The Fallacy of "There Must be One" Theory

Dick's Sporting Goods, Toys R Us, iHeartMedia, & Amazon

Ah, R.I.P. Toys R Us.

This week has undoubtedly been painful for employees, vendors, suppliers and fans of Toys R Us. The liquidation of the big box toy retailer is a failure of epic proportions; many creditors will be fighting over the carcass for months to come — both inside and outside of the United States; many employees now have two months to find a new gig; many suppliers need to figure out if and how they’ll be able to manage now that they’re exposure to unpaid receivables has increased. Good thing the company’s CEO is a man-of-the-people who can help cushion the blow.

Hardly. Enter CEO David Brandon and his shameless, out-of-touch attempts to cast blame onto outside parties: “The constituencies who have been beating us up for months will all live to regret what’s happening here.” Wait. Huh?!

TO READ THE REST OF THIS PIECE, YOU NEED TO BE A PETITION MEMBER. SIGN UP HERE.

iHeartMedia 👎, Spotify 👍?

Channeling Alanis Morissette: In the Same Week that Spotify Marches Towards Public Listing, iHeartMedia Marches Towards Bankruptcy

In anticipation of its inevitable direct listing, we’d previously written about Spotify’s effect on the music industry. We now have more information about Spotify itself as the company finally filed papers to go public - an event that could happen within the month. Interestingly, the offering won’t provide fresh capital to the company; it will merely allow existing shareholders to liquidate holdings (Tencent, exempted, as it remains subject to a lockup). Here’s a TL;DR summary:

And here’s a more robust summary with some significant numbers:

• Revenue: Up 39% to €4.1 billion ($4.9 billion) in ‘17, ~€3 billion in ‘16 and €1.9 billion in ‘15. Gross margins are up to 21% from 16% in 2014 - and this is, in large part, thanks to renegotiated contracts with the three biggest music labels. Instead of paying 88 cents on every dollar of revenue, the company now only pays 79 cents. Only.

• Free Cash Flow: €109 million ($133 million) in ‘17 compared to €73 million in ‘16.

• Profit: 0. Net loss of €1.2 billion in ‘17, €539 million in ‘16, and €230 in ‘15.

• Funding: $1b in equity funding from Sony Music (5.7% stake), TCV (5.4%), Tiger Global (6.9%) and Tencent (7.5%). Notably, Tencent’s holdings emanate out of a transaction that converted venture debt held by TPG and Dragoneer into equity - debt which was a ticking time bomb. Presumably, those two shops still hold some equity as Spotify reports that it has no debt outstanding.

• Subscribership. 159 million MAUs and 71 million premium (read: paid) subscribers as of year end - purportedly double that of Apple Music. Services 61 countries.

• Available Cash. €1.5 billion

• Valuation. Maybe $6 billion? Maybe $23.4 billion? Who the eff knows.

For the chart junkies among you, ReCode aggregates some Spotify-provided data. And this Pitchfork piece sums up the ramifications for music fans and speculates on various additional revenue streams for the company, including hardware (to level the playing field with Apple ($AAPL) and Amazon ($AMZN)…right, good luck with that), data sales, and an independent Netflix-inspired record label. After all, original content eliminates those 79 cent royalties.

Still, per Bloomberg,

Spotify for a long time was a great product and a terrible business. Now thanks to its friends and antagonists in the music industry, Spotify's business looks not-terrible enough to be a viable public company. 

Zing! While this assessment may be true on the financials, the aggregation of 71 million premium members and 159 million MAUs is impressive on its face - as is the subscription and ad-based revenue stemming therefrom. Imagine the disruptive potential! Those users had to come from somewhere. Those ad-dollars too.

