FacebookTwitterGoogle+RedditEmail

The Stalking Horse Bidder

by EILEEN APPELBAUM

Three years after being taken private by an affiliate of private equity firm Sun Capital Partners, Friendly’s – the family restaurant and ice cream chain known for its Happy Ending sundaes – filed for Chapter 11 bankruptcy protection.  According to the filing, Friendly’s proposes to use the bankruptcy to jettison the pensions of nearly 6,000 employees and retirees. Outrageous as this seems, Friendly’s also proposes to sell itself out of bankruptcy to another affiliate of its current Sun Capital owners in an auction to be held in early December.  While other bidders may enter the auction for Friendly’s assets and frustrate these plans, the conditions proposed for the auction heavily favor Sun Capital’s ‘stalking horse’ bidder.

A key part of Sun Capital’s restructuring plan is to shift liability for the pension plan to the federal government’s Pension Benefit Guaranty Corporation (PBGC). According to PBGC’s exposure report, released earlier this week, assuming that plans are not terminated by healthy companies, the program can meet its obligations through the next 10 years; although it faces a long-term deficit of $24 billion. Generally, businesses are able to shed pension liabilities in asset sales, and PBGC does not require companies to make good on pension plans they can no longer afford. But in an unusual move, PBGC announced that it will fight Sun Capital’s attempt to stick U.S. taxpayers with the bill. PBGC objects to what appears to be a transparent effort by Sun Capital to take advantage of the bankruptcy process to abandon pension obligations while continuing to keep its ownership of Friendly’s. If Sun Capital gets away with this, PBGC will be on the hook for the pension payments, the program’s finances will worsen, and Friendly’s workers may not get the full pension benefit they are owed.

Sun Capital’s disregard for Friendly’s workers extends beyond this effort to dump its pension obligations. The company could have provided advance notice of the impending shutdown to workers at the 63 restaurants slated to close as part of the bankruptcy filing since the bankruptcy was clearly planned well in advance. Instead, workers at these stores were told one evening that the next day would be their last. About 1,260 employees, well over 10 percent of the company’s workforce of 10,300, were laid off. The WARN Act requires 90-days   advance notice of a mass layoff, but only if the company has 50 or more full-time employees at a particular site. Most Friendly’s stores have about 20 employees. New York has its own state WARN Act that applies to firms with 25 or more workers at a single location. It is possible that some of the six closed Friendly’s restaurants in New York are vulnerable to a WARN Act violation. Even if Sun Capital is not legally prohibited from laying these workers off without 90 days’ notice, common decency suggests they deserved more than the 24 hours’ notice they got.

 

Friendly’s blames its financial woes on the recession and the rising price of cream. These are real issues, but according to Restaurant Finance Monitor, “Friendly’s problems are largely of its own making.” The leveraged buyout left Friendly’s with $297 million in debt, most of it taken out in 2008. In addition, after acquiring Friendly’s, Sun Capital sold its corporate headquarters property and the buildings housing 160 of its restaurants in a sale-leaseback arrangement in which the restaurants paid above market rents to stay in the same buildings that the chain used to own. Under these circumstances, Friendly’s could not make the investments and operational changes to make the turn around that Sun Capital had promised. As for the private equity firm’s claim to improve governance, Friendly’s had two CEOs in its three years as a Sun Capital portfolio firm.

 

This is not the first time a Sun Capital portfolio firm was burdened with debt, saddled with above-market rents in a sale-leaseback agreement for its facilities, and refused an injection of cash from the private equity firm that could have helped it survive. The bankruptcy of the west coast department store chain, Mervyn’s, while in Sun Capital’s hands not only cost the jobs of 30,000 workers, but stiffed the vendors for merchandise valued at $102 million.

 

Private equity firms argue that restructuring may be painful, but the improved financial, governance, and business operations at affiliated portfolio companies creates economic value. Sun Capital might have a hard time making this case. SSI Group, which operates Grandy’s and Souper Salad restaurants, and Real Mex, which operates El Torito Restaurant and Chevys Fresh Mex – all Sun Capital portfolio companies – also entered bankruptcy in the past two months.

Eileen Appelbaum is a senior economist at the Center for Economic and Policy Research and the co-author of ‘Leaves That Pay: Employer and Worker Experiences With Paid Family Leave in California.’

This article originally appeared on Huffington Post.

More articles by:
Weekend Edition
February 23, 2018
Friday - Sunday
Richard D. Wolff
Capitalism as Obstacle to Equality and Democracy: the US Story
Paul Street
Where’s the Beef Stroganoff? Eight Sacrilegious Reflections on Russiagate
Jeffrey St. Clair
They Came, They Saw, They Tweeted
Andrew Levine
Their Meddlers and Ours
Charles Pierson
Nuclear Nonproliferation, American Style
Joseph Essertier
Why Japan’s Ultranationalists Hate the Olympic Truce
W. T. Whitney
US and Allies Look to Military Intervention in Venezuela
John Laforge
Maybe All Threats of Mass Destruction are “Mentally Deranged”
Matthew Stevenson
Why Vietnam Still Matters: an American Reckoning
David Rosen
For Some Reason, Being White Still Matters
Robert Fantina
Nikki Haley: the U.S. Embarrassment at the United Nations
Joyce Nelson
Why Mueller’s Indictments Are Hugely Important
Joshua Frank
Pearl Jam, Will You Help Stop Sen. Tester From Destroying Montana’s Public Lands?
Dana E. Abizaid
The Attack on Historical Perspective
Conn Hallinan
Immigration and the Italian Elections
George Ochenski
The Great Danger of Anthropocentricity
Pete Dolack
China Can’t Save Capitalism from Environmental Destruction
Joseph Natoli
Broken Lives
Manuel García, Jr.
Why Did Russia Vote For Trump?
Geoff Dutton
One Regime to Rule Them All
Torkil Lauesen – Gabriel Kuhn
Radical Theory and Academia: a Thorny Relationship
Wilfred Burchett
Vietnam Will Win: The Work of Persuasion
Thomas Klikauer
Umberto Eco and Germany’s New Fascism
George Burchett
La Folie Des Grandeurs
Howard Lisnoff
Minister of War
Eileen Appelbaum
Why Trump’s Plan Won’t Solve the Problems of America’s Crumbling Infrastructure
Ramzy Baroud
More Than a Fight over Couscous: Why the Palestinian Narrative Must Be Embraced
Jill Richardson
Mass Shootings Shouldn’t Be the Only Time We Talk About Mental Illness
Jessicah Pierre
Racism is Killing African American Mothers
Steve Horn
Wyoming Now Third State to Propose ALEC Bill Cracking Down on Pipeline Protests
David Griscom
When ‘Fake News’ is Good For Business
Barton Kunstler
Brainwashed Nation
Griffin Bird
I’m an Eagle Scout and I Don’t Want Pipelines in My Wilderness
Edward Curtin
The Coming Wars to End All Wars
Missy Comley Beattie
Message To New Activists
Jonah Raskin
Literary Hubbub in Sonoma: Novel about Mrs. Jack London Roils the Faithful
Binoy Kampmark
Frontiersman of the Internet: John Perry Barlow
Chelli Stanley
The Mirrors of Palestine
James McEnteer
How Brexit Won World War Two
Ralph Nader
Absorbing the Irresistible Consumer Reports Magazine
Cesar Chelala
A Word I Shouldn’t Use
Louis Proyect
Marx at the Movies
Osha Neumann
A White Guy Watches “The Black Panther”
Stephen Cooper
Rebel Talk with Nattali Rize: the Interview
David Yearsley
Market Music
FacebookTwitterGoogle+RedditEmail