Mastermind GP Inc., which is currently owned by Canadian private equity firm Birch Hill Equity Partners Management Inc., was granted protection from its creditors in late November under the Companies’ Creditors Arrangement Act.Chris Donovan/The Canadian Press
Money-losing store chain Mastermind Toys is seeking court approval for its plan to sell the business, saying that if the deal does not go through soon, it may be forced to expand liquidation sales to all 66 stores across Canada.
The Toronto-based retailer announced last week that it had struck a deal to sell a majority of Mastermind stores to Unity Acquisitions Inc., a company controlled by retail veterans Joe Mimran, Frank Rocchetti and David Lui. According to court documents filed over the weekend, the acquisition would include at least 43 stores and is expected to preserve more than 500 jobs. Mastermind currently employs roughly 800 people and has already begun liquidation sales at 18 of its stores.
Mastermind GP Inc., which is currently owned by Canadian private equity firm Birch Hill Equity Partners Management Inc., was granted protection from its creditors in late November under the Companies’ Creditors Arrangement Act (CCAA). The company said it was running out of cash and would have to wind down the business entirely if a new owner could not be found.
Unity was the only buyer in a recent sale process that wanted to pursue a deal and was able to do so “in the limited time, and with the limited liquidity, available to the Mastermind Entities,” according to a report filed with the Ontario Superior Court of Justice on Sunday by the monitor overseeing the CCAA process.
That accelerated timeline is essential for Mastermind as it burns through cash. In a recent affidavit, Lucio Milanovich, a Birch Hill employee and interim chief financial officer of Mastermind, blamed the termination of an earlier deal to sell the business delays on the approval process with the federal Competition Bureau. In another affidavit sworn on Dec. 6, Mr. Milanovich noted that the new deal with Unity is “not conditional upon financing or any regulatory or other government approvals.”
The affidavit specified that under a forbearance agreement with Mastermind’s lenders, if the deal is not approved this month, the liquidation process will expand to include all of the stores. The deal is expected to close in mid-January.
“After a thorough Sale Process, where nearly 100 potential bidders were solicited and a number of Potential Transactions were negotiated but could not ultimately proceed, the Transaction represents the only viable going concern transaction available,” Mr. Milanovich’s affidavit states.
In the first 10 months of this year, Mastermind recorded $65.5-million in revenue and a net loss of $18.1-million. The company has been cutting costs, scaling back its inventory purchases and delaying payments to its suppliers.
The purchase price that Unity is paying for Mastermind has been kept confidential, but the monitor’s report indicates that it includes sufficient cash to pay down the remainder owed on credit facilities provided by Canadian Imperial Bank of Commerce that will not be covered by Mastermind’s sales. Currently, Mastermind owes roughly $18.5-million on those credit facilities, and continues to borrow cash to pay vendors, rent, payroll and other expenses.
According to a cash flow forecast, for the 10 weeks ended Jan. 28, the entirety of Mastermind’s receipts will go toward paying down the CIBC borrowings. The document estimates that at the end of that 10-week period, which covers the busy holiday season, nearly $3.9-million will be owed to CIBC.
Mastermind had total liabilities of $62.1-million, according to court filings last week, including the CIBC credit facilities.
Under the deal, Unity is not assuming responsibility for an estimated $36-million owed to unsecured creditors – such as merchandise and trade vendors, landlords with potential lease termination claims and employees who may have severance claims.
In its report filed Sunday, the CCAA monitor, Alvarez & Marsal Canada Inc., recommended that the court approve the deal, saying it contains “commercially reasonable terms” and provides for the preservation of a “substantial number” of jobs as well as relationships with many suppliers. The report states that the creditors would not see a better outcome through a liquidation or bankruptcy process.
It has been a busy year for Mr. Mimran and his partners. Over the summer, Unity acquired another Canadian retailer, Kit and Ace, as well as Vancouver-based shoe brand Casca Footwear. Mr. Mimran and Mr. Rocchetti also took over retailer Tilley Endurables Inc. in 2020.
“Post-COVID, so many retail opportunities have come up,” Mr. Mimran said in an interview with The Globe and Mail when the Kit and Ace deal was announced in July. “I think because of the changing landscape and all that’s transpired, people are getting in and out of certain assets,” he added, and noted that Unity was interested in looking at other deals.
Editor’s note: An earlier version of this story said if a deal with Mastermind's lenders does not close this month, a liquidation process will expand to include all of the stores. In fact, the liquidation process will begin if the deal is not approved this month. This version has been corrected.