Ullman probably has no choice but to finish the renovations that have already begun, even though that has meant tapping into the company’s credit line. More broadly, he faces a long-term strategic problem. Ron Johnson’s vision for J.C. Penney involved breaking up every large (100,000 square feet and up) store into shops, but the company is only a quarter of the way through that transformation. With some stores being 30% to 40% shops, others having a few shops, and some having no shops at all, Ullman and his team may have trouble crafting a coherent message to customers. However, J.C. Penney would need to invest even more money to complete the transformation — or to undo it. One thing is certain: J.C. Penney needs cash to resurrect itself.
Sources of cash
J.C. Penney and The Blackstone Group L.P. (NYSE:BX) have apparently been in touch with banks and private equity firms, with the goal of raising $1 billion through a combination of a five-year term loan and the sale of a minority stake in the company. Top J.C. Penney shareholder Bill Ackman claims that he and other major shareholders would be willing to put up more capital as well. However, each of these options comes with major drawbacks. Private equity firms will demand very good terms, which would dilute the holdings of other investors. Bank loans would saddle J.C. Penney with higher interest payments, damaging profitability even further. Last, while I could imagine major shareholders investing some additional money in J.C. Penney, even $500 million seems like a stretch. It simply does not make sense for these investors to throw good money after bad.
I think J.C. Penney’s best bet for generating cash is selling off a few of its most desirable stores. This is not a palatable strategy, as it means losing some of the highest-potential stores, but it could produce cash without severely diluting the interests of J.C. Penney shareholders or adding interest expense that J.C. Penney cannot afford. For example, Sears Holdings Corp (NASDAQ:SHLD), another struggling department store giant, was able to sell 11 stores to General Growth Properties Inc (NYSE:GGP) for $270 million last year. Bill Ackman’s Pershing Square hedge fund happens to be a major shareholder in General Growth Properties Inc (NYSE:GGP). This could open up an opportunity for J.C. Penney to pursue a similar deal — if any of its real estate would be sufficiently valuable to General Growth.
Foolish conclusion
J.C. Penney will have trouble raising $1 billion on acceptable terms. The best-case scenario is probably a sale of the most valuable store locations, but this depends on buyers being interested in the real estate. Even if J.C. Penney does raise $1 billion or more, there is no guarantee that a turnaround will take hold, making the company a potentially dangerous place for investors right now.
The article Can Anybody Spare $1 Billion for J.C. Penney? originally appeared on Fool.com.
Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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