Should JC Penney be split up or sold? Everything is still on the table as bankruptcy enters critical phase

Forty-five days into its Chapter 11 reorganization, J.C. Penney’s bankruptcy can still go in a few different directions.

All possibilities are still alive, including interest from three or four outside investors wanting to buy all or some of the 118-year-old retailer, according to discussions during a hearing Wednesday before U.S. Bankruptcy Court Judge David Jones.

Bankers and advisers are in the process of splitting up the real estate as part of the stated plan for Penney to emerge as two entities: a real estate investment trust owning some of the real estate and a successor J.C. Penney operating company. Penney would still own some of its real estate but would also pay rent to the REIT.

A third outcome, if negotiations fall apart, would be a liquidation with the proceeds going to Penney’s lenders and creditors. The judge reminded the lawyers that the first lien lenders should also be preparing a stalking horse bid, or a floor bid on the assets, in the event that Penney is put up for bids.

Penney has a few important deadlines coming up. So far its case has mostly stayed on schedule.

It has to deliver its business plan to lenders on July 8, and they have until July 14 to accept or reject it. As proposed now, Penney’s first lien lenders will own the REIT, said Penney’s lawyer Joshua Sussberg of Kirkland & Ellis.

For both the REIT and the retailer to be viable entities, both will have to wind up with valuable properties, Sussberg said. At the same time, the parties are figuring out how much rent Penney will pay for buildings it still needs. Finally, their capital structures, or how much debt each entity will end up with, is being ironed out, he said. “It’s incredibly complicated.”

The Plano, Texas-based retailer’s investment banker, Christian Tempke, managing director at Lazard, testified during the hearing that three potential investors in J.C. Penney have signed nondisclosure agreements.

Tempke said the parties will walk if their identities are disclosed. The discussion turned awkward after that, especially since Jones noted there have been multiple published articles in recent weeks reporting rumors and leaks about who’s interested in buying Penney.

Penney entered into the nondisclosure agreement with the three “sensitive” investors, and Tempke said if the documents aren’t sealed by the court, Penney would be breaking the contract.

“If the company ignores their concerns, they risk dropping out of the process, and that would be detrimental to what we’re trying to achieve, (which is) maximize the value of the assets,” Tempke said.

Tempke offered generic reasons why the investors should be kept confidential, but Jones scolded him after he asked for specific details about the nondisclosure agreement that Tempke didn’t provide.

“There is so much at stake for you not to have read the document,” which was at the reason for his appearance Wednesday, Jones said. The judge said he would sign the motion to keep the parties confidential, but he added that if anyone can show cause that they need to obtain the identity, he will grant the motion.

So far, major business publications including Bloomberg, CNBC, Reuters, the Wall Street Journal and Women’s Wear Daily have published reports quoting unnamed sources that:

Private equity firm Sycamore Partners was in preliminary talks to purchase Penney.

Penney’s biggest mall landlords, Simon Property Group and Brookfield Property Partners, would buy Penney.

Authentic Brands Group is interested in buying Penney. The firm specializes in collecting brands to operate stores and license the names to keep them going long often after their original organizations fail. It has recently acquired Forever 21 and Barneys New York out of bankruptcy. Its portfolio includes more than 40 brands, such as Nautica, Nine West, Frye, Thomasville, Sports Illustrated, Juicy Couture, Hart Schaffner Marx and Jones New York.

And finally, the possibility that Amazon might be interested in Penney and that executives from the online giant were spotted at Penney’s Plano headquarters.