*****

Enter iHeartMedia Inc. ($IHRT), owner of 850 radio stations and the legacy billboard business of Clear Channel Communications. In 2008, two private equity firms, Bain Capital and Thomas H. Lee Partners, closed a $24 billion leveraged buyout of iHeartMedia, saddling the company with $20 billion of debt. Now its capital structure is a morass of different holders with allocations of term loans, asset-backed loans, and notes. The company skipped interest payments on three of those tranches recently. While investors aren’t getting paid, management is: the CEO, COO and GC just secured key employee incentive bonuses. Ah, distress, we love you. All of which will assuredly amount to prolonged drama in bankruptcy court. Wait? bankruptcy court? You betcha. This week, The Wall Street Journal and every other media outlet on the planet reported that the company is (FINALLY) preparing for bankruptcy. And maybe just in time to lend some solid publicity to the DJ Khaled-hosted 2018 iHeartRadio Music Awards on March 11.

For those outside of the restructuring space, we’ll spare you the details of a situation that has been marinating for longer than we can remember and boil this situation down to its simplest form: there’s a f*ck ton of debt. There are term lenders who will end up owning the majority of the company; there are unsecured lenders alleging that they should be on equal footing with said term lenders who, if unsuccessful in that argument, will own a small sliver of equity in the reorganized post-bankruptcy company; and then there is Bain Capital and Thomas H. Lee Partners who are holding out to preserve some of their original equity. Toss in a strategic partner like billionaire John Malone’s Liberty Media ($BATRA) - owner of SiriusXM Holdings ($SIRI), the largest satellite radio provider - and things can get even more interesting. Lots of big institutions fighting over percentage points that equate to millions upon millions of dollars. Not trivial. Would classifying this tale as anything other than a private equity + debt story be disingenuous? Not entirely.

*****

"It is telling when companies like Spotify hit the markets while more traditional players retrench. Like we've seen in retail, disruption is real and if you stand still and don't adapt, you'll be in trouble. It gets harder to compete when new entrants are delivering a great product at low cost." - Perry Mandarino, Head of Restructuring, B. Riley FBR.

Indeed, there is a disruption angle here too, of course. Private equity shops - though it may seem like it of late - don’t intentionally run companies into the ground. They hope that synergies and growth will allow a company to sustain its capital structure and position a company for a refinancing when debt matures. That all assumes, however, revenue to service the interest on the debt. On that point, back to Spotify’s F-1 filing:

When we launched our Service in 2008, music industry revenues had been in decline, with total global recorded music industry revenues falling from $23.8 billion in 1999 to $16.9 billion in 2008. Growth in piracy and digital distribution were disrupting the industry. People were listening to plenty of music, but the market needed a better way for artists to monetize their music and consumers needed a legal and simpler way to listen. We set out to reimagine the music industry and to provide a better way for both artists and consumers to benefit from the digital transformation of the music industry. Spotify was founded on the belief that music is universal and that streaming is a more robust and seamless access model that benefits both artists and music fans.

2008. The same year as the LBO. Guessing the private equity shops didn’t assume the rise of Spotify - and the $517 million of ad revenue it took in last year alone, up 40% from 2016 - into their models. Indeed, the millennial cohort - early adopters of streaming music - seem to be abandoning radio. From Nielsen:

Finally, Pop CHR is one of America’s largest formats. It ranks No. 1 nationwide in terms of total weekly listeners (69.8 million listeners aged 12+) and third in total audience share (7.6% for listeners 12+), behind only Country and News/Talk. In the PPM markets it leads all other formats in audience share among both Millennial listeners (18-to-34) and 25-54 year-olds. However, tune-in during the opening month of 2018 was the lowest on record for Pop CHR in PPM measurement, following the trends set in 2017, the lowest overall year for Pop CHR, particularly among Millennials. While CHR still has a substantial lead with Millennials (Country ranked second in January with 8.4%), it will be interesting to track the fortunes of Pop CHR as the year goes on, and music cycles and audience tastes continue to shift.

This is the hit radio audience share trend in pop contemporary:

And, consequently, radio ad revenues have essentially flattened. And if Spotify has its way, the “flattening” will veer downward:

With our Ad-Supported Service, we believe there is a large opportunity to grow Users and gain market share from traditional terrestrial radio. In the United States alone, traditional terrestrial radio is a $14 billion market, according to BIA/Kelsey. The total global radio advertising market is approximately $28 billion in revenue, according to Magna Global. With a more robust offering, more on-demand capabilities, and access to personalized playlists, we believe Spotify offers Users a significantly better alternative to linear broadcasting.

