Kingswood Capital Management won the bidding for MEC; can it win over skeptical MEC loyalists?

The outside of a Mountain Equipment Co-Op is seen in North Vancouver, Monday, Dec. 9, 2017. Mountain Equipment Co-op has appointed a Best Buy Canada executive to head the outdoor gear retailer. The Canadian Press/Jonathan Hayward

VANCOUVER — Though it had been public about its financial struggles during the COVID-19 pandemic, the Vancouver-based outdoor retail co-operative MEC surprised its members last week when it announced a deal that would see it taken over by an American private equity firm. 

MEC’s board said it chose little-known Kingswood Capital Management for its commitment to the co-op’s ethos and its promise to keep most stores open. That hasn’t prevented the firm from facing the wrath of MEC loyalists who want the co-op model to stay intact—and who are suspicious of the retailer’s future under private ownership.

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Talking Point

The private equity firm gearing up to take MEC private is a relatively small newcomer. Alex Wolf founded Kingswood Capital Management in 2013, after leaving a big player with an “aggressive” reputation, and recently raised US$160 million to fund acquisitions of struggling businesses. While opposition to the deal continues to bubble from MEC’s loyal membership base, industry watchers say it’s not surprising to see a firm like Kingswood emerge as the winning bidder and their turnaround plan could succeed.

MEC’s board unanimously backed Kingswood’s proposal after it exhausted efforts to refinance the co-op and undertook what it called an “extensive and properly canvassed” search for a buyer. Of the four bids that resulted, the board and its advisers chose the one from the Los Angeles-based private equity firm, filing for creditor protection as part of the sale process.

Kingswood—which has created a Canadian affiliate, run by the man preparing to assume MEC’s chief executive role, Eric Claus—“values MEC for what it is, and their commitment to our philosophy has been evident since our very first interactions with them,” said MEC board chair Judi Richardson in a statement emailed to The Logic.

A subsequent statement to The Logic from MEC’s board of directors said the firm “brings relevant industry relationships and a broad network of internal and external operating resources that can strengthen the businesses it partners with and enhance value.”

Alexander Wolf founded Kingswood in 2013. Most of its now-eight-person team arrived in August 2019 or later, according to current employees’ LinkedIn profiles.

Wolf declined The Logic’s interview request “upon receiving advice that doing so would run afoul of SEC restrictions” that “relate to public discussions around Kingswood.” 

In an earlier email to The Logic, he said, “We at Kingswood believe the business has a ton of potential and are very excited about the future of MEC.”

In its roughly seven years, Kingswood has acquired four other companies. In July 2016, it acquired Avad, an American distributor of audio-video equipment, and its Canadian subsidiary. About a year and a half later, Kingswood privatized Versar, a public project-management firm. Next came AutoAnything, a California-based e-commerce platform for auto performance parts and accessories, in early 2018. Most recently, Kingswood acquired Texas-based Wave Electronics in October 2018 and merged it with Avad.

Kingswood also planned to add Florida-based discount retailer Stein Mart to its portfolio. Though the company entered into an agreement with Kingswood in January, the deal fell through in April due to what both companies called “unpredictable economic conditions resulting from the global health crisis caused by” COVID-19. Stein Mart has since filed for Chapter 11 bankruptcy.

While Kingswood is a relatively small newcomer to the world of private equity, it makes sense a firm of its size and scope would make the winning bid for MEC, said Gustavo Schwed, a clinical professor of finance at New York University’s Stern School of Business.

“This is a small deal,” he said, noting it would be too small for larger firms like Onex, KKR or Blackstone.

Financial details have not been disclosed, but Kingswood searches for deals of up to US$75 million, according to investment criteria.

Since its last completed acquisition, Kingswood has raised about US$160 million in funding, according to a U.S. Securities and Exchange Commission filing in August. CalPERS, America’s largest public pension fund, committed around US$34.7 million in 2019 through a fund managed by GCM Grosvenor.

Kingswood’s fund is smaller than the median buyout fund in terms of staff, but not by much, said Alexander Dyck, a finance professor at the University of Toronto’s Rotman School of Management. In 2010, the median mid-market buyout fund had five partners and 13 professionals, he told The Logic in an emailed statement, citing an academic study.

As far as the money Kingswood has raised, “they likely will raise debt capital if needed,” he said.

Incoming MEC CEO Claus said a fund’s size can change since its last public filing, and that what’s important is Kingswood had enough funds to complete the acquisition. 

He sees Kingswood’s relatively small size as “a good thing” compared to giant private equity firms that have “so many transactions they kind of look at things like rounding errors.”

For Kingswood, “it’s a big transaction. They’re very serious,” he said in an interview with The Logic.

