Mountain Equipment Co-op update Sep 21st: A question worth asking
On Sep 14th, the Board of Mountain Equipment Co-op announced that they would be selling all of the assets to a private equity firm under Companies’ Creditors Arrangement Act proceedings. I wrote previously about this here (estimates of how much money would be required) and here (the importance of focusing on creating a positive outcome.)
In week that has followed, over 115,000 people have signed a petition expressing their desire to “Save MEC” and messages of disappointment and concern have been published by prominent organizations and individuals including Vancity Credit Union, Co-operatives and Mutuals Canada (CMC) and the British Columbia Co-op Association (BCCA), and the Premier of British Columbia. There have also been compelling op-eds in the Toronto Star and The Province.
I’ve been watching with amazement as a group of members have managed to raise over $73,000 to become involved in the Companies’ Creditors Arrangement Act proceedings. That group is now on the official Service List and the stage has been set for some important days in court. The Comeback Hearing is scheduled for the 24th but an application has been filed to extend the stay of proceedings until the 28th.
I’d like to share a few quick thoughts:
The question:
In my opinion, the key question is: Should the member-owners of the co-operative have been given the opportunity to recapitalize the co-op before a decision was made by their Board to sell all the assets and transform the business to a private corporation?
This is a question worth asking and co-ops across the country will be watching very closely. I have opinions about how I would have preferred the Board to handle the situation but that is water under the bridge. Now that the co-op is in a CCAA proceeding, it is up to the judge to make a decision about whether the members should be given an opportunity to recapitalize the co-op before the pending sale is approved. This is a complex area of the law and I do not have a prediction about how it will unfold.
Is the co-op worth saving?
I’ve seen variants of this question asked many times. People lament that they have not received share redemptions in recent years, that the co-op is burdened with debt, and that the co-op has strayed too far from its original purpose. Some suggest that it would be easier to start from scratch. I see it differently.
The latest financial results (page 90 of 735) show $389 million in assets and $230 million in liabilities. Due to accounting quirks, those values don’t necessarily represent the true value of assets and liabilities. I would guess that the value of intangibles (gear designs, one of the most trusted brands in Canada, member list, supply chain relationships, etc.) is much larger than what is shown in the financial statements. There is no quick way to re-build a 49 year old organization. The loss of the co-op will be significant.
The value of member shares (which includes your initial $5 and all following patronage returns) and accumulated deficit is $160 million (as of Feb 2020.) That is value that currently belongs to the member-owners but will likely be zeroed out in the transaction. Although the co-op has not been paying out share redemptions in recent years, a successful turn-around would put the co-op in a position to make those payments in the future. In my case, that means that I would have expected to receive over $400 in the coming years after the accumulated deficit is reversed and important debts are paid off. That is in addition to further share redemptions tied to future purchases.
There are other, more important, reasons to save the co-op. Even when it was struggling in recent years, it found ways to contribute to important community organizations that build trails and protect public access to public land. Mountain Equipment Co-operative is a part of the fabric of the outdoor community.
Can enough money be raised?
My opinion is that it should be practical for a member-led group to put together an alternative bid but it’s hard to say with certainty given the limited information that members have access to. One could imagine how a $60 million loan from a bank (secured against real-estate and inventory,) a $60 million Large Employer Emergency Financing Facility (“LEEFF”) loan from the federal government (perhaps with some adjustments to the program), and a $20 million recapitalization from members in the form of investment shares would be more than adequate to manage the short term liquidity challenge while also buying enough runway to complete the turn-around of the co-op and ride-out the challenging COVID-19 period.
Can MEC be viable in the long run?
I’m optimistic about the potential for the co-op to be a viable operation in the long run and I’m particularly optimistic about the future for the outdoor recreation market in Canada. In the latest fiscal year, the co-op had sales of $463 million and an operating loss of $26.3 million. Comparing the results with those in 2010, we see that the gross margin % is very similar. The problem is that selling and administration costs are currently too high. There is good news though. These elevated costs occurred in a year where one-time projects (such as moving to a new Vancouver store) likely inflated expenses significantly. By axing further expansion plans, closing some stores, and focusing on core strengths, I have faith that there is a relatively rapid path to profitability. I also trust the analysis of the folks at Kingswood Capital Management. As a part of due-diligence they would have access to more complete information than members have and they seem to believe there is a path to long term profitability. Based on the real estate holdings and my estimate of a purchase price, I do not believe that Kingswood Capital Management is buying MEC primarily for the real estate.
