The first is bankrupt retailer Mervyn's LLC, which is suing three private equity firms, Cerberus Capital Management LP, Sun Capital Partners Inc. and and Lubert-Adler, as well as former parent Target Corp., for stripping down the value of its real estate due to what it alleges as a fraudulent deal. The lawsuit alleges that when Target sold Mervyn's to the PE firms for $1.26 billion in 2004 Mervyn's real estate assets were separated from its retail operations into a new entity, which in turn raised rents. Mervyn's is claiming the real estate deal drove them into bankruptcy.
Separating real estate and retail operations is a pretty common move among private equity deals for tax purposes and also because PE firms then can lease some locations to other retailers. As The Wall Street Journal points out, Eddie Lampert made his fortune dolling out Kmart's real estate, and Kohlberg Kravis Roberts & Co., Bain Capital LLC and Vornado Realty Trust made similar moves when they acquired Toys 'R' Us Inc.
However, the issue is not exclusive to PE retail deals. CVS Caremark Corp.'s $2.9 billion acquisition of Longs Drug Store Corp. may be facing a similar circumstance. Some of Longs' shareholders, such as activist investor CtW Investment Group, claim that CVS may have gotten a discount when it comes to Longs' real estate in the West Coast and Hawaii. CVS has apparently valued 200 Longs retail stores, three distribution centers and three office buildings at $1 billion and could make money off the assets by either selling them or generating cash through sale-leaseback transactions, according to MarketWatch. CtW estimates the properties were undervalued by 18% to 26%, according to a report in the San Francisco Chronicle. The dispute could force CVS to up the bid for the company. - Maria Woehr
See Dealscape: Bankrupt Mervyn's sues its former PE owners
See TheDeal.com: CVS to buy Longs for $2.9B
