Tuesday, March 30, 2010

The Mervyn's Deal from 2004 reverberates

Back in 2004, Target's sold the Mervyn's department-store chain to a group of PE investors led by Cerberus. (Faille's first law of finance: Cerberus has one of its many canine heads in everything!)

Mervyn's declared bankruptcy in 2008. (Didn't everybody?) But in Mervyn's case, ticked-off unpaid creditors decided it was all Target's fault. Target had structured the sale so as to strip to valuable real-estate holdings from the transaction, so that Mervyn's thereafter was required to make lease payments on land it had previously owned. Inflated lease payments, say the ticked-off creditors.

The estate trustee has apparently brought an adversary action against Target through the bankruptcy court. I say "apparently" because I haven't done a serious search via PACER for the actual papers yet, so I'm relying on news accounts. Said accounts tell me that Judge Kevin Gross of the U.S. Bankruptcy Court in Wilmington, Del., said the complex series of transactions should be viewed as a single deal, one that had "devastating" consequences on Mervyn's creditors, and he denied the motion to dismiss.

Last year, William Ackman tried to use a proxy fight to persuade Target to turn the land under its stores into a real-estate investment trust. His slate of nominees for the board was defeated, though. I wonder if Ackman has a cheering interest in this lawsuit one way or the other?

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