Thoughts on the statements from the MEC Board
Kingswood Capital published a response to the public feedback on Monday. The spokesperson for the Save MEC organization has since published a rebuttal.
The MEC Board published a letter and FAQ in response to the Save MEC movement on Friday. I want to make a few comments on the material published by the MEC Board.
Re the position that they could not have been more transparent:
1. Why weren’t members consulted about the sale before it was announced?
….
If the discussions had been public, it would have caused uncertainty and disruption not only within MEC, but also with vendors and creditors. This uncertainty could have irreparably harmed the organization.
I think that the financial challenges were well known and it would not have created much additional uncertainty on that front.
The financial challenges were widely known going back to 2019:
“Arrata, the former CFO of Best Buy, says the co-op is at a turning point, facing slow sales, inventory backups, supply chain problems and ever-increasing online competition.
“The sales growth hasn’t materialized, as we’ve seen increased competition by traditional big-box players and emerging e-commerce players,” Arrata said in a statement Tuesday about the recreation equipment giant’s financial challenges.”
In April of 2020, the co-op made it very clear that they were in a dire situation:
“The net result for MEC is that it has created significant cash pressure. We made the decision to layoff our store staff after supporting them with pay and benefits during our initial two week shut-down period. This decision was made to protect MEC and jobs over the long-term.
MEC also laid off staff at our Head Office, Distribution Centre and Service Centre, as we move into a “keep the lights on” model, with essential services only.
MEC is working with our partners, advisors and teams to examine every possible avenue of support for our Co-op.”
On top of those public statements, it also appears that they have over $28 million in unpaid bills to unsecured creditors. I don’t think that increased transparency would have created a major surprise for these vendors.
Re the decision to not ask members if they would like to recapitalize the co-op:
2. Why didn’t MEC reach out to members for cash instead of selling?
…
In examining the options and alternatives that would ensure MEC’s survival, the Board looked at various options for recapitalizing through the membership. However, the order of magnitude and urgent timing of MEC’s financial needs made it implausible that a voluntary member assessment or request for financial contribution would allow MEC to continue. The Board also received independent expert advice to this effect.
…
I do not agree that it was so implausible that the question should never have been asked. Regarding the “urgent timing,” I would point to the fact that they brought on a special consultant in February of 2020 (page 474 of 735) and one of the tasks of the consultant was to identify select potential financing partners. Members could have been identified as potential financing partners as early as February.
Re the decision to sell our member data:
4. What will happen to member information?
Canadian privacy laws permit MEC to transfer customer data (such as information about customer purchase history and marketing preferences), to the new company as part of the larger sale of MEC’s assets to the new company.
This information will be used by the new company for legitimate business purposes and in compliance with privacy laws, including for product recalls and warranty returns under MEC’s Rocksolid Guarantee.
By law, the new company is only entitled to use or disclose the transferred personal information for the same purposes for which MEC originally collected the information from you or as required by law. It is not permitted to use or disclose your information for any other purpose that requires your consent without first explaining the new purpose to you and then asking for and obtaining your consent.
The purpose for which MEC originally collected my information was so that I could join a co-operative as a member-shareholder. I am very disappointed that my participation in a co-operative could be sold to a private corporation without my consent. At the very least, I think that members should be given a choice: If they wish to benefit from recall notifications and warranty returns then they can opt-in to provide their personal information to the purchaser. In my opinion, no other member information should be allowed to be sold as a part of this transaction without explicit consent from each member before the information is transferred.
I want to end this post with some positive stoke
I asked a question online: “What is your favourite piece of MEC branded gear (current or historical)?” I was blown away to receive 363 responses. The MEC design team has delivered some amazing equipment over the years and I’m proud to have a lot of it on my shelf.
All the best,
Steve
stevejoneshikes@gmail.com
