By Eliza Ronalds-Hannon, Reshmi Basu and Jonathan Randles | Bloomberg
Franchise Group, the owner of brands including the Vitamin Shoppe, Buddy’s Home Furnishings and Pet Supplies Plus, filed for bankruptcy protection after months of losses and turmoil surrounding its backer B. Riley Financial Inc.
The company, also known as FRG, filed under Chapter 11 in Delaware, listing almost $2 billion of debt, according to court documents. Bloomberg News, citing people with knowledge of the matter, reported late Saturday that FRG was preparing to hand control to lenders including HPS Investment Partners after months of negotiations with the group over a restructuring.
FRG said in a statement it has struck a deal with lenders that own most of its senior debt. Under the proposal, which must be approved by a bankruptcy judge, supporting lenders have agreed to swap out first lien debt for 100% of the equity in the reorganized business.
The company has been at the center of turmoil surrounding Los Angeles-based B. Riley, the investment and brokerage firm that helped arrange a $2.8 billion buyout of FRG last year. The deal was led by founder and then-Chief Executive Officer Brian Kahn.
B. Riley shares fell 10% in New York premarket trading after the company announced it will need to take an additional impairment of $120 million on its equity investment in the parent unit of FRG and a loan to Kahn.
Kahn’s buyout
Just months after FRG’s debt-fueled buyout by Kahn, the founder stepped down from his CEO position amid a criminal investigation into his alleged role in a securities fraud case tied to the collapse of defunct hedge fund Prophecy Asset Management. Trouble at FRG accelerated as its brands struggled to perform as projected, compounded by maturities on its debt.
Kahn has categorically denied wrongdoing or any knowledge of misdeeds by the managers of Prophecy, and said he was among those who were defrauded as a result of Prophecy’s demise.
“FRG’s bankruptcy is a confluence of events that ultimately derailed our original investment thesis,” B. Riley co-founder and Chairman Bryant Riley said in an email to employees. “Unfortunately, the investment was devastated by the precipitous decline in consumer spending in the markets served by the FRG brands, and the fallout and uncertainty from the Prophecy scandal and the related federal investigation into Brian Kahn.”
The group sold its Sylvan Learning business in February, but other possible disposals were hampered by the allegations involving Kahn, FRG’s chief restructuring officer David Orlofsky said in a court filing. That meant “Franchise Group could not deleverage its balance sheet.”
FRG said Sunday that the first lien lender group agreed to provide the company with $250 million in Chapter 11 financing. The financing, along with cash already on hand, will provide the business “with ample liquidity to maintain operations across its businesses and fulfill go-forward commitments to employees, customers, vendors, franchise partners, and other stakeholders,” according to the statement.
The company will still market its business in Chapter 11 to ensure its assets are sold for as much as possible. As part of the restructuring, FRG said it has decided to wind down discount retailer American Freight and will commence store closing sales on Nov. 5.
Starting in 2018, Kahn had used a series of acquisitions to create FRG with financial backing from B. Riley. In last year’s buyout, B. Riley took a 31% stake in FRG and also loaned about $200 million to Kahn, with his stake in FRG used as collateral.
Nomura Holdings Inc. also helped arrange the FRG deal last year by providing a $500 million term loan to B. Riley. The Tokyo-based lender received shares in FRG and the loan as collateral along with other assets, Bloomberg previously reported.
B. Riley said it’s in compliance with terms of the Nomura loan, with the expectation it will be paid down to $125 million by the end of the month. A spokesperson for the Japanese bank declined to immediately comment.
“Despite the negative headlines, we are in far better shape than folks give us credit for,” Riley said in his email, saying B. Riley will have the capital to return to growth.
(Updates with comments from B. Riley chairman and Kahn, starting in the seventh paragraph.)
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