By Thomas J. Ryan

Performance Sports Group Ltd., (PSG) the parent of Bauer, on October 31 filed for bankruptcy protection in the U.S. and Canada with a goal of completing a sale by February.

The company, which also makes baseball bats, lacrosse sticks and other sports equipment under the Easton, Maverik, Mission, Cascade, Inaria and Combat names, already has a deal in place to sell nearly all of its assets for $575 million to an investor group led by Sagard Capital, its biggest shareholder, and Fairfax Financial Holdings Ltd. The investors will serve as the “stalking horse” bidder for an expected auction as part of bankruptcy court proceedings. Stalking horse bids typically represent a minimum opening price offered by existing shareholders in the business to prevent bargain-basement bids, but also serve to regain control of the company under similar ownership for an affordable price. One other possible bidder for the company is former PSG Chairman Graeme Roustan, who told Reuters in August that he was working with investment banks to explore a bid for the company.

PSG also announced that it had overhauled much of its management team. President Amir Rosenthal and Todd Harman, EVP Baseball/Softball, left the company on October 28. Dan Sills was named EVP, hockey, and Mike Thorne was appointed EVP, baseball/softball. Jennifer Hughey was named SVP, supply chain.

PSG had said in August it may have to file for bankruptcy as it faced a deadline to turn in its annual financial statements. At the time, Richards Kibbe & Orbe LLP and Alix Partners had been retained as independent legal counsel and financial advisor, respectively, to conduct an internal investigation in relation to the finalization of the company’s annual audited results. While the company’s audit committee and its advisors have advanced the investigation, it remains uncertain when it will be completed, PSG officials said.

Shortly after the company announced in August that it was unable to file its annual results because of an internal investigation, it revealed it is under investigation by the U.S. Securities and Exchange Commission and a Canadian securities regulator.

The company obtained a 60-day extension through October 28, 2016 from its existing lenders to file its annual figures along with the company’s first-quarter filings. Performance Sports wrote in a statement, however, “In light of the fact that the investigation remains ongoing and the timing for finalizing the annual filings remains uncertain, the company was unable to deliver the requisite annual audited financial statements resulting in defaults under the existing loan agreements as of October 28, 2016.”

The missed deadline put the company at risk of defaulting on some debts.

Baseball And Hockey Struggles
The company has struggled over the last two years with debts absorbed to acquire Easton’s baseball and softball business for $330 million in 2014, as well as a downturn in its baseball and hockey businesses. Sales are expected to decline 10 percent in both the fourth quarter and fiscal year ended May 31.

The baseball/softball market in particular experienced a significant downturn in retail sales across all product categories, but particularly in the company’s important bat category. The baseball category was also significantly impacted by the Chapter 11 filing of Sports Authority and the bankruptcy of an internet baseball retailer, Team Express.

In hockey, the consolidations in the U.S. with the August 2016 acquisition by Pure Hockey of Total Hockey that followed Total Hockey’s acquisition in 2015 of Players Bench, as well as the bankruptcy of Total Hockey in July 2016, led to lower hockey orders as its retail customers focused on reducing their inventory levels. Finally, results throughout fiscal 2016 and fiscal 2017 to date have continued to be negatively impacted by foreign currency exchange rates, specifically the depreciation of the Canadian dollar and other world currencies relative to the U.S. dollar.

Attempts To Stay Afloat
The company said that it had attempted to mitigate many of these issues, including through cost savings, profitability improvement initiatives and corporate restructurings. In mid-June, PSG hired a new CEO, Harlan Kent, formerly of Yankee Candle, who went on to consolidate the company’s entire baseball/softball category under its existing Easton operations in Thousand Oaks, CA while closing two Combat brand facilities. In early August, PSG said it would reduce its workforce by 15 percent to support estimated annualized savings of $5.9 million.

But the ongoing challenges, coupled with the costs involved in completing the audit investigation, defending certain securities class action litigation and responding to regulatory investigations and inquiries led to significant liquidity and cash flow constraints.

