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17,^,r
Southland C orporat ion :
From Profitability to Financial
Distress to Profitability

Case Summaryt This case follows Southland Corp. from its prosperous times in tla 1980s
its leveraged buyout in 1987 and its subsequentfinancial distress and banktuptcy in
1990. Southlandwent through typical stages in the banlauptcy process.Itfirst tried to negotiate a settlement with its creditors in the spring of 1990. When that failed, it presented a
prepaclcaged reorganization plan to the banlcuptcy court. The plan wos approved again
by shareholders and by the court. The reorganization substantially reduced the interest
burden that was hampering Southland. As of mid-1993, the company appears to be climbing back to profitabiliry under its new lapanese owners.

to

Twenty-four years of record-breaking high revenues and earnings. Eleven consecutive


years of dividend increases. Steady and continual growttr.It is a description of Southland Corp.
through 1985. It sounds like anything but a bankrupt firm. Yet ttris is a description of soonto-be-banlsupt Sourlland Corp., the owner of more than 8,000 7-Eleven and other stores, as
well as Citgo Peroleum Corp., Chief Auto Pafis, dairies, and food processing and distribution operations. Southland reorganized through a Chapter 11 bankruptcy filing in 1991
after years of negative earnings from 1987 onward. The firm's financial roubles were a
combination of too much debt at high interest rates and reduced cash flows.
Southland ried to stay afloat through an equity infusion from Ito-Yokado, Ltd., the
Japanese owner of profitable 7-Eleven Japan, Ltd., and through negotiation with its creditors. When informal talks failed, Southland entered formal Chapter
proceedings.

ll

A TIOSTILE TAKEOVER AVERTED


In hindsight, Southland's troubles began early in 1987 when rumors of a takeover bid
blew across Wall Street, The stock rose steadily from the $40s to the high $50s amid rumors
that the company had a breakup value of $70 a share. The company was managed by the

Ccf,yriSh O 1995 by South-Wc*m Callcgc ErHishing.

49

Case

Southland CorPoration

insiders owned only


Thompson brothers, sons of company founder Joe Thompson, but
planned
recapitalizaof a
about 157o of the outstanding common stock. By June, rumors
rumors, and the stock price
tion, involving large amoun-ts of debt, joined the takeover
private" transaction'2In the $5
climbed to $69.1 On July 5, Southland announced a "going
company paid $77 a
billion leveraged Uuyout dnO), the Thompson family's holding
one-third of the shareholders
share for two-thirds of southland's stock. The remaining
new
Southland' The Thompson
in
the
stobk
the
of
1007o
would receive some cash and
announced that it
Southland
Southland.
half
of
famity and insiders now owned about
store businesses
non-convenience
its
of
all
and
wouli sell some of its convenience stores
in
high yield junk
billion
to
close
pay
$3
down
ro raise money to buy out shareholden and
bonds acquired in the LBO

COMPETITIONHEATSUPANDTHEBUSINESSSUFFERS
the october
The first bad news event-and one beyond Southland's control-was
junk bond
raise
to
ability
Southland's
on
impact
1987 stock market crash. This had a serious
after the
rates
coupon
l5Vo-187o
at
expensive
prohibitively
debt, which became almost
the
short-term
pay
back
to
debt
high-yield
the
proceeds
of
Southland needed the
crash.

bridge loans it received to buy out the majority of its shareholders.


-Southland
eamings reports following the LBO were monotonous in their bad news
losses
refrain. Although operating profits were positive, shareholders faced substantial
portions
of
large
after interest payments *eie subtracted. Overall revenues declined as
measures, includthe company were divested. The firm instituted stringent cost cutting
through acquiexpansion
elimindting
products
and
rtew
on
ing reOucing internal spending
built
companies
oil
major
as
up
heated
business
store
in
convenience
siion. Competition the
maroperating
pumps.
Southland's
gasoline
their
next
to
stores
thousands of conrenience
gins declined steadily. (See Exhibit I balance sheets and income statements for a problamed its troubles on increased
lression of Sourhland's financial distress.) Southland
weaker domestic economic
environment,
weak
retail
sales
generally
a
well
as
Iompetition as
including its interest
assets,
more
and
more
off
firm
sold
The
.onditionr, and inflation.
store businesses.
its
non-convenience
all
of
and
in Citgo, over 1,000 7-Eleven stores,

purchases of
The Belzberg family of Canada had begun an attempt to uke over the firm by making large
page
65.
on
case
Industries
World
Armstrong
Southlaid stock. Foi *o." ubout Belzberg operations, see the
2 A leveraged buyout (LBO), one kind of a "going privai.e'r transaction, refers to a small group of investors
the stock off the
buying all of a.ompany's stock, with the purchase f-rnanced almost entirely by debt. This takes
1

public market.

