Apollo-backed Linens forced into fire sale

Apollo Global Management portfolio company Linens ‘n Things, once the second largest houseware retailer in North America, will sell its remaining stores and close down after a Monday deadline passed with no new bids submitted to buy the bankrupt company.

“The problem isn't that Linens 'n Things doesn't have value,” Marshal Cohen, chief industry analyst for US market research firm NPD Group, told Newsday. “The problem is that the value is too difficult to purchase at this time. Credit is a major part of it and growth by acquisition is no longer the darling child that it was only six months ago.”

Linens 'n Things will be sold for about $476 million to a liquidation group consisting of Gordon Brothers

Linens 'n Things: Fire sale

Retail Partners, Great American Group, Hilco Merchant Resources, Hudson Capital Partners, SB Capital Group and Tiger Capital Group. The sale includes the business’s remaining 371 stores.

Linens hoped to avoid a straight liquidation of the business and was exploring other alternatives, according to bankruptcy filings, including selling the business to a purchaser that would operate it as a going concern. The lack of additional bids other than the liquidation group, however, ended that hope.

Apollo bought a $201 million stake in Linens in 2006. The Leon Black-led private equity firm told investors in May when Linens filed for Chapter 11 protection that the bankruptcy would only minimally affect investor returns. Apollo estimated that if the value of its investment in Linens was marked down to zero, the gross internal rate of return for investors in Apollo Investment Fund V would drop by only 1 percent, according to an investor letter obtained by PEO.

Linens implemented a turnaround plan in 2006 after Apollo bought its stake to improve profits and grow productivity in stores. By 2007, the growing crisis in the housing market and the freezing of the credit markets cut into discretionary consumer spending, Linens said in court filings.

The decline in consumer spending, especially in housewares and home furnishings, led to a tightening of credit terms by suppliers and by the first quarter of 2008, Linens was having trouble paying its suppliers and maintaining an uninterrupted flow of merchandise into its stores. The company was also having trouble paying back its debt, which totalled $700 million in loans from GE Finance.

Linens is one of 34 private equity-backed companies that have gone bankrupt in 2008. Other private equity firms that have had portfolio companies slide into bankruptcy include Sun Capital Partners, which has had five bankruptcies this year, and Cerberus Capital Management, which has had two.