The private equity firm is buying Gymboree bonds and seems confident the brand will pull through, even if it enters Chapter 11.

(Bloomberg)—From the outset, Bain Capital was smitten with Gymboree Corp.

The private equity firm was convinced the children’s apparel retailer was recession-proof—a great brand with lots of growth potential. So in 2010, Bain outbid shops including Apollo Global Management LLC to acquire the company for the hefty sum of $1.7 billion. Gymboree is No. 392 in the Internet Retailer 2017 Top 500.

Seven years later, on the eve of a bankruptcy filing that people familiar with the matter have said could come from Gymboree as soon as June, Bain executives seem reluctant to give up on their big bet. They’ve snatched up Gymboree bonds as a way to retain a strong position in any revival, according to a person familiar with the matter. And just last week the company named a new chief executive officer with deep retail experience, who is charged with formulating a turnaround strategy.

Unlike buyout shops like Cerberus Capital Management or Platinum Equity, Bain typically opts for a smaller volume of acquisitions and selects companies it’s confident have potential to grow. Admitting defeat and walking away quickly from a busted deal isn’t in the firm’s DNA.


In the troubled retail industry, that’s a risky strategy. Numerous store chains weighed down by buyout debt and online competitors such as Inc. have sought bankruptcy in the past couple years. Some, like Sports Authority Inc. and Wet Seal, have not emerged. Gymboree has about $1 billion in debt that Bain loaded on, an amount that company founder Joan Barnes characterized in an interview as “horrendous.”

Bain may be counting on Gymboree’s well-known brand to help keep it afloat even if the retailer enters bankruptcy, said Jeffrey Gleit, a bankruptcy lawyer at Sullivan & Worcester LLP.

“Gymboree is a bit of an outlier in that it’s a good name and should survive,” Gleit said.

Representatives for Bain and Gymboree declined to comment.


Three brands

Bain beat a host of competitors to buy Gymboree, a company whose roots go back to 1976 when it opened play and music centers for children. It paid above the market average, even though the U.S. was emerging from the financial crisis. But the retailer was seen as resilient and less vulnerable to economic downturns because parents were thought to spend more on their children during tough times.

Gymboree also had the perceived benefit of operating three brands that targeted different price segments, along with its 700-unit play business that served as a marketing vehicle as well as a profit center in its own right.

But sales soon faltered as online competition grew. Gymboree was forced to discount items, putting it up against its own lower-priced chain, called Crazy 8. That brand had been expected to compete with Wal-Mart Stores Inc. (No. 3 in the Top 500) and Children’s Place Inc. (No. 110). Gymboree’s premium brand, Janie and Jack, has also resorted to discounting. A recent visit to a store on Manhattan’s Upper East Side saw few customers but many sale signs, notwithstanding the varnished wood floors and well-dressed displays.


Slimming down

By late 2015, then-CEO Mark Breitbard, backed by Bain, began more aggressive efforts to stave off financial oblivion, mortgaging its distribution center to raise cash. Bain also bought Gymboree bonds, which were trading as low as 20 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Breitbard sold Gymboree Play and Music in 2016 to Zeavion Holding, a longtime Bain investor, raising about $127 million that was intended for online and store improvements, while lessening the immediate threat of a default.


But in January the board removed Breitbard as the company was racking up a loss of $325 million in the quarter compared with a profit of $49 million in the year-ago period. As of last month, Gymboree’s bonds were worth just 4 cents on the dollar and Bain’s original $350 million equity check became practically worthless.

A representative for Banana Republic, where Breitbard is now CEO, said he wasn’t available for comment.

Buying debt

Bain has continued to buy up debt, at discounted prices, in part to receive payments from the bonds and earn some return on its investment, said the person familiar with the matter who asked not to be identified because he wasn’t authorized to speak publicly. But some executives, including senior adviser Jordan Hitch, who led the deal in 2010 and sits on the board, also believe the brand still has equity value, according to a person familiar with the matter.


Hitch didn’t respond to an email request for comment.

This tactic has started to spread among buyout shops, including Apax Partners and Thomas H. Lee Partners. When companies falter and the equity becomes drained of value, holding the right bonds can allow private equity sponsors to control the restructuring and potentially regain ownership after converting debt into new equity.

That may be how it works out for Gymboree, analysts pessimistic about bricks-and-mortar retailing said.

“We’re in only the third inning of the retail shake-out,” as mid-retailers like Gymboree get squeezed on both ends by luxury-and value-priced merchants, said Garrick Brown, head of the retail practice at Cushman & Wakefield Inc. Amazon’s dominance is obviously a big factor, and the real impact now is its expansion in clothing, Brown said.


Yet Barnes remains optimistic about the company she founded, once it’s shorn of debt.

“It was one of the first aspirational brands to cater to the preschool market,” said Barnes, now an adviser to Gymboree Play and Music. “There is no reason it can’t be again.”