J.C. Penney Buyout: Any Takers Now That Johnson Is Out?

moneyReports are indicating that J.C. Penney’s (NYSE:JCP) might decide to go private before it runs out of cash and loses another billion dollars for shareholders. Sources told TheStreet that firms like Apollo Global Management (NYSE:APO) and Leonard Green & Partners are studying a potential buyout of the struggling 111-year-old department-store chain. “Firms such as these could provide the kind of capital injection J.C. Penney would need to complete its transformation,” noted the publication. Even hedge fund manager William Ackman has acknowledged the problems.

However, even bigger news hit J.C Penney on Monday; Chief Executive Officer Ron Johnson — in the face of the retailer’s growing crisis — has decided that he will step down, as a source told CNBC. A formal announcement is expected soon, but for now, who his replacement will be remains unclear.

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Last week at an investors meeting, Ackman — whose Pershing Square Capital Management is its largest shareholder — offered a rare critique of the company’s chief executive officer. Ackman sits on J.C. Penney’s board, invested $800 million in the retailer, publicly supported Johnson’s turnaround, and even hand picked the chief executive for the leadership role. But now, he has expressed the belief that Johnson has made “big mistakes” and the impact of his turnaround plan has been “very close to a disaster,” so the “criticism is deserved.”

Already, Ackman’s fellow J.C. Penney board member Steven Roth dumped more than 40 percent of the J.C. Penney shares held by his Vornado Realty Trust (NYSE:VNO)…

Johnson envisioned a company that could offer everyday low prices and boost its offerings with a wide range of small boutiques from designers from Levi’s or Sephora. But his attempt to revitalize the chain and transform its business, from pricing to customer experience, has had the exact opposite effect.

In the 2 1/2 years since Ackman took his stake, shares J.C. Penney have slumped 48 percent — handing the hedge fund manager losses of approximately $500 million on paper — and the retailer is now trading at a 72 percent discount to its $13 billion in annual revenue, making the company the second-cheapest among U.S. department-store chains, according to Bloomberg. Since Johnson took over as chief executive in November 2011 — after working at Target and helping Apple create its iconic retail stores, the company has posted its lowest annual sales figure since at least 1986, which came alongside a $4.3-billion loss for 2012. The company’ setbacks have left J.C. Penney’s equity priced at 28 cents for each dollar of revenue, a valuation that falls behind Macy’s (NYSE:M), Nordstrom (NYSE:JWN), and Khol’s (NYSE:KSS).

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Because of the high amount of debt that J.C. Penney’s recent history has created — the retailer has the highest ratio of net debt to market value in the industry — a traditional leveraged buyout is unlikely, Morningstar analysts told Bloomberg. Rather, Ackman would need to seek out a buyout firm willing to put up cash and buy time for Johnson’s turnaround plan to accelerate. According to Ackman, one private-equity firm, which he did not name, approached him about buying J.C. Penney just after he made his initial investment…

While we welcomed this fund as an owner of the stock, we had no interest in selling the company for a quick premium because we believe in the long-term value creation opportunity,” Ackman said in a letter to investors last June. But several quarters of sales declines and a disastrous full-year annual report have been recorded in the intervening months.

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Another option for the retailer, according to International Strategy & Investment Group, is to place some of its locations into a real estate investment trust, or REIT. With substantially below-market rents, this plan could generate approximately $1.2 billion for the company.

But whether management chooses a REIT, a private buyout, or to maintain its current course, one thing is clear. “Ackman needs to act sooner rather than later,” Sachin Shah, a special situations and merger arbitrage strategist, told the publication. “It’s difficult because J.C. Penney has made so many missteps, burned a lot of free cash flow and sales have dropped. What he really needs are equity backers.” According Shah, the retailer would be better off as a private company while it attempts to complete the turnaround. However, that turnaround will now take place with out Johnson.

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