One company’s disruptive revenue-siphoning is another company’s bankruptcy. Now THAT’s “savage.”

---

PETITION LLC is a digital media company focused on disruption from the vantage point of the disrupted. We publish an a$$-kicking weekly Member briefing on Sunday mornings and a non-Member "Freemium" briefing on Wednesday. You can subscribe HERE and follow us on Twitter HERE.

Elizabeth Warren vs. the Bankruptcy Bar

A Reminder That Disruption Takes on Many Forms

PETITION is, broadly speaking, a newsletter about disruption. As loyal readers have surely noticed, the predominant emphasis, to date, has been tech-based disruption. But, spoiler alert, there are other forms. Earlier this week, Senators Elizabeth Warren and John Cornyn proposed a bill that swiftly reminded a cohort of (mostly Delaware) legal professionals that legislation, if passed, can be an even more immediate, powerful and jarring form of disruption.

Let’s take a step back. Shortly before Christmas, the Commercial Law League of America (CLLA) indicated that the U.S. Senate should consider a new bankruptcy venue reform bill. The gist of the proposal is that a debtor should have to file for bankruptcy in its principal place of business (or where their principal executive offices reside) - as opposed to, as things currently stand, its state of incorporation (the "Inc Rule"), where an affiliate is located (the "Affiliate Rule"), or where a significant asset is located (the "Abracadabra Rule"). Notably, a large percentage of companies are incorporated in Delaware, a state with well-established and well-developed corporate laws and legal precedent. Consequently, thanks to the "Inc Rule," Delaware is typically the most sought after venue by debtors, perennially topping annual lists with the most bankruptcy filings. In other words, the state of Delaware is the biggest beneficiary of the status quo. 

Putting aside the Inc Rule for a moment, the “Affiliate Rule” and “Abracadabra Rule,” respectively, have provided debtor companies with wide and crafty latitude to file in jurisdictions other than that of their principal place of business. Again, typically Delaware (and then, to a lesser extent, New York). Have a non-operating subsidiary formed in Delaware? Venue, check on the "Affiliate Rule." Got a random (unoccupied) office you set up last week in a WeWork in Manhattan? POOF, venue! Check on the "Abracadabra Rule." Got a bank account set up (a week ago) with JPMorgan Chase Bank in New York? Venue, again check on the "Abracadabra Rule". It is, seemingly, THAT optional. All of this is like saying that despite the entire automobile industry being manufactured, headquartered and principally-based in Detroit, General Motors ($GM) should file for bankruptcy in New York rather than Michigan. Oh, wait. That actually happened. Take two: that’s like saying that despite the entire automobile industry being manufactured, headquartered and principally-based in Detroit, Chrysler should file for bankruptcy in New York rather than Michigan. Damn. That also happened. Ok, here’s a good one: that’d be like saying it’s okay for the Los Angeles Dodgers to file for bankruptcy in Delaware rather than California. Wait, SERIOUSLY!?!? WTF. Who is to blame for this outrage? 

We'll keep this simple, lest this become a treatise absolutely nobody will want to read: federalism. Bankruptcy law is federal but every state has their own courts, circuit courts, and legal precedent. Some states have bankruptcy courts that are historically more favorable to debtors (cough, Delaware...need that incorporation business) - which, speaking commercially and realistically - are de facto clients of the state. Currently, debtors typically choose the venue so if you want to drive debtors to your courthouse steps, favorable corporate and debtor-favorable bankruptcy case precedent goes a long way towards filling court calendars. Not to mention hotels. In this regard, the bankruptcy court isn't all too dissimilar from a large tech company. Go fast and furious to market, aggregate a ton of users (here: debtors), acquire talent (read: judges), and build a database full of information (read: precedent) to then use against everyone else who tries to compete with you. That aggregation is the moat, the competitive advantage. Say, "we're the most sophisticated due to our talent, data, and predictability" and win. Boom. Dial up the Hotel Du Pont please!  

