RadioShack’s bankruptcy saga

Author: Zoe Thomas | Published: 30 Jun 2015
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The troubled electronics retailer found a novel way to maximise creditor value

RadioShack’s global asset sale has demonstrated how a retail business can maintain operations throughout a bankruptcy process and avoid total liquidation.

The US electronics company sold the bulk of its assets, including stores and franchise agreements, and entered into a transitional agreement with the main acquirer General Wireless. RadioShack representatives announced last Thursday that the company had reached an agreement to liquidate its few remaining holdings.

By dividing and selling part of its international business ahead of this liquidation, RadioShack was able to maximise value and continue operations at nearly half of its stores.

"When the marketing was done and there were groups of buyers who were interested in segments of the assets it became clear it was more valuable to split the business," said Gregory Gordon a partner at Jones Day who represented RadioShack.

Getting creditor consensus though was tricky. There were calls for, even proposed plans to, liquidate entirely. The lack of a primary stalking horse bidder early in the first auction added to this pressure.

To gain creditor support for this path, RadioShack kept open the possibility of a liquidation sale. Creditors were promised the company would consider either liquidation or going concern bids, and would make the choice based on the value of the deal.

"There was a lot of criticism that we didn’t have a real stalking horse bid, but by the time we got to the auction the contingencies had mostly been eliminated," said Gordon.

In the end, most of RadioShack’s global assets went to General Wireless (a subsidiary of Standard General) and regional bidders in Latin America and the Middle East. It enabled many of the stores to stay open, a rare occurrence for a bankrupt retailer.

KEY TAKEAWAYS

  • RadioShack divided its global assets to raise the value for creditors in its bankruptcy beyond what a liquidation would provide;
  • Losing bidders and large creditors objected to the auction process, but a bankruptcy judge sided with the company;
  • RadioShack’s stores, IP and franchise rights globally are now held by three different owners. They will need to figure out a method of production and distribution, but do not have contracts to do so.

Auctions and objections

General Wireless purchased the stores and inventory in the first auction. The company signed an agreement with Sprint to house the wireless provider’s stores in RadioShack’s.

But RadioShack’s largest creditor, Salus Capital, objected to the purchase. Salus argued a liquidation deal it had made with Hilco Merchant Resources offered superior value.

Delaware bankruptcy Judge Brendan Shannon agreed with RadioShack and the creditors committee, which said the potential cost of litigation in the Salus/Hilco deal made General Wireless’s offer more favourable.

Once the deal was secured, General Wireless became the owner of more than 1,700 US stores and their inventory. But without the intellectual property (IP) rights, it was unclear if RadioShack as a brand would continue.

The IP and outstanding franchise contracts were auctioned off in a second round of bidding and ultimately went to General Wireless. However the heated bidding process for these assets opened two new court objections.

The first came from Salus, which was eventually joined by the creditors committee. They wanted RadioShack to throw out the winning bid, and accept a higher offer made after the auction’s end from Wonderland Investment Group.


There was a lot of criticism that we didn’t have a real stalking horse bid, but by the time we got to the auction the contingencies had mostly been eliminated


The court sided with RadioShack and said the process had been closed.

A second objection was raised by Wonderland itself. The company claimed the auction process was unfair because the seller and its creditors had asked that final bids be submitted confidentially.

Again, Judge Shannon sided with RadioShack, upholding its deal with General Wireless. He ruled that Wonderland had appropriate opportunity to submit a bid and that its proposal was not as strong as the one accepted.

LatAm

As the US saga unfolded, RadioShack’s assets further south were also up for sale. Its IP assets and franchise contracts in Latin America were sold to Regal Forest.

The company is no stranger to the RadioShack brand, having purchased its franchise rights in El Salvador in 1998. The bankruptcy purchase of the additional stores run by RadioShack, plus the outstanding franchises agreement across the region, positioned Regal Forest as the RadioShack owner in 36 countries across Latin America and the Caribbean.

The company was also the third bidder in the auction for the US IP. It had hoped to take possession of the business more globally.

Regal Forest must now work with General Wireless and the RadioShack purchasers in the Middle East to set up global supply chains to keep costs low and support the brand, though no official agreement has been signed.

RadioShack still has a strong public image and brand in many Latin America countries, but poor management at the parent level made it difficult to secure product lines.

"The operation of the business, as in any business in a bankrupt state, was suffering," said Zygmunt Brett a partner at Arias & Muñoz who represented Regal Forest. "The sourcing of the products was not good, and this aspect is key to the franchise."

Franchise agreements

Globally, 20% of RadioShack’s stores were run by franchisees. These contracts were sold in the bankruptcy agreements, but the new owners intend to make changes.

In Latin America, Regal Forest plans to adjust contracts in each country rather than all at once so they can be tailored to the market and local law.

Brett said: "There is no specific franchise regulation or law per se in most countries in Central America, so you normally regulate the relationship through distribution agreements."

They will also need to battle brand pairing that has taken place in some countries against the terms of the contracts. Franchisees in some countries have leveraged the reputation of RadioShack to grow their own labels. Regal Forest will have to either get them to stop or give up their contracts in the jurisdiction so that it can control the company’s image moving forward.

US franchisees will be renegotiating their contracts too. General Wireless refused to accept the licensing agreements as they were when it won the second auction. Franchisees had expressed their willingness to form new contracts allowing General Wireless to keep these stores on the market while revamping the corporate framework.

See also

Detroit’s bankruptcy saga comes to end
Insolvency & corporate reorganisation report 2015

POLL: the world’s best restructuring regime