Fashion group J Crew pushed into bankruptcy by coronavirus

J Crew, the retailer known for colourful cashmere, Breton-stripe tops and upbeat branding, has filed for bankruptcy protection, becoming the first major US retailer to be pushed over the edge by the coronavirus pandemic.
The private equity-backed company said on Monday that its parent Chinos Holdings had filed for Chapter 11 relief after lockdowns to contain the spread of Covid-19 left it unable to cope with its near $2bn debt burden.
Like other bricks-and-mortar clothing chains across the US, J Crew had been struggling well before the outbreak. The maker of cashmere T-shirts and seersucker shirts made a series of design mis-steps in recent years, although its Madewell denim brand has remained popular among young female shoppers.

J Crew produced revenues of $2.5bn last year, yet the company’s debt load — a legacy in part of its 2011 buyout by TPG Capital and Leonard Green & Partners — inhibited its ability to take on rivals, including lower-priced H&M and Zara.
Michael Nicholson, Chinos president, said coronavirus had caused “considerable financial strain” but added it had “only exacerbated” the chain’s existing problems. About 11,000 of the retailer’s 13,000 workers have already been furloughed.
The bankruptcy of J Crew, which has about 500 outlets, is the latest blow to the retail property market. The New York-based retailer warned in the filing that it would need to close stores permanently if it could not secure “accommodations” from landlords, and was seeking court approval for “streamlined” lease rejections.
Restructuring bankers expect the impact of the pandemic on the industry will lead to more US retail failures in the weeks ahead.
Debt-laden department store and mall-based chains are under particular pressure. Both Neiman Marcus and JCPenney have missed bond payments in recent weeks.
J Crew’s roots are as a door-to-door clothing business, Popular Club Plan, that began in 1947. The J Crew brand was not developed until 1983 by Arthur Cinader, son of the founder, and Emily Woods, Arthur’s daughter.Started as a clothing catalogue venture, J Crew opened its first store in Lower Manhattan in 1989 and went on to build a national bricks-and-mortar presence with an Americana-inspired range that was more affordable than Ralph Lauren.Mickey Drexler, the US fashion retail personality, took charge in 2003 and repositioned J Crew, making it more upmarket. He also built the Madewell denim brand.

J Crew was embraced by celebrities including former first lady Michelle Obama, who sported a cardigan and pencil skirt combo on her first official visit to London in 2009. International expansion began in 2011.Yet the brand has increasingly struggled to remain relevant to modern shoppers. Fast-fashion rivals mimicked the look at lower prices, and the rise of Amazon added to the pressure. Mr Drexler stood aside as chief executive in 2017.

The company had sought to reduce its debt load by floating the fast-growing Madewell brand late last year but was unable to complete the listing.
As part of the bankruptcy, J Crew has reached a deal with its lenders to convert $1.65bn worth of debt into equity. The company said it had secured commitments for a debtor-in-possession financing facility of $400m to help it through the bankruptcy.
Jan Singer, chief executive, said the arrangement would help produce “sustainable growth” for J Crew and enhance “Madewell’s growth momentum”.
Additional reporting by Lauren Indvik in London

Thyssenkrupp shares tumble on warning over proceeds of lifts sale

German industrial group Thyssenkrupp’s shares fell 16 per cent on Monday, as the company warned proceeds from the sale of its crown-jewel lift business would not go as far as hoped, while private equity firms buying the unit sought to offload some of the deal’s risks.
In a letter sent to Thyssenkrupp’s 160,000 staff, and seen by the Financial Times, executives warned the crisis caused by the coronavirus pandemic would hit the company’s restructuring plans. 
“In the medium term, the corona-related outflow of liquidity will in all probability result in the financial leeway from the sale of the elevator business being much smaller than originally assumed,” three board members, including chief executive Martina Merz, wrote.

The steel and materials group is in a “difficult economic situation,” they added. “Corona is making the situation much worse. In view of the seriousness of the situation, everything must be examined and nothing can be ruled out.”
Separately, the FT reported that Advent and Cinven, the private equity firms planning to buy Thyssenkrupp’s lifts business for €17.2bn, are seeking to offload risk by bringing extra investors into the deal, which is due to be completed in July. 

