Department store retailer J.C. Penney said it has reached a stalemate in its bankruptcy process weeks after a deal was expected to close soon for its retail operating business.
Discussions have stalled with three undisclosed bidders for the business, an attorney for J.C. Penney told a bankruptcy court Monday.
Joshua Sussberg, a Kirkland & Ellis attorney representing J.C. Penney in its Chapter 11 bankruptcy case, said "egos have not been set aside" in terms of reaching a would-be deal for the retailer's operating business, which includes 70,000 workers with hundreds of retail properties and nearly a dozen distribution centers in the United States.
Before the pandemic, J.C. Penney had 846 stores in both owned and leased real estate and, without a buyer, the retailer said it might have to liquidate.
J.C. Penney filed for Chapter 11 bankruptcy protection in May in the Bankruptcy Court for the Southern District of Texas in Corpus Christi and had planned to sell its retail operating business, which would include J.C. Penney's intellectual property, with what it called some "valuable properties" in its real estate portfolio, as well as a master lease agreement on other retail properties identified as key to the retailer's business.
"In the last two weeks, we have reached a stalemate and a good faith proposal made over the weekend has gone unresponded to by bidders," Sussberg told the bankruptcy court. "As we have been doing this, the business has suffered with vendors holding onto inventory pending word J.C. Penney would be around in the future, not to mention a possible second outbreak of COVID-19."
Without progress on discussions, he added, several locations originally removed from the store closing list for negotiation purposes will be "closed promptly" upon bankruptcy court approval. In hearing this, Judge David Jones told Sussberg while it was unfortunate it has come to that, if it's important to facilitate moving things forward, he would approve the closings.
As of mid-day Monday, details of the impending store closings were not immediately available. In his update to the bankruptcy court, Sussberg said he's hopeful for further negotiations with the three bidders with a confidentiality agreement extended on the bidder's identities until Sept. 10 with lenders, but the company is weighing its options.
"The need for speed cannot be overstated, but we have a tremendous amount of work to do in the next 10 days," he added. "There are no guarantees in life and this company will do whatever it takes to get this across the goal line."
The bidders are widely speculated to be Simon Property Group, the biggest U.S. mall owner, in a joint effort with Brookfield Properties; Sycamore Partners, a New York private equity firm; and Amazon. But these companies have declined to comment to CoStar News on the industry speculation. J.C. Penney also declined to comment on its business outside the status updates in the bankruptcy hearings.
Andrew LeBlanc, managing partner of law firm Milbank, who spoke to the court Monday on behalf of the lenders, said there would be a "cleansing" soon regardless of what path was chosen in going forward, but the lenders agreed not to make any decisions before Sept. 10. He said lenders are exploring all alternatives as the "bidders have been a disappointment" in the negotiations.
Negotiations have moved "backwards from weeks ago," LeBlanc told the court. "We hope that changes and we have a good faith counter proposal out there from us. This is the last time we can get this done. Failing that, we will have to explore other alternatives and we are looking at a potential for liquidation. We will not stop working until we figure out what to do with the company."
As planned, outside of the retail operating business, the retailer's property operating company is expected to include 160 owned properties in a public real estate investment trust, Sussberg said, with a second REIT to own J.C. Penney's owned distribution centers. In August, J.C. Penney had begun auctioning off 24 of its owned properties and 142 store leases.
At the beginning of the bankruptcy process, the retailer said it would permanently close 242 stores as part of its initial strategy.