Register, or Login to view the article
June 3, 2019 – Publicly traded FTD Companies, Inc. (NASDAQ: FTD) and 14 affiliated Debtors (“FTD” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11240. FTD, an iconic premier floral and gifting company, is represented by Daniel J. DeFranceschi of Richards Layton & Finger. Further board-authorized engagements include (i) Jones Day as bankruptcy counsel, (ii) Moelis & Company as investment banker and financial advisor, (iii) Piper Jaffray Companies also as investment banker and financial advisor, (iv) AP Services ("APS" an AlixPartners affiliate) as restructuring advisor (with APS's Alan D. Holtz to serve as the Chief Restructuring Officer amongst other APS employees joing the Debtors) and (v) Omni Management Group as claims agent.
The Company’s petition notes between 10,000 and 25,000 creditors; estimated assets of $312.7mn and estimated liabilities of $374.9mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) UPS Supply Chain Solutions, Inc. ($23.2mn trade debt), (ii) Alorica, Inc. ($5.2mn professional services debt) and (iii) Sun Valley Floral Farms ($3.2mn trade debt).
In a press release announcing the filing, FTD advised: “The Company intends to use the court-supervised restructuring process to support and protect its ongoing business operations, including its relationships with member florists and business partners, to provide an efficient and binding mechanism for the potential sales of its businesses and to address a near-term debt maturity. The Company has already made significant progress completing its strategic initiatives, including:
- Entering into a definitive asset purchase agreement with an affiliate of Nexus Capital Management LP to acquire FTD’s North America and Latin America Consumer and Florist businesses, including ProFlowers;
- Entering into a non-binding letter of intent with a strategic investor to acquire Personal Creations;
- Entering into a non-binding letter of intent with Farids & Co., LLC, which is owned by Tariq Farid, founder of Edible Arrangements, LLC, to acquire Shari’s Berries;
- Completing the sale of U.K.-based Interflora to a subsidiary of The Wonderful Company; and
- Implementing a new operating model for ProFlowers to better support the FTD florist network and reduce costs by also harnessing our third-party drop-ship network.
The Company is operating in the ordinary course and remains focused on supporting its extensive network of member florists and business partners connected by its iconic FTD brand in North America and Latin America.
The Company expects that the Company’s common stock will be delisted from the Nasdaq Stock Market for non-compliance with marketplace rules as a result of the Chapter 11 filing. In addition, based on the values for the Company’s businesses contemplated by the potential asset salesreferred to above, the Company expects that existing Company stockholders will receive no recovery at the end of the court-supervised restructuring process."
Sale of Consumer and Florist Businesses to Stalking Horse Nexus Capital
FTD has executed an asset purchase agreement with an affiliate of Nexus Capital, a California-based private equity sponsor which will serve as a stalking horse in a section 363 auction/sale process, to acquire the Company’s North America and Latin America florist and consumer businesses, including ProFlowers. The purchase price is $95.0mn in cash. As part of the transaction, FTD will restructure its ProFlowers business such that floral order fulfilment and distribution for ProFlowers will be being transitioned to the FTD florist network and third-party fulfilment partners. Nexus Capital would acquire ProFlowers business as restructured. The Debtors President and CEO Scott Levin commented “We are pleased to announce Nexus Capital’s pending acquisition of our North America and Latin America Consumerand Florist businesses…We also believe the shift of ProFlowers orders into the FTD florist network will benefit our florist network and key third-party providers, and enable us to better serve customers. We look forward to continuing our important relationships with our florist partners.”
Further Potential Asset Sales
FTD further announced that it had entered into non-binding letters of intent with:
- a strategic investor to acquire Personal Creations and
- Farids & Co., LLC, which is ownedby Tariq Farid, founder of Edible Arrangements, LLC, to acquire Shari’s Berries.
Sale of U.K. Interflora to a Subsidiary of The Wonderful Company
FTD further announced the sale its Interflora business in the U.K. to a subsidiary of The Wonderful Company for $59.5mn in cash. The Interflora business operated independently from FTD’s North America and Latin America businesses and it is not part of the Chapter 11 filing.