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While buyout firms often sell on chunks of equity after agreeing to large deals, the process is taking longer than usual as the groups try to sell down at a hefty price tag, since the deal was struck in late February before the impact of the coronavirus pandemic became clear.
However, people close to Cinven and Advent said the majority of the equity syndication was accounted for and the groups would still be able to complete the acquisition even without new investors. 

Thyssenkrupp’s shares began to tumble in February as fears grew about the impact of the pandemic, falling from about €11 in the middle of that month to a low of €3.55 on March 19, although they have recouped some of those losses. On Monday morning, shares fell from €6.07 to as low as €5.08. 
Shares in neighbouring steel distributor Klöckner & Co also fell by 13 per cent on Monday, after the company reported a €21m net loss in the first quarter.
The wider MDax index, of which Thyssenkrupp is a constituent, fell by more than 3 per cent in Frankfurt. 
“Thyssenkrupp’s liquidity problems [negative cash flow] have been exacerbated by the crisis,” said Michael Muders, a portfolio manager at German institutional investor Union.
“Thyssenkrupp must now prepare for the time after the corona crisis, ie continue to reduce and restructure costs.”
The Essen-based company, which has already furloughed 30,000 employees and announced more than 6,000 job cuts, recently secured a €1bn credit facility from Germany’s state-owned development bank KfW. 
The funds would only be needed if there was a delay in the closing of the lift transaction, according to a person familiar with the company’s position.
Thyssenkrupp had also received half of the necessary antitrust clearances needed, a person close to the group said, although it was still waiting for approval from the European Commission.

Telefónica confirms UK merger talks with Liberty Global

Telefónica has confirmed it has entered talks with Liberty Global about a blockbuster deal to combine O2 and Virgin Media, a tie-up that would reshape the British telecoms market.
The Spanish owner of O2 in the UK said in a statement on Monday that talks with Liberty Global, which owns Virgin Media, remained at a “negotiation phase” and it could not guarantee an agreement.
However, a deal could be announced later this week, according to people with direct knowledge of the situation, as the two companies thrash out the details of a proposed 50-50 joint venture which would house O2 and Virgin Media. Liberty Global is preparing to raise new debt to pay Telefónica a cash sum to equalise the value of the two assets, according to multiple people with direct knowledge of the talks.

Telefónica agreed to sell O2 to rival Three in 2015 for £10.25bn but the deal was blocked by regulators. O2’s financial performance has since improved and the talks with Liberty Global have put a significantly higher value on the mobile phone company than was agreed five years ago, according to a person with direct knowledge of the talks.
Liberty Global could pay Telefónica between £5bn and £7.5bn in cash to reflect the £12bn of net debt that Virgin Media has on its books, according to Deutsche Bank analyst Robert Grindle. The bank values Virgin Media at £15.5bn and O2 at £11bn. It said a merger could generate £6bn of synergies and cost savings based on reduced operating expenditure and cutting the £200m that Virgin Media spends leasing capacity on mobile phone networks to offer its own wireless service.
Negotiations are being led by Mike Fries, chief executive of Liberty Global, and José María Álvarez-Pallete, chairman and chief executive of Telefónica.
Liberty Global declined to comment. Shares in the US-listed company gained 15 per cent on Friday night after reports of the deal surfaced. Telefónica’s stock was up 2.6 per cent to €4.29 in mid-morning European trading.
Both groups have been among the most acquisitive telecoms businesses for the past two decades, but they have started to unwind their empires in recent years.
Liberty Global, founded and controlled by “cable cowboy” John Malone, sold its cable networks in Germany and eastern Europe to Vodafone and merged its business in Holland with the British company. It also sold its Austrian network to Deutsche Telekom and has also tried to sell its Swiss division to Sunrise, although that deal fell through. Virgin Media, which has billions in accrued tax losses that could be written off against O2’s profits if a deal is struck with Telefónica, is by far its largest division following earlier disposals.

