Saturday, February 09, 2008
Bankruptcy of the Day: The road less traveled
The existing stock will be canceled and stockholders will receive nothing.
Another household name—Allied Van Lines, the mover, along with its parent corporation Sirva, Inc. and some 56 other companies under the Sirva umbrella—went before a federal bankruptcy court last Tuesday humbly beseeching protection from its creditors while it reorganizes. The problem was simple: It's assets, which presumably include the CEO's desk, totaled $924.5 million and its debts came to $1,230 million—a shortage of $305.5 million if you assume that someone will buy the desk at market value.
If you drop the zeroes and shift the decimal point two places to the left, it looks like my bank account. The last time when through some simple oversight my finances got out of hand, my bank's customer-service representative looked at me reproachfully through her chain-linked bifocals and noted that I appeared to be broke and overdrawn. I offered her my smelly shirt, which I thought should about cover it, but she insisted that it would be necessary to charge me a $35 fee for the service of allowing me to remain in that condition. When a corporation finds itself in my shoes, it is reported as a "liquidity crisis."
Over 50% of the company is owned by two investment funds, almost a third being under the control of Clayton, Dubilier & Rice (CB&R let's call them). On Tuesday Sirva's stock closed at 1.4¢ a share. (I hope you didn't buy any, because if the court approves the bankruptcy you will lose your pennies.)
Before you get out your hanky to mourn CB&R's loss, you should be aware that it was CB&R that conglomerated Allied Van and other viable firms into Sirva, at the cost of thousands of jobs. This new lean and "efficient" entity was then offered to the public in 2003. CB&R undoubtedly made a bundle through that initial public offering and has likely collected generous fees for their wise management of the funds holding the stock. But Linda Lipps notes that "From its beginning as a publicly held company, ... Sirva has lost money."
This is what is admiringly referred to as "creative capitalism." But to the unsophisticated and naïve observer it may appear that functional businesses were bought and exploited at the expense of their employees to produce a nonfunctional entity from which the organizers could make a considerable buck. Happens all the time. So let me warn you that it is thinking like that that can lead to cynicism, not to mention socialism.
Let me say in CB&R's defense that not only did it get rid of a number of useless employees, it also performed the invaluable work of recharacterizing the companies' mission. Where we used to think of Allied Van as a "mover," which connotes sweaty men and boxes, CB&R upscaled the mission to offer "relocation services" to just about anywhere outside North Korea. This "total package" was then offered to companies such as Chevron, which must whisk its executives about the world at a moment's notice as the war for oil demands. (More about those relocation services in a moment.)
According to Patrick Fitzgerald and Marie Beaudette,
The company's trade creditors and customers will be paid in full in cash, but general unsecured creditors will recover nothing.
Who might those general unsecured creditors be? I was able to locate only one name—the United Kingdom Pension fund, which Sirva was into for $31.8 million. Some old Brits may just have to live on less. (See "Maggie Thatcher's pension nightmare.")
The secured lenders will take 75% of the stock of the reorganized company as partial compensation. The bank of J.P. Morgan Chase & Co. and others lending the money to finance the bankruptcy will receive the remaining 25%.
Allied Van will continue to roll throughout the settlement.
What went wrong?
When a moving company faces bankruptcy you might suppose it's because people aren't moving. And to some extent that's true. Alex Markels reports that "the market's van lines segment is down 6.3 percent year over year, according to the latest data from the American Moving and Storage Association."
But the first account I read of the bankruptcy came from the AP, which wrote—
... the company's relocation services business has been slammed by the downturn in the U.S. housing market.
"Specifically, declining home prices have increased the number of homes the debtors have been required to purchase and subsequently sell for a loss," Sirva said in court papers.
What on earth is that about, I wondered? Why would Sirva buy houses? The Reuters account wasn't any clearer. Finally the Wall Street Journal clued me in—
Sirva said some of its relocation services agreements with corporate clients require the company to purchase homes from relocated employees for their appraised value if they're not sold within a predetermined period of time.
As of Jan. 11, the company had about 1,236 homes in its inventory that cost an average of $3 million per month to maintain....
There are a lot of people right now who wish they'd signed up for this service—to buy their home at the appraised value if it doesn't sell! And note that these are executive homes. I'd be surprised if even one of them is appraised at less than half a million.
And who came up with this bright idea? Why, Jim Rogers of CB&R, who is also credited with packaging Sirva and taking it public.
The irony of what happened to Sirva dawned on me. Having promised to sell, or in the alternative buy, the homes of some of its ritziest clients, Sirva stood to lose money every time it moved its customers.
In fact, it occurred to me that Sirva's service may have become an easy way out for owners who stood to lose millions on those overvalued homes. Is your house now worth $2 million less than what you paid for it? No problem. Sirva guaranteed to buy it at the appraised value, so just move on. Sweet!
But surely these are only the thoughts of a wayward mind.