The Company has received commitments for up to approximately $94.5mn in debtor-in-possession (“DIP”) financing from a syndicate comprised of its existing lenders.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Levin Declaration”), CEO Scott Levin detailed the events leading to FTD’s Chapter 11 filing. The Levin Declaration cites numerous operational disappointments, but the Debtors' greatest regrets clearly stem from FTD's December 2014 acquisition of Debtor Provide Commerce LLC ("Provide Commerce," comprised of the ProFlowers, Gourmet Foods, and Personal Creations business units). The $145.0mn Provide Commerce acquisition was the largest acquisition in FTD's history and was largely financed with $120.0mn of further borrowings under the Credit Facility. Ultimately, the Provide Commerce acquisition (i) failed to deliver on expected strategic benefits and (ii) placed severe liquidity pressures on the Debtors, which were otherwise struggling to meet a changing and challenging marketplace. Together, operational underperformance and increased borrowings under the Credit Facility led to repeated breaches of the Debtors' obligations in respect of that facility.
The Levin Declaration details: "Despite the legacy B2B business' consistent performance, a focus on near-term profitability and pullback of investment in areas such as quality controls, marketing, and technology over a number of years led to insufficient focus on the customer experience, decreased brand awareness, and customer base depletion. As further described below, the legacy business has not always evolved to match the market and consumer landscape. This became manifest after the Provide Acquisition, as year-over-year Florist segment revenues and operating income began to decrease, first, by 1% and 4%, respectively, between 2016 and 2017, and then by 9% and 8%, respectively, between 2017 and 2018. By 2017, however, the Debtors were constrained in their ability to fully address the incremental needs of the legacy florist business due to adverse outcomes related to the Provide Acquisition.
The Provide Acquisition was designed to complement and enhance FTD's existing businesses, ultimately driving greater profitability. FTD approached the Provide Acquisition with the investment thesis that a combined company would broaden its customer base and extend and diversify its product offerings and capabilities. FTD predicted that the Provide Acquisition — particularly the acquisition of ProFlowers — would result in a number of synergies, principally across the floral businesses.
Though the Debtors did realize certain synergies following the Provide Acquisition, such as certain reduced marketing costs, the integration of the Provide Business Units into the legacy businesses never materialized, resulting in the Debtors running essentially independent, rather than integrated, businesses. In particular, a number of key post-acquisition targets, such as (a) floral brand alignment, (b) necessary technological investments in the combined business (e.g., the consolidation of technology/ecommerce platforms), and the integration of marketing and business teams, have lagged. As a result, both the Provide Commerce and the Debtors' legacy brands suffered from internal friction and suboptimal structures within the Debtors' enterprise. ProFlowers was further hampered by a loss of critical institutional knowledge and key analytic capabilities due to post-acquisition employee attrition.
While the Debtors struggled to unify their businesses and implement the Provide Acquisition, the floral industry – and consumer expectations – continued to evolve. Following the example set by ProFlowers, other companies began to deliver farm-sourced fresh bouquets directly to customers, increasing competition in the B2C space. In addition, the expanding influence of e-commerce platforms like Amazon transformed customer expectations, particularly with respect to ease of experience and the fast, free delivery of goods. Given the perishable and delicate nature of the product, delivery and service fees were standard in the floral industry. As e-commerce companies trained consumers to expect free or nominal cost delivery, floral service fees became anathema to many customers.
A number of other market factors put additional pressure on the Debtors, including, among other things, increased shipping and online marketing costs, low barriers to entry for other direct-to-consumer businesses, and the growing presence of grocers and mass merchants providing low-cost floral products and chocolate-dipped strawberries during peak holidays. Collectively, market pressures contributed to declining sales and decreased order volumes, impairing the B2C businesses' ability to leverage and capitalize on scale. Specifically, between 2015 and 2016, aggregate U.S. Consumer segment revenue decreased by nearly $84 million (9%), while order volume decreased by approximately the same percentage. The portion of the revenue decline attributable to Provide Business Units largely was due to a 17% decline in ProFlowers' revenue.
Despite the Debtors' efforts to implement their turnaround strategy, the Provide Acquisition and the necessary resulting turnaround strategy had placed too much financial stress on the Debtors' enterprise. As set forth above, to fund the Provide Acquisition, FTD had taken on approximately $200 million in secured debt under the Amended and Restated Credit Agreement. At the time of the acquisition, limited reinvestment in the company and relatively steady cash flows allowed the Debtors to operate comfortably under the terms of the Credit Facility, despite certain relatively narrow financial covenants. By 2017, however, that was no longer the case. Deteriorating operational performance severely impaired the company's profitability and, in April 2018, FTD filed their 2017 10-K including a going concern qualification (a default under the Amended and Restated Credit Agreement).
