Last week, Instant Brands, the company that owns Instant Pot filed for bankruptcy. Like many people, this was shocking to me. Our household is one of the many that rushed out and bought one of these flexible little countertop marvels. To this day we continue to enjoy the trouble-free operation and delicious meals and sides it makes while completely unsupervised, allowing you to complete other tasks as your meal cooks, something that range top cooking or grilling can’t do.
I pored over numerous reports of Instant’s demise, and saw the usual assurances from corporate mouthpieces that all was not lost and they were committed to staying in business. They mentioned a lifeline of over $130M in lending to keep them afloat as they restructure to get lean, mean and stave off death. I noticed something else too as I kept reading: Instant Brands not only owns the Instant Pot but other well-known brands like Corelle, Pyrex and CorningWare. That seemed like a strange combination, with one line offering cookware and the other company countertop appliances. Those are related products only in that they are found in the kitchen but they otherwise looked like strange bedfellows to me. Further reading pointed out that Instant Brands is the merged creation of a private equity (PE) fund, Cornell Capital. In 2017, Cornell purchased the holdings of World Kitchen, LLC, a brand blamed back then by customers for offering products that were inferior in every way while still sporting iconic and trusted branding. It was eventually renamed Corelle Brands. Cornell Capital went on to purchase Instant Pot in 2019 merging them with Corelle Brands under the Instant Brands umbrella.
I imagine that there may be PE firms somewhere that do a good job; buying up companies with potential, obtaining additional funding and making them into powerhouses. It just feels like my anecdotal observations find very few instances of this. Case in point: when Mitt Romney ran for election in 2012 against incumbent President Barack Obama, he pointed to his time at Bain Capital and claimed they had great turnaround successes. Obama essentially portrayed Romney and Bain Capital as vampires that sucked the value out of companies, while offshoring jobs and profiting handsomely on fees, a claim Romney denied. When pressed for successes, Romney pointed to Staples and Bain’s investment in it to grow and become a major office supply retailer. Asked for other examples, Romney pointed to…Staples. Over and over, he mentioned them, and I don’t recall him mentioning any other successes anyone would know of from the decades he was at Bain.
This brings me back to Instant Brands. They were not a nascent company looking for a funding boost to break into the market. Instant Pot was already one of the hottest kitchen appliances going when Cornell bought them in 2019, with a dedicated and vocal fanbase, growing sales and recipes posted by social media influencers. Was it Cornell Capital’s wealth of expertise in the small kitchen appliance and retail space that Instant stood to gain from this acquisition and merger with Corelle Brands? No. Cornell Capital had no experience with retail products, much less housewares or small appliances prior to buying Corelle, and they owned Corelle for only a year before buying Instant Pot. Some reports at the time of Instant’s acquisition valued it at over half a billion dollars, with a noted potential for growth and cachet with millennials. Other reports focused on that last criterion as the thing that made it so attractive to Cornell Capital.
I could not find official terms of either deal but some sources claimed that the merger with Instant Pot was estimated to create a company with over $2B in combined value. Where does Instant Brands stand today? The picture is pretty bleak but it all starts with their debt load. It’s huge, especially in comparison to their current revenue stream. Moody’s was ringing the alarm when they downgraded Instant in March 2022 from an already shaky Ba3, speculative to substantial risk, to a dismal B1, speculative with high credit risk. They cited many factors, including the supply chain disruptions and freight costs of the pandemic, which prompted a decision to cancel product orders that would arrive too late for the 2021 Christmas season, cancellation of new product launches and slashing promotional Christmas sales.
Businesses can hit rough patches and customers can be a fickle lot. The delay of new product launches and less existing product, while heading into the busy Christmas shopping season, was a special kind of backbreaker. However, companies miss sales targets from time to time and it doesn’t become an existential crisis. Why is it so for Instant? Debt. That pacing beast that Cornell Capital bought is no longer a restrained and docile exotic pet. It is unchained and loose from its cage, ravenously looking for its next meal of interest and principal payments, and those meals have to be substantial for such a big beast. Quarters with $18M in sales revenue aren’t going to cut it. That onerous debt service appears to make all the difference.
I don’t have Corelle Brands or Instant Pots financials handy but I’m going to go out on a fairly sturdy limb here anyway. It doesn’t make sense that the combination of two profitable companies, one of which was very successful and poised for more growth, needed such massive borrowing. It would seem to me that the ongoing operations at both entities could be pumped back into the business, providing funding for research and development of new projects, improvements to existing lines, while still paying dividends to Cornell. At least, that would be the case if Cornell Capital didn’t borrow too heavily to close the deal and if it were putting the profits back into the business.
My suspicion is that neither of those last two assumptions was the case. I completely expect that they hugely overleveraged to make the purchase, assumed the Feds 0% rate giveaway was here forever, then saddled the new company with that debt. I also expect that, as these PE firms do, Cornell stuffed its pockets with huge dividend and management payments when things were good, assumed more of the same business environment was ahead and then COVID-19 stopped the music and the Fed took away lots of chairs. With sales and growth suddenly flushed down the nearest American Standard, debt’s reaper came knocking and the measly sales they generated from the first quarter of 2022 onward wasn’t enough to block or evade his scythe.