As a consequence of federalism, one jurisdiction's "makewhole provision" enriching bondholders is another jurisdiction's "no recovery for you" enraging bondholders. One jurisdiction's "restructuring support agreement" is another jurisdiction's "meaningless bound-to-be-blownup-worthless-piece-of-paper." That's the beauty of venue selection, currently. The system allows debtors to choose based on that precedent. Ask any of your biglaw buddies about "venue analysis" and watch their eyes roll into the back of their heads. That is, if you're even still reading this. They've all had to do it. It's a big part of the filing calculus. And everyone knows it. 

Enter Senators Warren and Cornyn. They're saying, "No way, Jose. This sh*t needs to stop." Okay, they didn't say that, exactly, but Senator Warren did say this, "Workers, creditors, and consumers lose when corporations manipulate the system to file for bankruptcy wherever they please. I’m glad to work with Senator Cornyn to prevent big companies from cherry-picking courts that they think will rule in their favor and to crack down on this corporate abuse of our nation’s bankruptcy laws.” The argument goes that the bill “'will strengthen the integrity of the bankruptcy system and build public confidence' by availing companies, small businesses, retirees, creditors and consumers of their home court." Ruh roh. 

A few years ago, a heavy hitter lineup of restructuring professionals were asked by The Wall Street Journal what they thought about this venue debate. The general upshot was "nothing to see here." With apologies for the paywall attached to the following links, you'll get the general idea. See, e.g., "the myth of forum shopping." See, also, "venue reform is a solution in search of a problem."; 
“allowing fiduciaries to exercise their business judgment about what filing location might maximize enterprise value or reduce execution risk or both.”; “If it ain’t broke, don’t fix it.”; "the current status quo of wide venue choice – should win out.”; “It’s not clear that these rules are problematic, so don’t apply a fix with its own set of unintended consequences.”; “The truth is that venue provisions are very appropriate and do not need to be adjusted”; "Letting debtors choose as they can now is 'good business sense.'"; and "current venue requirements 'strike a fair balance.'” In summary, you've got Senators Warren and Cornyn up against a LARGE subset of the bankruptcy bar. And those aren't all Delaware practitioners. That's a cross-section of the entire bar - with some financial advisors and investment bankers thrown in for good measure. Pop us some popcorn.

Now, we've been highlighting venue shenanigans since our inception. Not because it's wrong to leverage a favorable venue with uber-favorable precedent if you have that option; rather, because it has gotten so FRIKKEN OBVIOUS. Clearly an industry with $1750/hour billing rates isn't known for its subtlety. Want a third-party release to shield the private equity bros? St. Louis here we come! Have the opportunity to take advantage of a "rocket docket" and get those billable rates rubber stamped? Godspeed. Want to issue a "Standing Order" to divert bankruptcy traffic (back) into your court? May the Force be with you. 

That last bit is particularly notable. Venue gaming got so blatant that even the courts got in to the game. That "Standing Order" is as patent an acknowledgement of venue manipulation as anything we've seen of late. Why did this happen? Take a look at the case trends. After a few early (small) oil and gas exploration and production companies (E&P) filed in Texas and things, uh, didn't go particularly well for professionals, a deluge of E&P debtors mysteriously started popping up in Delaware. That's basic cause and effect. The subsequent cascading secondary effect was the "Standing Order" which, in response, guaranteed professionals that they'd get one of two judges and that, effectively, the Texas courts were open for business. Once that Order came out, debtor traffic curiously reverted back to Texas. E&P management teams and creditors could be heard in their home jurisdiction. Local firms could become "local counsel." Delaware counsel's loss was Texas counsels' gain. (If only the same could be said for lead counsel). Naturally, then, both the Texas Bankruptcy Bar Association and Texas Hotel & Lodging Association back the proposed bill: it basically fortifies the Standing Order. Also, guess where Senator Cornyn is from? Alexa, please cancel that Hotel Dupont reservation. 

We're not taking a position in this debate. We have no skin in that game. But we can't help but to chuckle at the timing. Ironically, it seems that more and more debtors are filing near their principal place of business rather than Delaware anyway (cough, third party releases!). See, e.g., Toys R Us, rue21, Payless Shoesource. And so this has the potential to reinforce a recent trend and compound the issues that have already surfaced for Delaware professionals. 

