JC Penney Gains on Prospects for Change

NEW YORK ( TheDeal) -- J.C. Penney Co. ( JCP) may have rid itself of its former chief executive Ron Johnson in the nick of time.

Though Johnson successfully enticed crowds to Apple Inc.'s sleek stores, he failed at J.C. Penney where customers wanted less of beautifully designed interiors and more of their dearly beloved coupons. As vendors tighten credit -- a sign that can auger bankruptcy -- Johnson's replacement Myron "Mike" Ullman has been summoned back to company after being shunted for Johnson in November 2011.

"It's too early to share next steps, but Mike Ullman plans to immediately engage with the Company's stakeholders, including a range of audiences -- customers, team members, suppliers, real estate, business partners, shareholders, etc. -- to analyze the Company's situation,'' said Joseph Thomas, a J.C. Penney spokesman, in an e-mail. "He will then develop a plan to improve performance moving forward."

J.C. Penney gained 2.3% to $14.41 in mid-morning activity. Shares plunged 12 percent on Tuesday, the first day of trading following the CEO switch.

While Thomas was touting Ullman's engagement with stakeholders, what he declined to say when asked was whether the company was considering hiring an accounting firm to conduct a cash flow assessment or a financial adviser to assist with a restructuring, or if J.C. Penney might sell off assets such as real estate, or even seek reorganization through a Chapter 11 bankruptcy filing.

Yet an industry source who specializes in retail restructurings and turnarounds said there is enough capacity on J.C. Penney's revolving credit facility to provide the retailer with the needed resources to keep the operation afloat.

The company could also consider selling some of its real estate, which includes more than 400 department store locations it owns, though the source ruled out converting real estate into a REIT. A successful REIT requires a top-notch credit rating, the source added, which J.C. Penney lacks.

What J.C. Penney will mostly strive its utmost to do is to avoid a Chapter 11 bankruptcy filing, however. One reason is the likely opposition of backer Bill Ackman, whose Pershing Square Capital Management LP has a nearly 18% stake in the retailer, although the hedge fund manager's star is likely on the descent since he brought Johnson on as CEO.

Another problem for a Chapter 11 reorganization is history. From housewares seller Linens Holding Co. to department store Mervyn's Holdings LLC, to bookseller Borders Group Inc., to electronics retailer Circuit City Stores Inc., bankruptcy files are littered with retailers that went into bankruptcy reorganizations hoping to emerge as stronger companies, but didn't make it.

That's also because, an industry source said, in an asset-rich situation such as J.C. Penney, creditors are more likely to push for liquidation to make sure they get their money back, rather to wait through the normal debt-for-equity swap that tends to accompany reorganization.

But if there is a white knight private equity buyer out there -- Apollo Global Management LLC and Leonard Green & Partners LP were names reported previously to The Deal as being interested -- J.C. Penney's stock price has farther to fall to get private equity interested. Buyout firms wouldn't consider a buyout of J.C. Penney until the stock reached about $5 per share -- the company currently trades at close to $14 per share, a source calculated.

But once J.C. Penney has troughed at that stock price, there is enough value in its brand name and real estate, as well as some of the brands it owns such as Liz Claiborne that it has acquired, for an acquisition to make sense, the source added.

As for Ullman, apparently J.C. Penney approached other candidates before offering him his old job back. Attracting a CEO is difficult for the company, someone familiar with the search process said, not only because of a dearth of available candidates and talent, but also because it doesn't have much cash for implementing new ideas, let alone offer a prospective CEO a lucrative benefits package and salary.

After all, J.C. Penney's board had already slashed Johnson's salary by 97% before they decided to part with him for good.

-- Written by Richard Collings in New York