Meanwhile, Telefónica has been in retreat due to its high levels of debt. The Spanish group had €57bn of gross debt at the end of September, or €38bn excluding leases, pension liabilities and the impact of disposals.
Having sold its Irish division, it tried unsuccessfully to sell O2, first to BT and then to Three, but later unveiled a plan to float the UK network that was stymied by Brexit. The group put its non-Brazilian Latin American divisions up for sale last year as part of a major overhaul under Mr Álvarez-Pallete.
Jefferies, the bank, has cut its rating on Telefónica to “hold” despite the possibility of a deal with Liberty Global as it said any leverage reduction would be “minor” given the group’s heavy debt position. “A UK joint venture with Virgin Media is no panacea,” said analyst Jerry Dellis.

Business can never go back to the way things were

The writer is a partner at Sequoia Capital
Judging by the number of self-administered haircuts visible on Zoom calls these days, hairdressers have nothing to fear about their long-term prospects once the devastating disruption to their business ends. The same is not true for many other businesses, as Covid-19 reshapes the contours of our lives.
The plague sweeping the world has turbocharged the growth of the internet and catapulted us into the future. In the space of March 2020, many businesses fast-forwarded to 2025. For some this meant a surge in activity, but for a vast number doomsday has come early.

Almost all the companies whose fortunes have been lifted by the pandemic conduct all, or a big part, of their business over the internet. Many also provide services to the home. The management of the online restaurant and grocery delivery companies cannot add capacity quickly enough; the purveyors of online exercise equipment have brought puddles of sweat to many more basements and attics; video streaming services and producers of podcasts have scrambled to add bandwidth.
Covid-19 has also boosted the fortunes of companies providing remote medical diagnosis and home therapies. Educational institutions ranging from elementary schools to the world’s leading universities have taken their lessons from the classroom and lecture hall to the bedroom and kitchen table. Large financial institutions have permitted their brokers to do the unthinkable: conduct trades from home. Software and hardware companies are scrambling to shield home workers from cyber attacks as a fresh crop of security companies are monitoring suspicious activity in deserted workplaces.
For others Covid-19 has accelerated the day of reckoning. Mall operators and department store owners have seen a preview of what their future was already going to look like. Many small restaurants and corner stores will never reopen because “cloud kitchens” or the 24-hour pharmacy will have taken their places. Gym operators may find that clients accustomed to exercising at home may not attend as frequently.
After the air corridors slowly reopen, business travel and entertainment will be severely dented. People who had been accustomed to flitting back and forth to China six times a year might cut their number of trips in half and depend more heavily on video calls. The gruelling multi-city roadshows that are part of stock offerings are probably a vestige of the past.
Managers are likely to question the value of compelling teams to convene in one place. Those who doubt whether video calls can ever replace the benefits of personal meetings should remember that the defenders of voicemail once said that email could never capture the tones, inflections and spirit of an answering-machine message. As a result airlines and hotels will suffer for longer than anticipated and thousands of commercial aeroplanes will be dumped at fire-sale prices or sold for parts.
Bosses will also be far more willing to embrace the idea that their teams don’t have to appear in an office just to demonstrate they are working. Millions have discovered the productivity boost gained from fewer social interruptions more than compensates for the loss of companionship. This doesn’t portend the end of offices, but it probably means a future in which managers are more willing to let their employees spend some time working from home. It’s easy to see how this could lead to a permanent crimp in the demand for commercial office space.

As for the recovery, the west is at a disadvantage to China where the response to Covid-19 has been more effective than the uncoordinated and tragically belated firefights conducted in the US and elsewhere.
It will take longer for western consumers, with savings rates far below their Chinese counterparts, to regain confidence. An entire generation is now being given a taste of what their grandparents experienced during the Depression. In addition, Beijing is likely to take further steps to boost domestic consumption at a time when export markets remain shaky because of Covid-19, the trade war and its decision to nurture more homegrown technology.
For business and political leaders Covid-19 conveys two other lessons.
First, their organisations can move more quickly than they ever thought possible. Second, those who played down the warnings of the plague have now received a taste of what it will be like if they continue to ignore scientists’ warnings about a far greater scourge to humanity: climate change.