Behind the bankruptcy of Performance Sports Group

Laden with debt, company looks for a new owner
Former PSG chairman W. Graeme Roustan says Sagard Capital Partners poses a conflict of interest because of its relationship with PSG’s competitor.

Performance Sports Group’s Halloween bankruptcy filing should be no treat for its creditors and shareholders. If the recent past and the current plan are any guide, both groups may end up feeling tricked by the Exeter-based sporting equipment company.

But if all goes as planned, the company itself will remain intact, with many of its employees holding onto their jobs. That’s what happened to Merrimack-based GT Advanced Technologies, which in 2014 filed the second-largest bankruptcy ($1.5 billion) in New Hampshire’s history.

PSG’s $608 million Chapter 11 filing may not be as large, and unlike GTAT ended up selling its assets to a private equity firm PSG filed with its buyer in hand: its largest shareholder, also a private equity firm.

The root causes of both bankruptcies are similar.

GTAT failed in its attempt to become a supplier to Apple Inc. by biting off more debt than it could chew, rendering its stock worthless and leaving creditors with pennies on the dollar.

PSG apparently swung for diversification and missed when it paid $330 million for Easton-Bell’s baseball and softball division, a move that even at the time was criticized for overvaluing the division.

PSG is now so laden with debt, that, unless a bidding war takes place, shareholders will get back little, if any, of their investment, and recent creditors may also get substantially less than they are owed.

An inkling

Still, PSG’s bankruptcy proceedings are just beginning, and financial information is slow to come out. As Vince Martin, a blogger on the website Seeking Alpha put it, “The latest financial information now is over eight months old— and very possibly inaccurate in some way, shape or form. Acquirers will get access to the data room to understand where potential value might lie under the collapsing profits and slowing revenue. The rest of us are flying blind, or close to it.”

Well, not totally blind. The picture is clear that this company has been in trouble for a while. The market already had an inkling of that back on Aug. 15, when the company revealed that it wouldn’t file its annual financial statement due to an internal investigation. It also disclosed — only when pressed by NH Business Review — that it was being investigated by financial regulators in both the United States and Canada. That filing delay eventually triggered a default on more than $500 million in loans.

The Oct. 31 bankruptcy filing did not indicate when the internal investigation would be completed and when, or if, that annual report will be filed. 

In addition, investors learned in April that PSG was writing off a $145 million impairment charge related to the baseball division, contributing to a net quarterly loss of $188 million.

It had earlier revised its economic outlook, thanks to the bankruptcy of The Sports Authority retail chain, a major vendor, and other retailer failures, and that caused the company’s stock to nosedive.

Slow baseball and softball bat sales and currency headwinds added to a revenue decline that began to show up in by the end of February, when sales were down 8 percent, to $126 million, according to the company’s April quarterly filing.

In its bankruptcy filing, the company told the court that in the 12 months ending in September, it generated $569 million in revenue. While not strictly comparable, that would be 13 percent less than the revenues generated in fiscal 2015, which ended in May of that year.    

But even that kind of revenue decline usually isn’t steep enough to push a company into bankruptcy, unless it is already on the brink of debt. 

PSG apparently was. It had borrowed heavily — taking out both a $200 million revolving credit loan and a $450 million secured term loan — to buy Easton-Bell’s baseball and softball business. The money also was used to finance other acquisitions.

The company also issued a $125 million initial public offering on the New York Stock Exchange in 2014. It had traded on the Toronto Stock Exchange for about three years before that, under the name Bauer Performance Sports, when it was named for its legacy hockey brand. It was trying to diversify seasonally and geographically by buying into the U.S. pastime, but by the time PSG declared bankruptcy, it still had nearly $490 million to pay off on that debt. 

Other challenges

Then there are the expenses related to the aforementioned investigations as well as a class action suit, which charges the company with channel-stuffing — using deep discounts to push up sales and quarterly earnings.

In October, the company asked that the charges be dismissed, arguing that plaintiffs used the “sinister-sounding term” to describe no more than an “aggressive sales campaign.” But the plaintiff, undeterred, filed its second amended complaint, including the bankruptcy filing.

The company has also been fighting off a challenge by its former chairman, Canadian investor W. Graeme Roustan, who blames the revenue falloff on the company’s strategy to open its own chain of retail stores. Roustan has argued that the move angered other retailers that carry Bauer merchandise. 

The bankruptcy was the company’s attempt to gain time to arrange a sale. 

