A Pre-Nup to Discourage Private Equity Companies From Asset Stripping

In one of the largest settlements by creditors against private equity (or PE) companies, Cerberus Capital, Sun Capital Partners and Lubert-Adler/Klaff have agreed to pay $166 million to vendors of bankrupt department store chain Mervyn's. The proposed settlement will prove even costlier to the PE firms when settlement terms force them to withdraw their own financial claims against the Mervyn's bankruptcy estate.

When the leveraged buyout that carved Mervyn's out of retailer Target was consummated in 2004, Mervyn's brought 30,000 employees and 257 stores to the altar. The PE consortium brought $400 million in equity and borrowed another $800 million using Mervyn's real estate as collateral, all of which went to Mervyn's parent company, Target. The private equity group formed Mervyn's Holdings to operate the department store business, and transferred Mervyn's valuable real estate assets to MDS Realty. Mervyn's received no compensation for these assets and no residual interest in the property. <Read more>