Few companies these days look like hot investment opportunities, but few companies are able to cash in on economic distress like liquidation firm Great American Group LLC.
The Woodland Hills company, which has made its name handling going-out-of-business sales for the likes of electronics retail chain Circuit City, has experienced a growth spurt recently. Now, the company is set to go public in an unusual way.
Alternative Asset Management Acquisition Corp., a special-purpose acquisition company based in New York, recently reached an agreement to acquire the privately held company and form a new entity called Great American Group Inc., which will be publicly traded.
Alternative Asset Management shareholders plan to vote July 28 on the deal, valued at roughly $175 million.
Special-purpose acquisition companies, also known as spacs or blank check companies, raise money through an initial public offering for the express purpose of acquiring companies not yet identified. The vehicles allow targeted companies to go public without their own IPO.
The deal, if approved, would be the first local transaction of its type since American Apparel Inc., the downtown L.A. manufacturer of trendy clothes, was purchased in December 2007 by a spac known as Endeavor Acquisition.
The acquisition vehicles became popular in the early 2000s as investors were willing to throw cash into unusual ventures. But many have struggled to complete deals, both because attractive acquisitions have become harder to find and because shareholders have voted down many of the proposed transactions.
Spacs typically target traditional operating companies, such as manufacturers with growth potential, which have become much less appealing investment options in the current recession.
The Great American deal, therefore, is unusual. However, it is typical in that Alternative Asset Management has seized on what it believes may be one of the few growth sectors in the current economy, said Brett Goetschius, editor of the SPAC Report, an alternative asset research provider.
“It does speak to the times we’re in at the moment,” he said.
Growth opportunity
Founded in 1974, Great American is a leading liquidation firm employing some 120 people. The company, already doing well before the current economic downturn, has been growing as the recession has forced many retailers out of business.
Great American typically acquires the assets of a bankrupt company and sells the products, warehouse inventory and even store fixtures, often at a discount. Other times, the company helps shut down individual stores for a company looking to trim costs.
It recently handled the high-profile liquidations of retailers Circuit City, Mervyn’s and Linens ‘n Things, as well as selling off the fixtures and furnishing of the now-demolished Stardust hotel and casino in Las Vegas.
Other liquidators have been similarly busy.
“It’s been a pretty active first half of the year,” said Dan Kane, a principal at rival liquidation firm Tiger Capital Group LLC, which handled the Circuit City sale along with Great American. Kane expects business for liquidation companies to continue going strong for the foreseeable future.
For Great American, the transaction with Alternative Asset Management is an opportunity to fund additional growth at a time when many experts predict continued bankruptcies and retailer liquidations.
“Our new position as a public company will provide us with capital to fuel future growth initiatives and will further incentivize our team members,” said Andrew Gumaer, Great American chief executive, in a statement. The company declined to comment further.
Do or die
Under terms of the deal announced this month, Great American will receive $60 million plus 12 million Alternative Asset Management shares, which closed July 23 at $9.66. Alternative Asset Management, which went public in August 2007 with a $414 million IPO, has already announced that Gumaer and other members of Great American’s management team will remain on with new company.
For Alternative Asset Management, this week’s shareholder vote represents a do-or-die moment of sorts.
Due to regulatory restrictions, spacs generally have to complete an acquisition within 24 months or they are forced to return the money to shareholders. This has presented problems for the large number of spacs formed in 2007 the most popular year ever for spac formation.
After just one spac went public in 2003, the movement gained momentum until 2007, when 66 spacs completed IPOs. The vehicles are popular in part because they provide individual investors with an avenue into private equity-style deals.
However, the unusual entities, dependent on finding successful operating businesses to acquire and on obtaining shareholder approval of the purchase, have fallen out of favor as the economy has swooned.
According to data from SPAC Research Partners, about two-thirds of the spacs formed in 2007 either have liquidated or are expected to. The five largest spacs formed in the past two years are all still looking for a deal.
One local spac, Santa Monica Media Corp., went public in March 2007 seeking to acquire a company in the communications, media, gaming or entertainment fields. Unable to complete a deal within the two-year timeframe, however, the company announced earlier this year that it would return money to shareholders. Executives could not be reached for comment.
Even Alternative Asset Management ran into difficulty as its deadline approached.
The company in March reached an agreement to acquire Halcyon Asset Management LLC, a hedge fund manager. Last month, however, the two sides terminated the agreement for undisclosed reasons.
“It’s been a very tough go,” said the SPAC Report’s Goetschius. “There have been only a few completed acquisitions. Most of the recent deals have been voted down by shareholders.”