This is nerdy sh*t. But it’s still big deal disruption. Just disproportionately for the Delaware bar and the city of Wilmington. It’s so big that even iHeartRadio released a podcast discussing it. Without irony. Dramatic disruption AND comedy. 

Who knew bankruptcy could be so entertaining?

Is Digital Media in Trouble?

Don't Sleep on Digital Media "Distress"

Last week we announced that we'll be rolling out our Founding Member subscription program in early '18. The response was overwhelmingly positive with many of you reaching out and essentially saying "what took you so long." That warmed our heart: thank you! We look forward to educating and entertaining you well into the future. The timing fortuitously dovetails into a general narrative about the state of digital media today. 

For instance, is it fair to characterize Mashable as a distressed asset sale? Well, the company - once valued at $250mm - is reportedly being sold to Ziff Davis, the digital media arm of J2 Global Inc., for just $50mm. So, what happened? New capital for media companies has dried up (unless, apparently, you're Axios) amidst weakness in the ad-based business model. With Google ($GOOGL) and Facebook ($FB) dominating ads to the point where even Twitter ($TWTR) and Snapchat ($SNAP) are having trouble competing, digital media brands are feeling the heat. Bloomberg highlights that at least a half dozen online media companies - from Defy Media (Screen Junkies, Made Man, Smosh) to Uproxx Media (BroBible) - are also considering sales to bigger platforms. Indeed, in an apparent attempt to de-risk, Univision is ALREADY reportedly trying to offload a stake in the Gawker sites it recently bought out of bankruptcy.

Which is not to say that bigger platforms are killing it too: the Wall Street Journal reported earlier this week that both Buzzfeed and Vice will miss internal revenue targets this year. Oath, which is Yahoo and AOL, binned 560 people this week. Of course, those in the distressed space know that one's pain is another's gain. To point, Bloomberg quotes Bryan Goldberg, founder of Bustle, saying "Small and more challenged digital media companies have been hit hard. This is a time for companies with cash flow and capital to start acquiring the more challenged digital assets." That sounds like the mindset of a distressed investor: the buyside and sellside TMT (telecom/media/technology) bankers must be licking their chops. Back to restructuring, these sorts of mandates may be decent consolation prizes for those professionals not lucky enough to be involved with the imminent bankruptcies of (MUCH larger and obviously different) media companies like Cumulus Media ($CMLS) and iHeartMedia Inc. ($IHRT), both of which are coming close to bankruptcy (footnote: click the iHeartMedia link and tell us that that headline isn't dangerous in the age of 280-characters!). For instance, Mode Media is an example of a digital media property that failed last year despite at one time having a "unicorn" valuation (based on $250mm in funding), a near IPO, and tens of thousands of users. It sold for "an undisclosed sum" (read: for parts) in an assignment for the benefit of creditors. Scout Media Inc. filed for bankruptcy in December of last year and sold in bankruptcy to an affiliate of CBS Corporation for approximately $9.5mm. Not big deals, obviously, but there are assets to be gained there. And fees to be made. 

In response, (some) digital media brands are looking more and more to subscribers and less and less to advertisers in an effort to survive. Longreads' "Member Drive," for example, drummed up $140,760 which, crucially, it'll use to pay writers for quality long-form content. Ben Thompson has turned Stratechery into a money-making subscription-only service; he told readers that they're funding his curiosity and their education. Indeed, his piece this past week on Stitch Fix ($SFIX) may have, in fact, impacted sentiment on the company's S-1 and, in turn, the company's IPO price. These are only two of many examples but, suffice it to say, the "Subscription Economy" is on the rise. 

Which is all to say that our path is clear. And we look forward to having you along for the ride. Please tell your friends and colleagues to subscribe TODAY: existing subscribers will get a preferential rate.

Gearing Up for Auto Distress

Is Another Wave of Auto-Related Bankruptcy Around the Corner?

We take this break from your regularly scheduled dosage of retail failure-porn to introduce a topic we haven't addressed yet in detail: auto-related distress.

