Southland Corp., parent of the worldwide network of 7-Eleven convenience stores, sought court protection from creditors Wednesday in the second-biggest retailing bankruptcy case in U.S. history.
The Chapter 11 bankruptcy filing, however, is designed to push through Ito-Yokado Co.'s proposal to buy 70% of debt-ridden Southland for $430 million in cash. The bailout deal would be the largest Japanese investment in a U.S. retailer.
Ito-Yokado, Southland's longtime affiliate in Japan, since March had tried to buy the Dallas company without going through bankruptcy court, making concessions to bondholders along the way. As it became apparent that its efforts to win the needed 95% support of bondholders would fall slightly short, however, Ito-Yokado was persuaded by Southland to support a so-called prepackaged bankruptcy plan to complete the deal.
Southland filed its reorganization plan minutes after midnight Wednesday morning in Dallas. It followed a tabulation late Tuesday showing that holders of 89% of the company's bonds and 90% of its preferred stock endorsed the prepackaged bankruptcy, easily surpassing the required two-thirds majority.
In a prepackaged bankruptcy, a company goes into federal court with a reorganization plan largely worked out. If the bankruptcy judge approves the plan, a company can emerge from bankruptcy in months instead of the years that it takes some big Chapter 11 cases. Analysts predicted that Southland would be out of bankruptcy in about six months.
Wednesday's news generally was a relief to franchisees, providing assurance that Southland could continue to pay the stores' suppliers without interruption.
Joe Saraceno, chairman of the National Coalition of Assns. of 7-Eleven Franchisees and president of its Southern California affiliate, said the only problem may be confusion among suppliers over the next couple of days until they are notified of developments.
By the end of the week, however, "vendors will feel good because they won't lose a dime," he said.
Many of the owners of the company's 3,113 franchises hoped that the Ito-Yokado deal would go through outside bankruptcy court to avoid bad publicity, but Saraceno said he remains pleased with the buyout proposal. He expects Ito-Yokado's investment to go into remodeling older stores, installing computerized cash registers and increasing advertising.
Brian Doyle, an analyst with Salomon Bros., lauded Southland for keeping the Ito-Yokado deal intact after initial efforts failed.
"What you have that's extraordinary is a Japanese investor that will live with bankruptcy," Doyle said. "In Japan, that's anathema, but Southland has done a good job educating them" about U.S. business practices.
Prepackaged bankruptcies still are a new legal device, and analysts noted that a challenge to Southland's plan might throw the process off track. "Things can always happen," said James D. Bennett, an analyst with the investment firm R. D. Smith & Co. in New York. Bankruptcy court, he said, "is not a perfectly controllable environment."
Southland's $1.8 billion in junk bonds--debt taken on when the founding Thompson family took the company private in 1987 to avoid a takeover--generally rose on the news. The interest costs on that debt, along with stepped up competition from oil company mini-markets, brought Southland $1.5 billion in losses during the past three years.
The company joined a growing list of junk bond-financed firms that have gone into bankruptcy this year. The collapses began in January, when the department store divisions of Campeau Corp. sought Chapter 11 protection in the biggest retailing bankruptcy in U.S. history.
Under the proposed reorganization, Southland investors would turn in their bonds for lower-yielding securities but they also would receive 25% of the company's stock. By one estimate, bondholders on average would get little more than 30 cents on the dollar for their bonds.
The Thompsons--who own nearly all of the company started as an ice shop 62 years ago in Dallas--would be left with slightly less than 5%. Separately, Southland's bankruptcy filing listed assets of $2.53 billion and liabilities of $3.38 billion.
One Southland investor called the prepackaged bankruptcy plan "a great deal" for Ito-Yokado but not for bondholders and expressed hope that another bidder would step in to offer a higher price for the company.
The investor, David Glatstein of the Dallas bond firm Barre & Co., said potential buyers may have been frightened off previously by the difficulties of bargaining with disparate groups of investors. With the case now in bankruptcy court, however, Glatstein said a bidder could simply submit its proposal to the bankruptcy judge and creditors committees.
"If you want to do a deal, now's the time to do it," Glatstein said.
According to Glatstein's figures, Ito-Yokado should be able to recapture its $430-million investment in Southland within four years, largely because of reduced bond interest costs. He suggested that the company's network of roughly 13,000 company-owned, franchised and affiliated stores would be attractive to restaurant chains such as McDonald's that are looking for new outlets.