Apollo-backed Linens forced into fire sale

Apollo Global Management bought a $201m stake in Linens ‘n Things, once the US' second largest housing retailer, in 2006. The firm has told investors the bankruptcy will only minimally affect their returns. More than 370 stores will now be liquidated.

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 deadline passed this week with no new bids submitted to buy the bankrupt company.

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

Linens 'n Things: Fire

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 – which has just hired former Citi Property Investors president and chief executive officer Joseph Azrack to lead its new venture into real estate – 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 the Apollo Investment Fund V would drop by only one percent, according to an investor letter obtained by PERE's sister website, PEO.

Linens implemented a turnaround plan in 2006 after Apollo acquired its stake in the firm. 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. 

Lubert-Adler Real Estate, Cerberus Capital Management and Sun Capital Partners have also seen their retail investment in California-based department store, Mervyns, go bankrupt. The private equity firms have since been named in a lawsuit for allgedly “siphon[ing]” valuable real estate assets away from the company to leverage the buyout, eventually forcing the company into bankruptcy. The private equity and real estate firms contest the charges saying they will vigourously defend themselves.