed Weeden & Co. analyst Kevin Starke in a research note Monday.
Starke noted that in the court papers, BCBG said it must control purchasing and operating decisions immediately. Because of that, the BCBG proposal is only feasible if it proceeds without an auction and can close the deal immediately upon bankruptcy court approval.
“We think it’s unlikely the court will bypass the auction process and wonder aloud whether BCBG will really pull its bid if an auction is conducted,” wrote Starke in his research report.
According to data provided by BCBG in its court filing, the company posted $72.2 million in net income on sales of $375 million for the year ended Dec. 31, 2004. Apparel sales per square foot were $545.
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How either Wet Seal or BCBG will operate the stores as a going concern is also unclear. The speculation among some financial sources is that some stores will remain under the G&G nameplate while others will be converted to the brand of the acquirer. They also said other stores could be used for an entirely different concept. Then again, the retailer’s current business model may not be worth maintaining.
Charles Kuoni, a director of Corporate Revitalization Partners as well as chief restructuring officer at G&G, said in a court filing that G&G’s board in 2004 reviewed its then existing business and determined that the framework was “not a sustainable business model.”
The company then began pursuing a new plan that included the launching of a new product line called Lola, set for spring 2006. G&G, which began including some Lola product in its stores, ran out of money before fully converting all G&G and Rave store signs to Lola.
Kuoni said that G&G is forecasting a pretax loss of $11 million for fiscal year 2006.