There has been a lot of hot air blown in the past couple of weeks regarding Kanye West and Dame Dash being interested in buying the troubled e-commerce retailer Karmaloop. The two made a series of Instagram posts where they described with some bluster how they were purchasing the company.
“We just about to do some new shit, you know, stick together culturally — take over the world and create a whole new industry and just play the game fair,” said Dash. He went on to say, “…we linking up and we decided to buy Karmaloop — we just talked about it, it’s gonna happen. And a couple of other cool things — we ain’t doin’ no music unless that’s for fun. Only big baller stuff.” Furthermore, “[We’re] not doing any bubblegum shit, and I hope the whole world sees this and wants to do the same thing.”
But before everyone starts celebrating the arrival of “Kanye-loop,” we should look further into the details. What we find is that, although their zeal is admirable, Dash may have spoken a bit too soon, as no deal has been made; the company is actually in the process of looking for bidders for an auction. Taking over the world, Mr. Dash, may come with some challenges, and to borrow a phrase from John Lennon, “Instant Karmaloop may knock you right in the head.”
Greg Selkoe, the founder of Karmaloop, was somewhat less forward regarding the matter, saying to the Boston Business Journal that “Kanye and Dame are among several people we’ve spoken with about Karmaloop. We’re having a lot of conversations and seeing intense interest in our brand.”
So what’s actually going on behind the veil of celebrity and empire building? Let’s look at the who, what, where, when and why.
We know some of the who part already. West and Dash have announced themselves as interested parties. Greg Selkoe, along with his wife Dina Selkoe, are the founders of Karmaloop, having started it in 2000. Bidders will include a group of the senior lenders of Karmaloop, including Comvest Partners. They are among the largest of some 10-25k creditors, according to the bankruptcy petition.
The what of the auction is simply that it is to be held. Comvest intends to make the initial bid–known as the “stalking horse” bid–fairly low in order to stimulate further bid making. According to court filings, that number will be $13 million. The next bid after that will be no less than $250 thousand, with further bids being no less than an additional $100 thousand each.
The where and the when have been determined to be:
From Motion to Approve Bid Procedures, IV.8.d.
The why centers around some $40 million in debt that the company took on from 2011 to 2013 when they attempted to expand by opening business divisions Monark Box, Boylston Trading, Miss KL, and KarmaloopTV, all of which have been shuttered. Their total debt and equity financing from outside companies is approximately $70 million, with the bankruptcy petition listing total liabilities of between $100 and $500 million and assets of significantly less at between $10 and $50 million. The upside here is that Comvest has offered to convert its debt into stock in the reorganized company, which should greatly ease the debt burden.
Further easing the burdens of the company is the fact that Karmaloop will be conducting its sale under section 363(f) of the chapter 11 bankruptcy code. During a bankruptcy, the company can attempt to sell its assets (which are described in the Asset Purchase Agreement in the Exhibit B PDF, which is attached) “free and clear” of any liens, claims, interests and encumbrances–leaving the creditors to take home only what they can get in sale proceeds, in accordance with their status per bankruptcy priority rules. Less harshly, the bankrupt entity can offer creditors new terms that could ultimately yield them more by becoming a lender in the reorganized company (“forced” to take on new terms is undoubtedly how some would regard this). To be able to qualify for this ability, the bankrupt entity has to pass one of five tests, which Karmaloop believes it does, and thus it is looking to adjust the credit terms of its lien holders during the sale. The filings describe it as follows:
Here, to the extent the Sale is implemented, the Debtors will demonstrate at the Sale Hearing (to the extent necessary) that one or more of the tests of section 363(f) are satisfied with respect to the Sale. In the first instance, the Debtors have no reason to believe that holders of Liens would not consent to the terms of the Sale pursuant to section 363(f)(2) of the Bankruptcy Code. In addition, the Debtors believe that all holders of Liens could be compelled to accept a money satisfaction of their interests in legal or equitable proceedings in accordance with section 363(f)(5) of the Bankruptcy Code, to the extent that such interests are sought to be discharged in the order approving the relief sought in this motion. Accordingly, the Debtors submit that any Liens will attach to the net proceeds (if any) recognized at the Sale.
The bottom line is this: here we have a company which has some 4 million unique monthly visitors, and which had some $160 million in revenue in 2014. Karmaloop was a growth story to begin with, and retailers’ margins in general are fairly thin. (For comparison, Gap has ~7% profit margins, Urban Outfitters has ~7, American Eagle has ~3%.) There are a lot of interesting dynamics going on here, and a new entity could potentially prosper by focusing on the core business unit. Unencumbered by burdens of its failed ventures, it could get a breath of new life, something which all the interested parties—including Selkoe, Comvest, and potentially “Com-West”—would be happy to see.
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