On September 1, PSG confirmed that its board had formed a special committee of independent directors, which hired Centerview Partners as its independent financial adviser to assist “in the review and evaluation of strategic alternatives and in the company’s ongoing discussions with its lenders,” indicating that a sales process had started.

In its statement announcing the bankruptcy filing, Performance Sports said the Special Committee decided that absent the legal protection afforded with bankruptcy proceedings, the company’s cash flow position “would continue to deteriorate.” The companies planning the joint bid also committed to provide $386 million in debtor-in-possession (DIP_ financing. Pending court approval, the financing would allow PSG to continue operating without interruption.

Subject to approval of the courts, $25 million of the DIP financing is available to the company immediately, with the balance of the financing to be available upon the courts’ approval at a second hearing, expected to be held on or about November 30, 2016. The DIP financing is expected to be used to refinance its term loan credit agreement and fund day-to-day operations in the ordinary course of business. The joint bid from Sagard Capital and Fairfax Financial sets the floor, or minimum acceptable bid, for an auction under the supervision of the courts. PSG said the proceeds from the joint bid should be in excess of the company’s secured debt liability and expected to provide “meaningful recoveries” to the company’s other stakeholders.

“The agreement we have reached with Sagard Capital and Fairfax Financial is a testament to their confidence in the future of our business and all of our great brands,” Kent said. “We believe that pursuing a sale through a court supervised restructuring process represents the best path forward for our customers, vendors, retail and business partners, employees and other stakeholders. While the sale process is underway, our employees will remain focused on serving our customers and consumers and delivering our industry leading products and brands. Our on-hand inventories, and normal procurement activities to date, position us well to fulfill our customers’ orders. With new financing from Sagard Capital, Fairfax Financial and our lenders, we will have adequate liquidity to fund our ongoing operations.”

Paul Desmarais III , executive chairman of Sagard Capital, added, “Our plan provides financial stability to PSG to ensure that it can maintain operations and serve customers and retail partners throughout the court process. As long-term shareholders, our goal is to support PSG’s management in preserving and growing the value of PSG’s market-leading franchises to build a strong, successful business.”

Brookfield Asset Management Inc., Performance Sports’ second largest shareholder, last week indicated it was exploring a bid for the company. A source told The Wall Street Journal that Brookfield remains interested in supporting the Fairfax and Sagard bid, but hasn’t yet decided whether to join the takeover bid or lend money through the DIP loan. Brookfield and Sagard together own a 30 percent stake in the company.

The bankruptcy filing shows that the company’s largest unsecured creditors are many of its overseas suppliers. They include Strewn Worldwide Ltd., Taiwan, which owed $6.2 million; Sigma Global Company Ltd., Taiwan, $3.05 million; Growth Link Overseas Co. Ltd., Hong Kong, $2.78 million; Cortina Global Corp., Taiwan, $1.68 million; Prosperous International Ltd., Hong Kong, $1.08 million; Merry Might Co. Ltd., Taiwan, $1.05 million; Sinmax International Co. Ltd., Taiwan, $920,800; Inko Java, Indonesia, $408,787; and Ho Jeon Ltd., $377,745.

Among the unsecured creditors in the U.S., Sierra Pacific Constructors, a store design firm based in Woodland Hills, CA, was owed $2.5 million. Roustan, who was chairman from April 2008 to September 2012 and remains a significant shareholder, has been particularly vocal about PSG’s move to open Own The Moment Hockey Experience stores and their potential negative impact on existing wholesale sales. In 2015, he threatened to orchestrate a proxy challenge to secure a board seat over the issue and the company’s overall poor performance. In 2008, Roustan partnered with Kohlberg & Company to acquire Bauer Hockey from Nike Inc. for $200 million.

Other unsecured U.S. creditors included Veraction, Memphis, TN, which was left with an unpaid bill of $994,792; OHH Acquisition Corp., Brentwood, TN; $748,968; Woneel America Inc., South Pasadena, CA, $447,409; Stahls, Sterling Heights, MI, $208,416; and New Era Cap, Buffalo, $153,581. Wilmington Savings Fund Society held an undetermined unsecured claim that’s being litigated.

Photo courtesy Bauer