The auto narrative appears to change by the week depending on, uh, well, generally whatever Elon Musk says/tweets, so let's take a look at what's really been happening recently and filter out the hype (note: Tesla recently failed to deliver on production, lost key execs, and fired hundreds of people on Friday...draw your own conclusions...p.s. stock still going bananas): 

• Short Interest in Auto Parts Stocks. It has increased. This piece attributes this to Amazon's new foray into the car parts business. Is that really the reason why? 
• Sales. Car and light truck sales are trending downward. Auto loans that maybe - just maybe - jacked up sales are also on the decline. Mostly because default rates are going up. Here's a chart showing auto debt climbing as a share of household liability.
• Supply Chain Distress. Last year we saw DACCO Transmission Parts Inc. file for bankruptcy. During the Summer, Takata Inc. filed for bankruptcy (on account of a massive liability, but still) and Jack Cooper Enterprises Inc., a finished-vehicle logistics/transportation provider, reached a consensual agreement with its noteholders that kept the company out of bankruptcy court. For now. Then, a little over a week ago, GST Autoleather Inc. filed for bankruptcy, citing declining auto output. Is this the canary in the coal mine? Hard to say. Literally on the same day that GST filed for bankruptcy - again,citing declining auto output - General Motors, Ford and other OEMs reported the first YOY sales increase (10%), surprising to the upside. It seems, however, that the (sales) uptick may be artificial: in part, it's attributable to (a) Hurricane Harvey damage and mass vehicle replacement; and (b) heavy vehicle discounting. On a less positive note, Ford announced that it will beslashing billions in costs to shore up its financial condition; it also announced back in September that it would slash production at five of its plants. And General Motors Co. announced earlier this week that it would be idling a Detroit factory and cutting production. Production levels, generally, are projected to decline through 2021. Obviously, reduced production levels and idled plants portend poorly for a lot of players in the auto supply chain. 
• EV Manufacturing. There is increasing interest in investing in and developing the (electric) car of the future. And that includes major luxury car manufacturers like Mercedes-Benz and Audi. These manufacturers may just be putting the nail in the coffin for upstarts like Faraday Future, which barely seems like it can get off the ground.
• EV Manufacturing - Second Order Effects. Earlier this year we covered Benedict Evans' (now famous) piece on the second-order effects of the rise of electric and autonomous cars. Others, more recently, have been raising questions about what this electric-car future will look like. While others, still, are saying chill the eff out. We, rightfully questioned what would happen once electric cars gained greater traction given the relatively small number of components therein relative to the combustion engine vehicle. To point, Bloomberg writes, "After disassembling General Motors’s Chevrolet Bolt, UBS Group AG concluded it required almost no maintenance, with the electric motor having just three moving parts compared with 133 in a four-cylinder internal combustion engine." Whoa. That's a lot of dis-intermediated parts manufacturing. UBS also projects that electric vehicles will overtake gas and diesel cars by 2038 - with a rapid ramp up succeeding a slow build. 
• Charging Points. They've doubled in Germany and a plan is in place to get more super-chargers in place by 2020. Royal Dutch Shell announced on Thursday that it agreed to buy NewMotion, one of Europe's largest EV charging companies; it plans to deploy them at existing gas stations. All of this points to bullish views about EV adoption - worldwide. And we didn't even mention China, which is voraciously trying to curb emissions/pollution and go electric. 
• Increases. Range and prices. Anything that combats "range anxiety" will help adoption. Prices, however, still have to come down for electric cars to be competitive. 
• Derivative Distress. This was interesting: folks are concerned that autonomous cars may also mean the end of public radio. Will other players that benefit from captive car audiences, e.g., iHeartMedia Inc. and Sirius, also see effects? In all of iHeartMedia's discussions (see below), what are analysts assuming about the future of car ownership? About the rise of podcasts? 

To put the cherry on top, The Washington Post had a piece just this week asking whether 2017 will mark the end of the internal combustion engine. Once you add up all of the above? Well, it becomes clearer that restructuring professionals may have to re-acquaint themselves with auto distress strategies. Maybe that dude who was once the "gaming guy" who is now the "oil and gas guy" will have enough time to become the "auto guy."

