Ailing Retailer Spells Trouble For Trimaran

After sitting on the auction block in 2007, struggling retailer Fortunoff Fine Jewelry and Silverware is finally due to be sold—out of bankruptcy. The company filed for Chapter 11 last month, wiping out a nearly $60 million equity investment made by Trimaran Capital Partners and retail investment shop Kier Group Holdings in 2005.

The Uniondale, N.Y.-based company was scheduled to go on the bankruptcy auction block on Feb. 26 (after Buyouts went to press). The leading contender to take control of the jewelry chain is NRDC Equity Partners, which agreed in early February to buy the company out of bankruptcy for $80 million. Judge James Peck of the Southern District of New York approved the deal in mid-February, barring higher offers at auction. The judge denied NRDC Equity’s request to set a break-up fee if a higher bid emerges, according to Bloomberg News.

Trimaran Capital, a mid-market firm focused on retail companies, paid for Fortunoff with money from its $543 billion second fund, which closed in 2001. After an aborted effort in 2004, the firm last year began marketing a successor fund, with a target between $750 million to $1 billion. Trimaran Capital declined to comment.

NRDC Equity, a retail specialist, owns the Lord & Taylor department store chain and plans to cross-sell Fortunoff’s luxury goods at those stores. In fact, NRDC Equity began circling Fortunoff last year. The company sat on the block for months last summer, and NRDC Equity made plans in the fall to buy and revive the business without having it go through the bankruptcy process, a source close to NRDC Equity told Buyouts.

Disappointing holiday sales, however, made the Chapter 11 filing inevitable. The company simply stopped paying its bills at the beginning of 2008 and lost out on a recent bid to refinance its debt, according to a trade report. The company filed for bankruptcy on Feb. 3.

LBO shops typically have mixed views on buying companies out of bankruptcy. While NRDC Equity can scoop the company up for cheap, the firm wanted to avoid a bankruptcy filing because it requires an auction, according to our source close to the firm. Even though companies commonly enter Chapter 11 with buyers in place, formal auctions are required, the source explained. In this case, open bidding could very well produce rival offers from several parties that expressed interest in the company last summer, when Trimaran Capital and Kier Group informally shopped Fortunoff, our source said. Bankruptcy auctions often bring skittish bidders back to the table, since the process can force landlords, contractors and other interested parties to resolve disputes.

On the other hand, filing for bankruptcy with a buyer in place has the advantage of sending a message of confidence to vendors and employees that the business won’t liquidate. NRDC Equity has no plans to close any of Fortunoff’s 20-some stores and may embark on an expansion program for the company, the source close to the firm said.

Fortunoff’s demise started well before the latest economic downturn. Warning signs were already going off in 2005 when the Fortunoff family sold 75 percent of the retail chain to Trimaran Capital and Kier Group. The two firms outbid Apollo Management for the right to turn the company around. The transaction was valued at between $250 million and $280 million, according to reports. In addition to their $59.6 million equity commitment, Trimaran Capital and Kier Group contributed a $12.8 million secured loan, a source familiar with the deal told Buyouts.

However, Trimaran Capital “never got the chance” to turn Fortunoff around because the bottom fell out of Fortunoff’s market before the resuscitation plan could take hold, according to a second source familiar with the deal. “As soon as positive things started happening, the overwhelming environment turned bad for jewelry and house wares,” our source said.

NRDC Equity, which declined to comment, is a joint venture between professionals at Apollo Real Estate Advisors and its parent company, National Realty & Development Corp.—E.G.