Re: Stephen Cooper's strategy by: zipperdydoodah (84/F) 06/19/05 06:26 pm Msg: 145626 of 145675
Cooperscraft: You are of course right. The leverage that the franchisees have over KKD is that KKD misled them with false sales numbers and the like.
But KKD's response would be "so sue me - I can't pay. My debt covenants demand that have to file bankruptcy rather than pay".
This is really a battle between creditors of insolvent entities. The creditor of KKD is Silverpoint - and they call the shots. If you have not noticed the owners of KKD (ie long shareholders) do not call the shots.
The creditors of the insolvent franchisees are banks, GE Capital and KKD. The owners of the franchisees still call the shots. (I do not see GE Capital exerting control and as for the banks being that organised...)
If you were a sensible GE Capital at this point you would (a) call all the breaches of covenants on the franchisees and (b) expect KKD to pay. When this does not happen you file involuntary bankruptcy for KKD, all the franchisees and then GE capital winds up in a position to pick-and-chose the stores. But GE Capital will not behave in this way. The other banks have less incentive (or detailed knowledge) because with the exception of BB&T most banking groups are bankers for only one franchisee and BB&T is not the banker for many.
So the franchisee does as best he can. He withholds payment to KDD and he pays himself what he can - and he waits. His position is weak but then so is KKD's as there has to be a cash-bleed going on at the mothership. This is the negotiating positions of weaklings. And if you are a weakling you don't want to telegraph how weak you are to everyone - and hence KKD does not file financial statements and nobody else is talking.
I personally think that Silverpoint will be stuffed here. I do not think there is 100 stores making $200K per year (after management expenses) to make this thing worth $200 million. And it needs to be worth $200 million for Silverpoint to make anything like a reasonable return. (KKD bulls think its going to wind up more like 200 stores making $400K - in which case SP will make out like bandits and even bankruptcy would not be inevitable - but still in the interest of SP.)
But that is not the point. Unless KKD can fold up all the stores and Silverpoint gets the chance to pick and chose amongst all the stores then there is NO CHANCE that they will find 100 good stores - and hence there is no chance that Silverpoint will come out whole.
As to Diversify's question - yes there are offers on the board to the franchisees - but I am not privy to quantum or details of each offer. The franchisees are made to sign non-disclosure clauses - so the offer is not as blatant as "take-it-or-leave-it". And there is no point asking a franchisee anything unless you can convince them to breach their non-disclosure clause. (Besides - as both sides are weaklings it is not in anybody's interest to disclose their weakness.)
Zip I say
Oh - and for those longs - if Silverpoint really thought it likely that the common shares would survive they would have negotiated a convertible upside into their debt. KKD was weak enough that they would have given Silverpoint (really the only lender) a convertible. That Silverpoint did not want a convertible says it all... SP intended from inception to "take control through Chapter 11".)