Professional Documents
Culture Documents
17,^,r
Southland C orporat ion :
From Profitability to Financial
Distress to Profitability
Case Summaryt This case follows Southland Corp. from its prosperous times in tla 1980s
its leveraged buyout in 1987 and its subsequentfinancial distress and banktuptcy in
1990. Southlandwent through typical stages in the banlauptcy process.Itfirst tried to negotiate a settlement with its creditors in the spring of 1990. When that failed, it presented a
prepaclcaged reorganization plan to the banlcuptcy court. The plan wos approved again
by shareholders and by the court. The reorganization substantially reduced the interest
burden that was hampering Southland. As of mid-1993, the company appears to be climbing back to profitabiliry under its new lapanese owners.
to
ll
49
Case
Southland CorPoration
COMPETITIONHEATSUPANDTHEBUSINESSSUFFERS
the october
The first bad news event-and one beyond Southland's control-was
junk bond
raise
to
ability
Southland's
on
impact
1987 stock market crash. This had a serious
after the
rates
coupon
l5Vo-187o
at
expensive
prohibitively
debt, which became almost
the
short-term
pay
back
to
debt
high-yield
the
proceeds
of
Southland needed the
crash.
purchases of
The Belzberg family of Canada had begun an attempt to uke over the firm by making large
page
65.
on
case
Industries
World
Armstrong
Southlaid stock. Foi *o." ubout Belzberg operations, see the
2 A leveraged buyout (LBO), one kind of a "going privai.e'r transaction, refers to a small group of investors
the stock off the
buying all of a.ompany's stock, with the purchase f-rnanced almost entirely by debt. This takes
1
public market.
SowhlandCorporation
Exhibit
Southland Corporation
Income Statement
(in thousands)
Revenues
Expenses
Depreciation
Net operating income
Interest
Other non-cash
1992
1991
1990
1989
$7326,000
180.000
200.000
$8,348,000
8,017,500
207.000
$827sOoo
7,197,350
$8,010,000
7,530,710
49,650
n9,294
123,500
3t2,250
t23,650
189,290
459,500
572,250
45,000
1s6000
11,000
7,732,754
230.000
93,000
1,003,000
8,000
-128,000
-12,000
-131,000
-74,000
-301,000
-1,251,000
-$0.32
-$0.22
-$15.14
-$6.48
Number of shares
409,3'75
336,364
19,891
193,056
$3.0625
$1.9375
(r2l3r)
(r2t3t)
charges
I axes
Net income
51
52
Case
Southland CorPoration
Revenues
Expenses
Depreciation
Net operating income
Interest
Other non-cash
charges
Taxes
Netincome
Earnings Per share ',
Number of shares
Stock price
(NYSE)
1988
(Successor)
1981
(Predecessor)
1987
1986
$7,950,000
7,397,890
247.000
$3,211,000
3,16a308
92.000
$4,865,00
$8,578,000
8,086,715
4,584,920
114.000
186.000
66,080
45,080
305,285
59,285
46,000
200,000
305,110
43308
560,n0
163,515
70,840
14,L77
-110,000
-216,000
-71,000
-150,000
31.000
90,000
-$r.22
-$0.75
$1.42
$3.96
t71,U9
200,000
63,380
50,505
s76.25
oRr)
$67.125
(rztrs)
-SoahlandCorporation
198s
1984
1983
$12,719,000
12,197,960
187.000
344,040
51,040
$12,035,000
11,575300
r65.000
294,600
122,600
$8,772,000
70,000
12,000
54,000
213,000
160,000
132,000
$4.41
$3.41
$3.26
Number of shares
48,299
4692r
40,49r
Revenues
Expenses
Depreciation
Net operating income
Interest
Ottrer non-cash
charges
Taxes
Net income
8,367,725
145.000
259,275
73,275
53
.-1
54
Case
Southland CorPoration
Southland CorPoration
Balance Sheet
(in thousands)
1992
L99L
1990
1989
(est.)
$351,000
$640,000
$635,903
$769,57s
Plant, property,
and equiPment
Other assets
1,356,000
338.000
$2,045,000
1,7r5,501
447.638
$2,799,042
1,555,700
Total assets
1,592,000
380.000
$2,612,000
$770,000
$4298,119
2,874,000
142,315
182.536
Curent
assets
Current liabilities
Long-term debt
Other liabilities
Total liabilities
$765,000
2,408,000
19r.000
$3,364,000
179.000
$3,823,000
$i,319,000
-$1,211,000
$4,662,970
331.000
$2,656,275
$827,500
3,815,000
28 r.350
$4,923,8s0
Preferred stock
Common equity
-$1,823,928 -$2,267,575
SouthlardCorporation
Currenl assets
Plant, property
and equipment
Other assets
Total assets
1988
(est.)
(Successor)
1987
(est.)
(Predecessor)
1987
(est.)
