Franchise Group Inc. (FRG) is a well-known company that is a parent to brands like Vitamin Shoppe, Buddy’s Home Furnishings, and Pet Supplies Plus, and has sought Chapter 11 protection from its creditors due to substantial losses, alongside the growing crisis involving its key sponsor, B. Riley Financial Inc. The petition was filed in Delaware where the company claimed debts worth about $2 billion. Based on information from court papers, FRG plans to turn over the reins of the empire to the lenders, namely HPS Investment Partners, after an extensive period of restructuring talks.
FRG within the press release announced that it has settled a row with the creditors, who possess the majority of its senior debt. If the bankruptcy judge endorses this settlement, the participating lenders will receive ownership of the restructured company in exchange for their first lien debt. This is followed after several setbacks regarding FRG and its key finder, B. Riley, which was responsible for arranging a $2.8 billion takeover of FRG a year ago. The transaction was spearheaded by FRG’s founder and former CEO Brian Kahn.
In fact, after the bankruptcy filed, B. Riley share prices dropped by 10% during the prem at trading session. The firm explained that it would incur another impairment of investment in FRG and loan to Kahn amounting to $120 million. This highlights again the pressure on B. Riley as it seeks to recover from the investment that went sore with acquisition and restructuring of FRG.
After Kahn stepped down as the chief executive officer of FRG, his association with the firm became more and more the subject of controversy. His exit from the company came suspended over a concurrent criminal investigation on alleged securities fraud involving a now-defunct hedge-fund, Prophecy Asset Management. Kahn has always maintained that he was neither involved in any wrongdoing nor any of Prophecy’s managers fraudulent schemes, insisting that he was also a casualty of the fall of the fund. Nonetheless, scandals in which Kahn has been embroiled have affected FRG adversely as well as distorted the firm’s prospects.
In an email to officers of the company, B. Riley co-founder and chairman Bryant Riley characterized the bankruptcy of FRG as a complex of factors that thwarted the firm’s original objectives for investment. As he explained, the investment was hurt by an unexpected turn of events, namely, the sharp drop of consumer spending in the primary regions of operations for FRG, the damage caused by the Prophecy affair as well as the subsequent investigation concerning Kahn.
Earlier this year, FRG sold its Sylvan Learning business in an attempt to reduce debt. However, further asset sales were reportedly hindered by the legal issues involving Kahn, according to FRG’s chief restructuring officer, David Orlofsky. These issues prevented FRG from sufficiently reducing its debt burden, contributing to the company’s current financial difficulties.
FRG disclosed that a group of its first lien lenders agreed to provide $250 million in financing to support the company during the Chapter 11 process. Combined with existing cash reserves, this financing will allow FRG to continue operating its various businesses and fulfill its commitments to employees, customers, vendors, franchise partners, and other stakeholders. Additionally, FRG announced plans to market its assets in bankruptcy to secure the highest possible value. As part of its restructuring efforts, the company has decided to close its discount retailer, American Freight, with store-closing sales beginning on November 5.
Particularly from the year 2018, Kahn has been expanding FRG through a myriad of acquisitions while securing funds from B. Riley. During the buyout last year, B. Riley emerged with 31% ownership of FRG. Besides, the company lent Kahn $200 million against his shares in FRG. The Tokyo headquartered Nomura Holdings Inc. is also reported to have involved itself in the acquisition by loaning B. Riley $500 million with security of FRG assets and shares. B. Riley has reported that it has not breached any of the conditions of the loan and projects to lower the facility drawn to $125 million before the end of the month.
Nevertheless, retaliating against these challenges, Bryant Riley noted in the correspondence that there were no threats to the finances of B. Riley and there would be a recovery. “We’re not in that bad of shape, contrary to what the headlines or the public might suggest,” Riley said, expressing his belief that B. Riley would be able to secure the funds necessary to resume growth.
In the US Bankruptcy Court for the District of Delaware, the bankruptcy case of Franchise Group Inc. is Case No. 24-12480. This is because the present financial restructuring is what you can call the ‘avalanche effect’ from empire-building acquisitions, dysfunctional market conditions, and legal challenges that B. Riley and FRG are grappling with and will continue to be very instrumental to the two companies.
