Toys R Us Fallout

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Mattel Inc. Reported Dogsh*t Numbers

It sure may seem like we have it out for the big box toy retailer. We don't. We just call it like we see it. Last week we called the company a "dumpster fire" on account of the string of emerging negative news. Subsequently, CNBC reported that "poor holiday sales cast doubt on its future" adding, "The poor holiday numbers may require Toys R Us to renegotiate the terms of its debt with its lenders, sources say. They will hover over Toys R Us as it works with debtholders over the next couple of weeks to draft its plans for moving forward. The lenders will have to determine if the Toys R Us business plan is supportable, said the sources." Is it getting hot in here?

Meanwhile, Toys' closure of 180 locations has reportedly exposed 20 CMBS loans with a combined balance of $500mm. 

Finally, in our "Dumpster Fire" piece, we also threw shade all over Bloomberg's rosy view for Mattel Inc. ($MAT). Rightfully so, it seems. The company reported dogsh*t holiday numbers: net sales were down 11%, gross sales were down 9%, and North America was the biggest disappointment with net and gross sales were down 17%. The company straight-up blamed the Toys bankruptcy for some of the poor performance as the company reportedly accounts for 20% of Mattel's U.S. sales and 11% of its international sales. Consequently, Mattel is suspending its dividend, shedding non-core underperforming brands, and targeting $650mm in cost reductions. Read: job cuts.

BigLaw Entrepreneurship & Innovation

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Quinn Emanuel Pioneered Themselves to Millions

This profile about Quinn Emanuel Urquhart & Sullivan LLP is eye-popping. Putting aside the profits for partner figures - also eye-popping - the story captures the thinking of a few entrepreneurs disguised as biglaw attorneys. Here you have a couple of lawyers who were comfortably earning "one or two million dollars in revenue per year" from the big banks deciding that they could multiply that if they were to sue the banks rather than represent them. In other words, go where no one else is going. Amazing. 

Elsewhere in biglaw innovation, we couldn't help but chuckle at this sequence of events. On January 25, The American Lawyer reported that Reed Smith LLP "is the latest Big Law firm to implement health and wellness programs to combat the stresses often linked with life in the legal profession." And then on January 26, Bloomberg reported, "Workplace wellness programs have two main goals: improve employees’ health and lower their employers’ health-care costs. They’re not very good at either, new research finds."Womp womp. We're not knocking health and wellness and we are well aware that lawyers, in particular, suffer from high rates of depression (and alcoholism). But "not very good" isn't a great description for an expensive initiative. Maybe it helps with recruiting?

Investment Banking (Short Lip Service)

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This is an interview (audio) Bloomberg did with Ken Moelis, Chairman of investment banking firm, Moelis & Co. ($MO) at Davos. We perked up when Mr. Moelis was asked the following, "Is it possible that a woman will be the next leader of Moelis & Co.?" "Oh, definitely," Mr. Moelis responded.

Possible, sure. Probable? Statistically speaking, no. 

Take a look for yourself: here is the "Senior Leadership Team" of Moelis. We count 9 women out of 156 Managing Directors. For the math-challenged, that's 5.7%. Which makes Moelis a quintessential investment banking dude-fest. "We don't do as good of a job at retaining them through the life cycle of becoming a managing director." Understatement much? If the "entering work force...is somewhere right around 50-50," that is clearly right. The word "good" shouldn't be anywhere in that sentence.

Co-working Spaces (Holy WeWork Batman)

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Brookfield Asset Management Inc. and Onex Corp. are reportedly prepping a $3.7b offer to purchase IWG Plc, a commercial real estate company and office space owner. Those who have been around the restructuring industry long enough will recall that IWG is the successor entity to Regus, which filed for bankruptcy nearly 15 years ago after it expanded too quickly in the midst of the dot-com boom. Now, putting aside "location location location," which, admittedly, is, uh, we guess kind of a big deal in real estate, it's important to note that IWG actually owns its office space. It also has nearly 3k locations. Its main competitor, WeWork, in contrast, does not own most of its 283 lease rejections...uh, oops, we mean, locations. Which, naturally, means that it is valued at 7x BAM and Onex's offer for IWG. Because, you know, pixy dust. 

Since we're on the topic of WeWork, we might as well note that news out of its WeLive division has been scant ever since Bloomberg reported a few months ago that the concept wasn't gaining traction. Notably, however, Node, a co-living company based in London and New York just launched its third Bushwick-based location. Things are only going to get harder for WeWork as it tries to justify its lofty valuation.

Bloomberg Finds Chapter 22s "Enticing"

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Ah, Poor Headlines...