“In light of our inability to file our annual audited financial statements and the resulting default under our secured loan agreements, we believe that today’s action is the responsible course to take for Performance Sports Group to address its financial, legal and regulatory challenges under supervision of the courts,” said Bernard McDonell, PSG chairman.

Sagard Capital Partners, which holds 17 percent of the company, with the help of affiliate Fairfax Financial Holdings Unlimited, is offering to buy the company for $575 million. It has also disclosed that it is in confidential talks with Brookfield Asset Management Inc., PSG’s second-largest shareholder, which holds 13 percent of shares, to participate in the deal.

This would be a “stalking horse bid,” meaning that others would outbid it. But if that happens, Sagard would get a $20 million breakup fee as well as $3.5 million in expenses.

The Sagard proposal also calls for rolling over and increasing the company’s debt.

A consortium of banks, led by Bank of America, would sign a new revolving loan agreement, increasing the current interest rate by a point and a half, to 4.83 percent. A Sagard affiliate would provide a debtor in possession term loan for $361 million, though the interest rate would nearly double, from 4.83 percent to 8 percent. 

There are more fees as well, according to the Canadian bankruptcy court’s estimate. There’s another $5.6 million for financing, some $7.5 million for legal and professional costs and $7.5 million for insurance to indemnify executives and board members from litigation.

The company also projects a negative cash flow of $20 million over the next three months. But with financing, it expects to end up with $11.5 million in the bank. 

The company has have one good thing going for it. Whoever buys it will inherit a $110 million tax write-off.

That’s if all goes as expected, and the auction takes place after New Year’s and the sale closes at the end of next February. 

130 NH creditors

Roustan also has written to Canadian authorities to investigate the sale on conflict-of-interest and antitrust grounds. He charges that Sagard’s parent company, Power Corporation of Canada, owns part of Adidas, which owns CCM, PSG’s largest competitor. Roustan first made the allegations back in August.

“I believe Sagard shouldn’t be at the table in any capacity whatsoever,” he told NH Business Review the day of the bankruptcy filing.

But Roustan, who has said he was interested in bidding on his own, has withheld comment after retaining Dickinson-Wright, a prominent law firm with offices in both the United States and Canada.

And there could be more obstacles, since the first deadline for official objections in the U.S. court isn’t until Nov. 15.

“Equity will be zeroed out” unless PSG gets a much larger bid than offered by Sagard, wrote Seeking Alpha’s Martin, though it’s possible that those who held on to their shares might not be holding completely worthless paper. 

Philip Emma, a retail analyst at Debtwire, told NH Business Review, that “traditionally the equity owners get the shaft” in a bankruptcy, but “that is not automatically the rule.” In this case, he said, since one and perhaps two, major shareholders are in on the deal -— and one of them is offering to provide financing — you have more degree of optimism.”

Indeed, he was surprised that the stock price held up for as long as it did. Shares had closed at $3.48 on the Friday before the bankruptcy filing halted trading on the major exchanges. Even on Nov. 4, shares were being swapped on the Pink Sheets under the ticker symbol PSGLQ, at $1.34. Still, at this time last year, the stock was trading for more than $12.

Unsecured creditors may get back a little more, but they are still behind the secured debtors, who would presumably be paid their full $490 million if the sale goes through. The company hasn’t totaled up unsecured debt yet. The first claims haven’t come in as of deadline, and a creditors committee had not yet been formed.

But the filing did list the 40 largest unsecured creditors. Leading the way is Bonny Sports Corp. in Taiwan, for $6.2 million, followed by Sigma Global Company, also in Taiwan ($3 million), and Growth Link Overseas Co. in Hong Kong ($2.7 million). Sierra Pacific Construction ($2.5 million), a California firm, is the largest unsecured U.S. creditor listed 

UFP Technologies Inc., a publicly traded company based in Newburyport, Mass., is the largest creditor close to home, owed $153,449.58, according to the filing. But UFP, which makes foams, plastics and composites, should be able to take that in stride. It reported revenue of $139 million in 2015, with a net income of $8.7 million in 2015. 

The filing also disclosed 12,000 potential creditors, apart from employees, including about 130 in New Hampshire. But these were mainly companies PSG cut a check to. Many of those contacted by NH Business Review said they hadn’t done business with the company in years.

Tim Hurley, owner of Alphagraphics, a printing company in Manchester, was the exception. He said PSG owes him $442, though he said he would be surprised if he ever sees a dime of it.

“I’m sure I’m way down on the list,” he said. But he figured he’d write it off. “Lots of companies we’ve done jobs for have gone belly-up. That’s all part of the business.” 

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