Overview
One of the craft industry’s biggest retail giants, Joann Fabric and Craft Stores, has found itself tangled in a financial knot of its own making. The culprit? A private equity firm known as Leonard Green & Partners, which brought a leveraged buyout to Joann in 2011, entailing a mountain of debt that has left the company fraying at the edges.
The Before and After of the Leonard Green Buyout
Prior to the private equity buyout, Joann Fabric was a financially healthy company, with a solid customer base, robust profits, and a clear growth strategy. However, the arrival of Leonard Green brought with it a monumental shift in financial strategy. The $1.6 billion buyout was financed with a hefty amount of debt – debt that Joann, not Leonard Green, was saddled with.
Unraveling the Financial Maneuver
Leonard Green’s approach follows a classic private equity playbook: make an acquisition using borrowed money, transfer the debt onto the acquired company’s books, then cut costs and extract dividends to recoup their investment. And so, Joann found itself not just a craft retailer, but effectively a debt service business.
The retailer now had to manage nearly $1 billion in long-term debt, report revealed. Consequently, much of Joann’s profit was redirected toward servicing this debt rather than reinvesting in the business or its workforce. Even as revenues increased, the weight of the debt was as unyielding as ever.
The High Cost of Financial Engineering
Apart from the crushing financial load, there were also casualties in terms of workforce and corporate culture. Staff cuts and a faltering commitment to customer service led to a downward spiral, with discontent from both employees and customers. This was a far cry from the original Joann, known for its dedication to customer service and wooden, homey stores.
Takeaway
In the case of Joann Fabric, the impact of Leonard Green’s leveraged buyout reveals the high cost of private equity debt. Financial engineering might seem like an attractive play at first glance, promising fast returns and reduced risk for the equity firm, but it often extracts a heavy toll on the business, its employees, and its customers.
While private equity provides an important source of funding for many companies, it’s clear that not all buyouts are created equal. Leveraged buyouts, like the one Leonard Green brought to Joann Fabric, can result in negative outcomes that echo long after the equity firm has taken its profit and moved on. For the stakeholders left behind, the legacy of such deals can be decidedly threadbare.