Further, on a consolidated basis, the Debtors materially underperformed projections during the 2018 Valentine's Day peak, and residual order decline extended through Mother's Day and the rest of 2018. The underperformance was driven, in part, by ineffective marketing followed by a poor consumer response, which required significant discounting and dumping of inventory, particularly in the U.S. Consumer segment. Overall, U.S. Consumer segment order volume decreased 5% from 2017 to 2018, and average order value decreased 3% over that time. In the aggregate, U.S. Consumer segment revenue decreased by $61.1 million (8%), and operating income decreased by $51 million (110%) between 2017 and 2018.
While the Debtors had hoped to independently refinance the outstanding debt under the Credit Facility, the 2018 Valentine's Day holiday period underperformance contributed directly to a breach of the consolidated net leverage ratio covenant under the Credit Facility. As a result, on March 30, 2018, FTD entered into a forbearance agreement and Credit Facility amendment with its lenders. However, due to limited momentum gained under the expensive turnaround strategy and declining operational performance, the Debtors were unable to adhere to the Credit Facility's financial covenants. Ultimately, FTD and its secured lenders entered into nine amendments to the Credit Facility between 2018 and 2019. While the various amendments bought the Debtors runway to attempt to right size their businesses and review strategic alternatives, they also had the effect of imposing further borrowing restrictions which, in turn, tightened the Debtors' liquidity and placed additional pressure on the Debtors' businesses.
Prepetition Capital Structure
The Debtors' prepetition debt consists of (i) outstanding amounts under the Debtors' July 17, 2013 credit facility (the “Credit Facility”) and unsecured trade debt.
Credit Facility: The agreement governing the Credit Facility initially provided for three facilities: (a) a $200 million term loan (the "Term Loan Facility"); (b) a revolving credit facility with initial availability of $250 million (the "Revolving A Facility"); and (c) a revolving credit facility with initial availability of $100 million (the "Revolving B Facility" and, together with the Revolving A Facility, the "Revolving Credit Facility"). All obligations under the Credit Facility are due at maturity on September 19, 2019.
Amendments to the Amended and Restated Credit Agreement have, among other things: (a) reduced the lenders' commitments under the Revolving A Facility and Revolving B Facility to $150 million and $25 million, respectively; and (b) further restricted combined usage under the Revolving Credit Facility to amounts ranging from $60 million to $170 million based on the Debtors' expected borrowing needs. As of the Petition Date, the Debtors had approximately $149.4 million in secured indebtedness outstanding under the Credit Facility, consisting of $57.4 million under the Term Loan Facility, and $92 million under the Revolving Credit Facility.
Unsecured Trade Debt: In the ordinary course of their businesses, the Debtors historically have purchased goods and services from numerous vendors. These vendors include, among others, suppliers of (a) perishable and non-perishable inventory, (b) commercial common carrier services, (c) various marketing and technology services, and (d) third-party drop-ship services for the Debtors' enterprise. As of the Petition Date, the Debtors estimate that they owe approximately $72.4mn for unsecured obligations for goods and services.
FTD lists the following entities as holding 5% or more of the Debtors’ publicly traded equity:
- Nantahala Capital Management, LLC (14.0%)
- Travertine Creek, Inc. (12.0%)
- Diamond Investment Group, LLC (12.0%)
- FTD 50 LLC (12.0%)
- Dimensional Fund Advisors (7.7%)
- Mauricio Jaramillo (5.1%)
About the Debtors
Tracing their origins back over 100 years, the Debtors are a premier floral and gifting company with an international presence providing floral, specialty foods, gift, and related products and services to consumers, retail florists, and other retail locations and companies in need of floral and gifting solutions. The Debtors operate primarily in the United States and Canada; however, they have a worldwide presence and their Mercury Man® logo is displayed in over 30,000 floral shops in more than 125 countries. The Debtors' diversified portfolio of brands also includes ProFlowers®, Shari's Berries®, Personal Creations®, Gifts.com™, and ProPlants®. In addition to floral arrangements and plants, which are the Debtors' primary offerings, the Debtors also market and sell gift items, including gourmet dipped berries and other specialty foods, personalized gifts, gift baskets, and other gifting products. The bedrock of the Debtors' business is their vast global network of retail florists.
Read more Bankruptcy News