Sun Capital-backed Mervyns to liquidate(2)

Department store Mervyns, bought in 2004 by Cerberus Capital Management and Sun Capital Partners for $1.2bn, will liquidate after filing for bankruptcy protection in July.

Bankrupt private equity-backed department store Mervyns plans to liquidate its business and wind down operations after failing to return the company to profitability since filing for Chapter 11 in July.

California-based Mervyns will hold liquidation sales at its remaining 149 locations and auction off the store leases. The company determined that going out of business sales during the holiday season would best maximise value for company creditors.

“We are disappointed with this outcome but the company’s declining liquidity position and the extremely challenging retail environment, together with the fact that we have exhausted all other possibilities, requires that we take this action,” John Goodman, chief executive officer of Mervyns, said in a statement.

Mervyns has said part of the reason it went bankrupt was because Cerberus Capital Management and Sun Capital Partners, which bought the company in 2004 for $1.2 billion, along with Lubert-Adler Real Estate, transferred control of Mervyns real estate assets and leased them back to the company at double the previous rent.

The company said the private equity firms “siphon[ed]” around $1 billion in real estate assets from the company to leverage its $1.2 billion buyout. The company filed a lawsuit last month against Cerberus, Sun Capital and Lubert-Adler. The private equity firms have denied any wrongdoing.

Mervyns: liquidating

Cerberus sold its stake in the department store company to Sun Capital last November, according to media reports at the time. Others named in the suit include Target; Klaff Partners’ joint venture with Lubert-Adler; Goldman Sachs Mortgage Company; Archon Financial; LaSalle Bank National Association and Greenwich Capital Financial Products.

Mervyns is one of 34 private equity-backed companies that have filed for bankruptcy in 2008. Earlier this month, Apollo Global Management portfolio company Linens ‘n Things said it would liquidate its remaining stores after a deadline passed with no new bids submitted to buy the bankrupt company. The business collapsed under debt obligations it couldn’t meet because of declining profits and the increasing prices of raw materials and fuel.

Apollo bought a $201 million stake in Linens 'n Things in 2006. The company filed for Chapter 11 protection in May.

Linens 'n Things will be sold for about $476 million to a liquidation group consisting of Gordon Brothers Retail Partners, Great American Group, Hilco Merchant Resources, Hudson Capital Partners, SB Capital Group and Tiger Capital Group. The sale includes the business’s remaining 371 stores.