by Eliza Ronalds-Hannon, Reshmi Basu and Jonathan Randles
Franchise Group Inc., the owner of brands including the Vitamin Shoppe and Pet Supplies Plus, filed for bankruptcy protection after months of losses and turmoil surrounding its founder and its backer B. Riley Financial Inc.
The company, also known as FRG, filed under Chapter 11 in Delaware, listing assets and liabilities each between $1 billion and $10 billion. Bloomberg News, citing people with knowledge of the matter, reported late Saturday that FRG was preparing to hand control to lenders including HPS Investment Partners after months of negotiations with the group over a restructuring.
FRG said in a statement it has struck a restructuring deal with lenders that own most of its senior debt. Under the proposal, which must be approved by a bankruptcy judge, supporting lenders have agreed to swap out first lien debt for 100% of the equity in the reorganized business.
The company has been at the center of turmoil surrounding Los Angeles-based B. Riley, the investment and brokerage firm that helped arrange a $2.8 billion buyout of the company last year. The buyout was led by founder and then-Chief Executive Officer Brian Kahn.
Just months after FRG’s debt-fueled buyout by Kahn, the founder stepped down from his CEO position amid a criminal investigation into his role in a securities fraud case tied to the collapse of defunct hedge fund Prophecy Asset Management. Trouble at FRG accelerated as its brands struggled to perform as projected, compounded by maturities on $2.6 billion in debt.
FRG said Sunday that the first lien lender group also agreed to provide the company with $250 million in Chapter 11 financing. The financing, along with cash it already has on hand, will provide the business “with ample liquidity to maintain operations across its businesses and fulfill go-forward commitments to employees, customers, vendors, franchise partners, and other stakeholders,” according to the statement.
The company will still market its business in Chapter 11 to ensure its assets are sold for as much as possible. As part of the restructuring, FRG said it has decided to wind-down discount retailer American Freight and will commence store closing sales on Nov. 5.
Starting in 2018, Kahn had used a series of acquisitions to create FRG with financial backing from B. Riley. In last year’s buyout, B. Riley took a 31% stake in FRG also loaned about $200 million to Kahn, with his stake in FRG used as collateral.
Copyright Bloomberg News
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