Divided Recaps Under Attack in Payless Holdings Case

Niiiiiiiiiice. We're impressed that Reuters and Bloomberg both picked up on something that happens - or at least appears to happen - often in bankruptcy cases: a conflict. 

Here's the drill: the official committee of unsecured creditors (UCC) in the Payless Holdings LLC case filed an application seeking to employ The Michel-Shaked Group as expert consultants. The mandate included providing "expert consulting services and expert testimony regarding the Debtors' estates' claims relating to the pre-petition dividend recapitalizations and leveraged buyout, including solvency and capital surplus analysis." As a quick refresher, Payless' private equity overlords Golden Gate Capital and Blum Capital dividended themselves hundreds of millions of dollars of value via debt incurred - albeit under relatively low interest rates - on the company's balance sheet. The company's debt load - in addition to various other factors characteristic of retail players today - was a major factor in the company's eventual bankruptcy filing.

Payless Holdings LLC - through Munger Tolles & Olson LLP ("MTO") as counsel to "the independent director of the Debtors" - subsequently objected to the UCC's application. The independent director (the "ID") claimed that the application is, at a maximum, duplicative of the services to be rendered by another UCC professional and at a minimum, premature. Why premature? Well, because the ID is conducting, through MTO, his own investigation into the dividend recapitalization claims the company might have against the private equity firms. That investigation is ongoing. Having a simultaneous analysis runs the danger of not only being duplicative and premature but also hindering the Debtors' aggressive proposed timeline for emergence from bankruptcy. 

As loyal readers of PETITION know, we're big fans of the (shadiness of the) dividend recap and, as such, we really enjoyed Bloomberg's snark: "That's right, someone close to private equity is investigating private equity firms for doing a very private equity thing." To be clear, separate counsel at the direction of an independent director is investigating the private equity firms. But, close enough. 

Let's pull the thread. Payless' main counsel, Kirkland & Ellis LLP, does a ton of private equity work - including, upon information and belief, work for the private equity sponsors implicated here. According to its own retention application, K&E has been representing Payless since 2012 as general corporate counsel. The private equity transaction dates back to 2012. Curious. K&E began representing the Debtors in connection with restructuring matters in November 2016; its engagement letter is dated January 4, 2017. 

The ID presumably got his mandate because he has "served as an independent or disinterested director for various companies in financial distress and restructurings." Among his qualifications are four other current director engagements including iHeartMedia Inc. and Energy Future Intermediate Holding Company LLC. Recognizing that the recap might be at issue, the ID hired separate counsel shortly after joining the board in January 2017 - right around the same time that K&E got hot-and-heavy on the restructuring side (if the engagement letter date is any indication). 

So, to summarize, K&E and management have been working with the private equity owners for five years. During that time, the dividend recaps occurred. The ID came on board right around the same time that K&E's restructuring team got enmeshed with the company. The same ID has a board portfolio of 5 directorships, 60% of which are for companies that are using K&E as restructuring counsel as we speak. Meanwhile, we have to assume that the ID gets paid tens of thousand of dollars for each board mandate with, perhaps, some equity consideration thrown in for good measure. Defensively, the objection drops a nice little footnote to assure us all that the ID is truly independent:

From the Debtors' Objection to the Shaked Application.

Perhaps the benefit of the doubt ought to be given to the ID and approval of the Shaked application delayed until after the ID completes his investigation. After all, if he comes down against the private equity shops, the application is moot. On the flip side, well, he won't. Notably, the objection already lays the case that the company relied in its business judgment on the opinions of Duff & Phelps, which issued a solvency opinion and presentation at the time of the transaction(s). Naturally, the UCC won't believe it and will push, again, for this engagement. Presumably, the company will jam them with the "train has left the station" defense. The upshot: if we were litigating this on behalf of the UCC we would certainly call into question the actual "independence" of the investigation sooner rather than later and see if the Judge bites. If done tastefully and in a way that doesn't impugn the character of the ID (which we are in no way advocating), it will at least somewhat offset the impression the Debtors are leaving with the Duff & Phelps bit and plant the seed in the Judge's mind for consideration upon the results of the investigation.

The hearing on the matter was scheduled for May 31 but was subsequently pushed indefinitely.