1986
$739,350
$298,623
$452,445
$?46311
1,494,600
318.000
$2,551,950
603,668
128.440
9L4,620
2272,624
194.600
351.653
$1,030,731
$1,561,665
$3321,088
Current liabilities
$795,000
$312,100
Long-term debt
Other liabilities
Total liabilities
1,090,100
109-174
$486,500
300,533
165.410
$952,541
3,735,133
$r,520,374
$952443
$t.7s32s7
125,000
125,000
$1,542,831
270.300
$3,615,300
Preferred stock
Common equity
Current assets
Plant, property
and equipmert
Other assets
Total assets
Current liabilities
Long-term debt
Other liabilities
Total liabilities
Preferred stock
Common equity
-$1,063,350
-$489,643
$484,222
1985
1984
1983
$646,828
$1,393,384
$1,584,886
1,722A96
864.194
r,589,924
t,8t5,974
130.414
134.U5
$3,233,518
$3,339,772
$3,309,455
$1,038,409
575,586
122.700
$t,r37 263
856,646
150.176
r,125,&3
$1,736,695
$2,144O85
$2,234,493
$1,195,687
$r,074,962
1,002,031
106.819
125,000
$1,371,823
639196
161220
55
56
CaseS SoahlandCorPoration
to CCC. (The bonds eventually received D ratings.) Company auditors said they
com"r"d
doubted ttrat southland had the ability to conlinue as a going business. The Japanese
of
757o
to
buy
agreed
Ltd.,
Japan
of
7-Eleven
pany lto-Yokado, Ltd., a majority owner
pur- "
Southland's shares for a desierately needed infusion of new capital.3 As part of the
lighten its debt load. '
chase agreement, Southland needed to negotiate with its bondholders to
BondhJlders were offered zsro coupon securities and common stock in exchange for their
high coupon bonds. Bondholders would own lOgo of the proposed restructured Southland, as would the ThomPson familY.
Bondholders criticized the offer as "too little, too late," indicating that ttre plan favored
equityholders at their expense. One analyst said ttrat liquidation would net more than twice
thl piesent value of the-bonds. Another said, "They're asking bondholders to take a huge
.ffi'&*HTIffJff
;::i$:1"?#iil:"fJ3:
[##::',lffi ;;'#;;ff Hiifl f mortgage
on
those assets,
Southland's assets declined in value. The bodholders owned a
with the
Even
bonds.
the
value
of
did
the
so
had
declined,
but since rhe underlying value
the
profitable
until
become
to
not
expect
did
the
company
proposed restructuring of debt,
spendits
capital
resEicted
debt
of
large
amount
the
that
LnO of 1993. Southland conrended
ing and left it wlnerable to cornpetition'
7-Eleven Japan was Southland's first. international 7-Eleven licensee in 1973. It is also the largest licensee and
largest convenience store operaLor in Japan, with about 4,000 stores. 7-Eleven Japan purchased Southland s Hawaiis widely
ian-stores in 1989. Ito'yokado owns a 50.37o interest in 7-Eleven Japan, while the remainder of the stock
3
held.7-ElevenJapanexperiencedhighprofitabilityduringtheperodo[t}riscase.a Cal Mankowski,;'Talking Point-southland Bondholders," Reuters News Service, March 23' 1990.
5 "southland Says Bankruptcy Possible Alter Huge Loss," Reuters News Service, April 3, 1990.
SonthlandCorporation
57
PREPACKAGED PLAN
In July, Southland, is bondholder committee,6 and lto-Yokado announced that they
agreed to the restructuring plan. In what may have been a move to cover all the bases, at
the same time Southland asked'bondholders to embrace its proposed exchange terms,
which needed to be acceptedby 957o ofbondholders and two-thirds ofpreferred share-
i;i""ff
tance. If the prepackaged plan was subsequently accepted by banlauptcy court, then it
would be binding on all securityholders. Southland estimated that a prepackaged reorganization plan would be approved within six months, whereas a raditional Chapter 11 proceeding might take several years to complete.
Southland did indeed fail to get the supermajority it needed,T and in October 1990, it
officially filed for protection under Chapter 11. The company simultaneously filed the
prepackaged bankuptcy plan with the court, because it did receive the required two-thirds
acceptance by creditors. The prepackaged plan was the first. ever filed by a major retailer.
A syndicate of lenders offered $400 million in debtor in possession (DIP) financing for use
as working capital. Southland planned to continue business as usual during the banlauprcy
proceedings, which began December 14, 1990.
A PLAN IS APPROVED
Bankruptcy judge Harold Abramson dismissed Southland's prepackaged plan and
required a new vote on the plan, despite the previously gained two-thirds majority. Creditors objected to the Thompson family retaining a 5Vo equity stake in the company, and they
were allowed to circulate details of their objections to securityholders. Judge Abramson was
quoted as saying, "We're now in bankruptcy and I want to follow the bankruptcy code."8
A month later the count was in, and securityholders overwhelmingly accepted the reorganization plan, which was in Lum confirmed by the banlruptcy court. This eleared the way
for Southland's relatively quick emergence from Chapter 11 and for a purchase of its
stock by Ito-Yokado. Southland's chief financial officer (CFO), Clark Matthews, said:
'
tantly, a siz-eable cash infusion'from new majority owners who share both our
-7
The exchange offer was acccptablc to 897o o[ the bondholders, holding 801o of t]re debt, shy of he 957o
required, and to 90Vo of the preferred stockholders, where a two-thirds majority was needed.
8 Lynne Richardson, "Soutlrland Debtholders Agree on Reorganization PIan," Reuters News Service,lanauy 24,
1991.
58
Case
SouthlandCorPoration
;;;;t
cro
QUESTIONS
exceed i1s assets, or when its
1. A firm becomes financially distressed when its liabilities
used !o dqtermine the point of financash flow is negative. Usually market value numbers are
liabiliries exceeded its assets
cial disress. Uie book ualues to determine when Southland's
look at noncash items in
im cash flows became negative. (l'{ote that you need to
and when
net income')
the income statement, as well as add depreciation back to
particular, look at Southland's cur2. What does ratio analysis show about Southland? In
and cash flow from
rent ratio, times interest earned, return on equity, return on assets
ratio
to plot these ratios over time and look for Uends' The current
operations. it is useful
..Court Confirms Southland's Reorganization Plan;" B usiness Wire, Febrmry 2l , 1991 '
I
t:l
l'
';'- ?
SouthlatdCorPoration
59
is u *ryq= of how well a.comis (cunent assets)/(cunent liabilities). Times interest earned.
(net profit before taxes + interpury .u" meet its interest payments and is defined as
*tq*V
i"t"et
expenses
manage-