I’ve seen this movie play out before. Chrysler was bought by Cerberus Capital Management in 2007. Quick aside, in Greek mythology, Cerberus is a three-headed dog that guards the gates of Hell to prevent people from leaving. Yeah, folks this one didn’t end well but whereas Chrysler began this quest outside, in the end it wound up inside the gates of hell under Cerberus leadership. The purchase deal was for $7.4B and when Chrysler filed bankruptcy in 2009 it had $39B in assets and $55B in liabilities. Cerberus was able to wiggle out with only a few scratches but ownership of Chrysler has been passed around like a bottle of cheap liquor between vagrants ever since. Their product offerings are a lot slimmer too, with some body styles getting very long in the tooth.
Toys R Us was bought by Bain (yes, Barry O. was right about them), KKR and Vornado Realty Trust in 2005. By 2018, even if you still didn’t want to grow up, you couldn’t be a Toys R Us kid. They were bought with just under $2B in debt and declared bankruptcy in 2018 with debts over $5B. Do you remember all of the fleetwide makeovers and service improvements that happened in the years before the bankruptcy? Yeah, me either. I remember walking into our local one to look for a gift a year or so before they declared. It was a sad, outdated, unloved, faded and thinly stocked ghost of the store I remembered. A beloved toy store was run into the ground, all while it was apparently burdened with debt and the available funds paid fees and dividends to the leeches that bought it. More retail failures like this are listed here by an activist group.
There are other examples but you get my point. The same worn pages of this playbook still keep getting called, no matter how many times the companies in question get their ribs and collarbones broken by combination tackles from mismanagement and market forces. After every lost game and failed season of ownership, the private equity coaches leave town unscathed to take over another team, leave it a failure, wash, rinse and repeat. According to this source, 2023 will have the largest number of PE owned bankruptcies since 2020 at the current pace. You read that correctly. This year’s PE performance in a strong economy, is slated to echo a year when the economy was convulsed by a combination of COVID and a wishful president, who initially advised a virus would all just go away like magic, but soon began advising people to look into introducing chemicals and light into their bodies to kill it, rather than the vaccines he got funding for.
To paraphrase Edwin Starr; PE, huh, good God y’all. What is it good for? Absolutely nothing! Say it again!! It would be bad enough if these vultures swooped down, attacked and picked the bones clean of some weak, stumbling companies that were mildly profitable but already not long for this earth. My britches are in a wad because they keep targeting companies that are generally sound, even if they are not making the sexiest returns. After they load up on debt to buy them, assign that debt to the acquired company and begin to manage them, what do they do next? The same predictable cost-cutting, staff reductions, and cuts to the quality of the products manufactured or sold to meet an “enhanced value” to the customer. That usually means either manufacturing lower quality products or acquired stores filled with cheap, chintzy overpriced trash that isn’t enough of a draw for new customers and drives away loyal customers in disgust.
I have seen claims that some European countries require PE firms to put up more of their own capital in order to purchase a company compared to here in the USA. Increasing the amount of skin in the game could be a good start in dissuading these unnecessary takeovers that so frequently turn into bankruptcies. However, even more than that may be necessary. I propose that we make PE funds only have the ability to target failing companies or those showing no revenue growth over the last 5 years. If they are as good at turning around a wayward ship as they say they are, we should be supplying them companies worthy of their business acumen. If they take over a company or three, and like Instant Brands or Chrysler it fails in a short time, say four years or less, ultimately filing for bankruptcy protection, they should have to pay a tax on the amount of total debt outstanding at the time bankruptcy is declared.
These PE characters shuffle papers around, take their fees, pay themselves lavishly after these takeovers, milk a cash cow until it falls lifeless and desiccated to the ground, carve it up to sell for steaks and ride off without any consequences. Those destroyed companies employed people and took orders that were filled by other companies employing other people. After they fail, a void is left and as the Atlantic article I linked to above demonstrated, those employees now have to find other work. If we keep allowing these parasites to keep acquiring, devastating, bankrupting and closing companies, successful or marginally strong alike, there will eventually be a lot fewer companies to fill our needs for goods and services, or to provide jobs. More players generally make capitalism a more compelling system than socialism or communism. If we keep letting buzzards buy companies, whether another car company or the next Instant Pot, drive them into the ground and leave fewer choices, we are on our way to lone suppliers filling market roles, without worthy competitors to force them to be their best.
This tune is off topic but I invoked it above and cursed myself with an earworm. Enjoy.
All true save for one thing. Cerberus is normally depicted as having three heads. Did you know that Cerberus owns Albertson's Foods and also the 5 major patents for high blood pressure medications. Now check the sodium levels in their private store brands. Yup. Got them coming and going.
Thanks for the commentary.