Case Study: Apparel Company Divestiture

Overview: This non-viable company was successfully and expeditiously divested to a strategic buyer that resulted in net proceeds that were above expectation and that fully paid out all outstanding bank loans. Cedar Croft’s consulting team, who developed and executed a transition strategy that was very different from the approach intended by management, accomplished this result.

The Company: The Apparel Company (Company) was a wholly owned US subsidiary of a Canadian-based parent. Company’s business was the design, sourcing, sale and distribution of both corporate and golf apparel under four distinct brands. Company had corporate headquarters in Midwest US, and a decoration and fulfillment facility in Southeast US. Company employed 140 people.

Situation: Company’s sales and margins were declining rapidly and operating losses were increasing. Annual sales were approximately 20% below the $33 million recorded in the prior year, and were 34% below breakeven. Cedar Croft Consulting, acting as financial advisor to the parent company, recommended the immediate divestiture or closing of Company. An investment banker was engaged and a wide canvas was conducted. The lone interested party was a strategic buyer who entered into a Purchase Transition Agreement (PTA) to acquire only certain brands and selected inventory over a six-month period. Company was required to operate its decoration and fulfillment facility during this period.

At this time, the Senior Lender was in an over-advance position of $1.2M on an outstanding loan balance of $7.5M.

Management’s Intentions

It was the intention of management to affect the PTA by:

  1. Gradually transitioning some of the Midwest US operations to the strategic buyer, while phasing out the balance of the on-site activities over a 5-month period.
  2. Continuing to operate the Southeast US facility with only minor changes (these operations were unprofitable on an EBITDA basis).
  3. Continuing to source product to fill in sizes for selected styles and issue some payments to trade creditors and royalty licensors.

This approach was not acceptable to the Senior Lender and they were only willing to continue to support the company provided that Cedar Croft Consulting was appointed as Chief Restructuring Officer (CRO) of Company throughout the transition.

CRO Objectives

It was the intention of the CRO to achieve:

  1. Maximizing the cash proceeds by drastically and immediately reducing costs while identifying additional strategies to increase the value of the asset sales,
  2. Identifying and minimizing all execution risk factors, and
  3. Compressing the overall liquidation time period.

Divestiture Key Steps

  1. The decommissioning of the Midwest US facility was commenced immediately. 25 employees were terminated Day 2. The remaining 5 employees were terminated 30 days later. Critical on-going functions were transferred to Southeast US. The head office leased facilities were vacated within 45 days.
  2. A communication protocol with major vendors and royalty licensors was implemented and payments curtailed.
  3. An alternate inventory liquidation process was developed to accelerate the sale of PTA-excluded product.
  4. A cash flow budget for the transition period was prepared and enforced. Payments to unsecured creditors were suspended.
  5. The company’s collection process was outsourced and enhanced in order to collect the opening $3 million in receivables.
  6. Efficiency measurement and shop floor loading tools were developed and implemented in the Southeast US distribution facility, allowing for an immediate reduction in indirect labor costs and significant improvements in direct costs. These improvements resulted in the facility operating above break-even and meeting all fulfillment and distribution requirements.
  7. Strict enforcement of the terms of the PTA. Shipments from vendors were placed on hold, Company ceased purchasing additional goods and the original vendor payment terms were not honored.

Results

Two months prior to the end of the original PTA period, the strategic buyer was induced to purchase all remaining inventory and assume the Southeast US facility. The net results were:

  1. The price paid for this inventory exceeded the appraised liquidation value by over $2 million.
  2. Midwest US monthly overhead was reduced from $200k to zero in 45 days.
  3. Southeast US monthly operating costs were reduced by $100k in 60 days.
  4. 98% of the opening receivables were collected by the new PTA closing date.
  5. 65 jobs in Southeast US were preserved.

In summary, the proceeds from this transaction paid the Company’s Senior Lender loan in full, and provided an additional $1.5 million to pay down the parent company’s loan (cross guarantees were in place).