Bloomberg is getting a little lax here with this headline, "Filing 'Chapter 22' Becomes Enticing Option for Ailing Retailers." We get what they're TRYING to say here which is that restructuring retail right now is really tough. And that a number of retailers, e.g., Wet Seal, American Apparel, General Wireless & Eastern Outfitters, have filed for bankruptcy twice in a short time span. Get it? Chapter 11 + Chapter 11 = Chapter 22. So creative these restructuring folk. Anyway, we've highlighted this issue too (see "Rewind II" here). But to suggest that filing a 22 is "enticing" is a bit of a stretch, yeah? All four of those businesses are effectively gone now and a lot of investor money was lost along the way: not much "enticing" about any of that. But they make tons of money and we do a free newsletter so what the hell do we know? P.S. the article short-changed the industry-agnostic, cough, appeal, of a chapter 22: it neglected to mention Venoco LLC and the possibility of a few solid oil and gas 22s to come. 

Part of Toys R' Us' Failure? Amazon Plays the Long Game

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Among today's frenzy around Toys R' Us...and we're specifically referring to Bloomberg, Debtwire, Reorg Research, and others tripping over each other to be the first to "break" news...there was THIS far more meaningful contribution to the discussion. Choice quote: "The companies agreed that Toys R Us would give up its online autonomy, with ToysRUs.com redirecting back to Amazon." This passage is referring to a deal struck between Toys and Amazon back in 1999. Yes, 18 years ago. We repeat: Amazon initiated the eventual destruction of Toys R Us 18 YEARS AGO. Private Equity merely helped accelerate it. Now THAT is what you call the long game. Respekt. 

Professionals (Long Consolidation)

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A few weeks ago we noted a Bloomberg piece wherein restructuring professionals, e.g., FTI Consulting Inc., complained about a dearth of deals and a bevy of competition. One way to do away with some of the competition is to join it and that is precisely what FTI is doing with its announced acquisition of CDG Group. To recap, a prolific segment of FTI escaped to greener pastures at Berkeley Research Group. Now FTI has found (potential) replacements (and has upsized headcount further). We love musical chairs. Werk, werk, werk, werk, werk. 

Venezuela, Bond Ethics & Argentina (Short Ethics)

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We're big fans of Bloomberg's Matt Levine. He has written some great stuff on Venezuela and we like how he takes a piss out of Eaton Vance Corp. in this piece. Putting aside high-yield issuances, though, folks in the distressed space know these ethical dilemmas all-too-well: in the claims trading space. To our knowledge, that space isn't as prolific or lucrative as it once was before the proliferation of expedited 363 sales and prepacks but there are still some exceptions and sometimes those exceptions can be dicey. We were thinking about this very subject while watching HBO's (fairly) new Bernie Madoff pic. When Madoff went down, claims traders started licking their chops looking for opportunities to arbitrage. So what happened? Moms and Pops accepted offers to sell their claims for pennies on the dollar to funds. Why? Because many just lost their life savings and needed liquidity, that's why. Why did the funds do this? You know, because of their fiduciary duty to generate alpha for LPs, of course. Those that didn't partake because of ethics? Well, quite frankly, they didn't make money like some of the big boys did. Which also means that those bros didn't get paid. "Honey, why wasn't your bonus bigger this year?" "Because management wouldn't let me make money off the backs of financial victims, baby." Ethics have costs, we suppose. Elsewhere in the realm of ridiculousness, Argentina, the Lucy to yield-starved investors' Charlie Brown, issued a 100-year bond. Choice quote: "The market has a short memory." You think? We wonder whether there's a PIK toggle feature: at this point nothing would surprise us. 

Short Restructuring Professionals Who Suck at Marketing $FCN

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We get the old adage that all publicity is good publicity. That said, we have to question the prudence of trying to promote your brand in a piece that says that "[r]estructuring advisors are short on work and long on time." Of acknowledging that you're overstaffed. Of stating that you're trying to do anything you can to keep bodies billing. Of noting that investment bankers and financial advisors are crossing over and creating even MORE competition for (the limited amount of) restructuring mandates. So, if we were on a management team and we found, say, FTI Consulting Inc. ($FCN), on the other side of the table pitching us, we'd be waving the above-linked article in the air like a crazed lunatic - all the while negotiating down hourly fees, success fees, tail length, and expense allocations into bargain basement territory. Then, after we get the bill and see body upon body stacked up on the engagement, we'd negotiate the bill down even more - knowing full well the shenanigans that are being pulled. After all, what do you do when you've got bodies on payroll? You "staff" them damn it, that's what. Because 900 people is a lot of mouths to feed. So, thanks for making all of that so bloody obvious, ya'll. Solid move. But PR!! And personal branding!!