The inside of a Mountain Equipment Co-Op is seen in North Vancouver in Dec. 2017. The Canadian Press/Jonathan Hayward

Wolf did get his start at one of private equity’s giants. Before Kingswood, he spent the bulk of his career at Cerberus Capital Management, the New York-based private equity firm co-founded by Steve Feinberg and William L. Richter, where he worked as managing director and partner from 2001 to 2012. At Cerberus, Wolf “led or co-led the acquisitions of companies from global Fortune 500 corporations, entrepreneurs and the public equity markets,” according to his Kingswood corporate biography.

Cerberus’s reputation is “aggressive,” said Schwed, adding it sits on the sharp end of an already sharp industry.

In 2007, the firm acquired U.S. gunmaker Remington Arms. Despite once strong sales, Remington faced bankruptcy after Cerberus saddled it with hundreds of millions of dollars in debts it could not pay back, reported The New York Times. (A lawsuit from the families of victims of a mass shooting at Sandy Hook Elementary School in Newtown, Conn. added to the company’s money woes. Schwed said a sudden downturn in gun sales after U.S. President Donald Trump won the election in 2016 also worked against it.)

Cerberus also once held Anchor Hocking, Anchor Glass and NewPage—all with poor results. In 2004, Cerberus acquired Anchor Hocking and two other brands, turning them into a new entity called Global Home Products. That business filed for Chapter 11 bankruptcy in 2006. The book Glass House later explored how private equity helped shatter the American town where the company manufactured products. Anchor Glass also filed for bankruptcy, as did NewPage.

However, Schwed said, “you can’t cherry pick some of the bad deals” in evaluating Cerberus, adding the company also had a lot of successful ventures. While Wolf served on the boards of NewPage and Anchor Glass while at Cerberus, Schwed warned against drawing inferences about him from the track record of his previous employer. “It all depends on whether the guy is a good investor or not,” said Schwed.

Claus, a veteran retail executive, first started speaking to Wolf about four years ago, when Wolf sought his advice on a possible deal. Over the years, Wolf brought five potential acquisitions to Claus, including MEC (the others Claus described as being “essentially” U.S. retailers). He advised against all but MEC.

“I didn’t believe that the companies had the ability to turn around, or that the amounts of money, energy, resources that would be required to turn them around would not make financial sense in any foreseeable future,” Claus said.

With MEC, he and Kingswood believe their turnaround plan—a focus on downsizing some of its store count, enhancing e-commerce, and addressing product assortment and production—can work.

Schwed said it sounds like a plausible strategy. While one potential concern with private-equity acquisitions is that the investors will liquidate a company’s assets and wind it down, Schwed said it’s unlikely to happen in this case, as MEC doesn’t have much to liquidate.

Inventory makes up about $108.5 million of the company’s current assets, which total nearly $389 million, according to court documents. Property, equipment and intangibles add roughly another $275 million. MEC has lease agreements on 18 of its retail stores, as well as a distribution centre, its Vancouver head office and a permanently closed Montreal store, according to court documents. MEC owns the property at six stores and one distribution centre.

Nonetheless, public pressure against the deal continues to build.

A crowdfunding campaign raised more than $80,000 in several days to cover legal fees for a group calling themselves Save MEC that retained legal counsel in an effort to intervene in upcoming creditor-protection proceedings. Their petition has garnered more than 100,000 signatures.

Kingswood understands members’ concerns about the sale, it said in an open letter released Monday evening.

It assured members it planned to focus on stores, product assortment and development, and improving online shopping. Kingswood teased the possibility of a “special loyalty program” that would “treat our customers like the co-op members [they] have been.”

“We are eager to get started putting our vision into action, and to breathing new life into one of Canada’s most trusted brands,” ended the statement, attributed to Claus and Wolf.

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Kingswood’s bid presented “the highest consideration” and reflected “the lowest closing risks,” according to documents MEC filed in court. The firm also committed to retaining at least 75 per cent of MEC’s active employees and assuming the leases of at least 17 of the co-op’s 22 stores. MEC’s sale agreement with Kingswood “will repay the Lenders in full” and leave additional money for other costs.

The question of whether Wolf and Claus will succeed in turning the retailer around “has more to do with the competitive situation it faces in the Canadian market than anything else,” Schwed said.

Competitors spending aggressively or consumers turning to Amazon, for example, for goods they would otherwise buy at MEC could be problems, he said. It comes down to market conditions, and whether Kingswood and Claus can execute their plan.

Schwed thinks Kingswood’s goal is likely a sale in about five years, or an initial public offering—much like anyone following the private equity playbook.

“The worst-case scenario is that [MEC] ends up where it started,” he said, referencing the company’s current state in creditor protection, “and the only loser there is going to be Kingswood.”