SowhlandCorporation

Exhibit

Southland Corporation
Income Statement
(in thousands)

Revenues
Expenses

Depreciation
Net operating income
Interest
Other non-cash

1992

1991

1990

1989

$7326,000
180.000

200.000

$8,348,000
8,017,500
207.000

$827sOoo

7,197,350

$8,010,000
7,530,710

49,650

n9,294

123,500

3t2,250

t23,650

189,290

459,500

572,250

45,000

1s6000

11,000

7,732,754
230.000

93,000

1,003,000

8,000

-128,000

-12,000

-131,000

-74,000

-301,000

-1,251,000

Earnings per share

-$0.32

-$0.22

-$15.14

-$6.48

Number of shares

409,3'75

336,364

19,891

193,056

Stock price (OTC)

$3.0625

$1.9375

(r2l3r)

(r2t3t)

charges
I axes

Net income

51

52

Case

Southland CorPoration

Revenues
Expenses

Depreciation
Net operating income
Interest
Other non-cash
charges
Taxes

Netincome
Earnings Per share ',

Number of shares
Stock price

(NYSE)

1988

(Successor)
1981

(Predecessor)
1987

1986

$7,950,000
7,397,890
247.000

$3,211,000
3,16a308
92.000

$4,865,00

$8,578,000
8,086,715

4,584,920
114.000

186.000

66,080
45,080

305,285
59,285

46,000
200,000

305,110

43308

560,n0

163,515

70,840

14,L77

-110,000
-216,000

-71,000
-150,000

31.000
90,000

-$r.22

-$0.75

$1.42

$3.96

t71,U9

200,000

63,380

50,505

s76.25

oRr)
$67.125

(rztrs)

-SoahlandCorporation

198s

1984

1983

$12,719,000
12,197,960
187.000
344,040
51,040

$12,035,000
11,575300
r65.000
294,600
122,600

$8,772,000

70,000

12,000

54,000

213,000

160,000

132,000

Eamings per share

$4.41

$3.41

$3.26

Number of shares

48,299

4692r

40,49r

Revenues
Expenses

Depreciation
Net operating income
Interest
Ottrer non-cash
charges
Taxes

Net income

8,367,725
145.000
259,275
73,275

53

.-1

54

Case

Southland CorPoration

Southland CorPoration
Balance Sheet
(in thousands)

1992

L99L

1990

1989
(est.)

$351,000

$640,000

$635,903

$769,57s

Plant, property,
and equiPment
Other assets

1,356,000
338.000

$2,045,000

1,7r5,501
447.638
$2,799,042

1,555,700

Total assets

1,592,000
380.000
$2,612,000
$770,000

$4298,119

2,874,000

142,315
182.536

Curent

assets

Current liabilities
Long-term debt
Other liabilities

Total liabilities

$765,000
2,408,000
19r.000
$3,364,000

179.000
$3,823,000

$i,319,000

-$1,211,000

$4,662,970

331.000
$2,656,275
$827,500
3,815,000
28 r.350
$4,923,8s0

Preferred stock

Common equity

-$1,823,928 -$2,267,575

SouthlardCorporation

Currenl assets
Plant, property
and equipment
Other assets

Total assets

1988
(est.)

(Successor)
1987
(est.)

(Predecessor)
1987
(est.)

1986

$739,350

$298,623

$452,445

$?46311

1,494,600
318.000
$2,551,950

603,668
128.440

9L4,620

2272,624

194.600

351.653

$1,030,731

$1,561,665

$3321,088

Current liabilities

$795,000

$312,100

Long-term debt
Other liabilities
Total liabilities

1,090,100
109-174

$486,500
300,533
165.410

$952,541

3,735,133

$r,520,374

$952443

$t.7s32s7

125,000

125,000
$1,542,831

270.300
$3,615,300

Preferred stock
Common equity

Current assets
Plant, property
and equipmert

Other assets

Total assets
Current liabilities
Long-term debt
Other liabilities

Total liabilities
Preferred stock
Common equity

-$1,063,350

-$489,643

$484,222

1985

1984

1983

$646,828

$1,393,384

$1,584,886

1,722A96
864.194

r,589,924

t,8t5,974
130.414

134.U5

$3,233,518

$3,339,772

$3,309,455

$1,038,409
575,586
122.700

$t,r37 263

856,646
150.176

r,125,&3

$1,736,695

$2,144O85

$2,234,493

$1,195,687

$r,074,962

1,002,031

106.819

125,000
$1,371,823

Common size averages used to generats balance sheet for 1987-1989:


Current assets: 9.37o of sales
Plant, property, and equipment 18.87o
Other assets: 4.07o
Total asses: 32.lvo
Current liabilities: 107o
Long-term debf Use interest at l5?o to generate long-term debt
Other I iabil ities:. 3.47o
Common equity: Plug figure

639196
161220

55

56

CaseS SoahlandCorPoration

SOUTHLAND TRIES TO LIGHTEN ITS LOAD


By early 1990, the Thompsons all but gave up. The company warned that it might
position was
not be able to meet scheduled interest payments in the future. Its precarious
ratings lowprices
bond
and
bond
discounted
deeply
n:cognized in the market in the form of

to CCC. (The bonds eventually received D ratings.) Company auditors said they
com"r"d
doubted ttrat southland had the ability to conlinue as a going business. The Japanese
of
757o
to
buy
agreed
Ltd.,
Japan
of
7-Eleven
pany lto-Yokado, Ltd., a majority owner

pur- "
Southland's shares for a desierately needed infusion of new capital.3 As part of the
lighten its debt load. '
chase agreement, Southland needed to negotiate with its bondholders to
BondhJlders were offered zsro coupon securities and common stock in exchange for their
high coupon bonds. Bondholders would own lOgo of the proposed restructured Southland, as would the ThomPson familY.
Bondholders criticized the offer as "too little, too late," indicating that ttre plan favored
equityholders at their expense. One analyst said ttrat liquidation would net more than twice
thl piesent value of the-bonds. Another said, "They're asking bondholders to take a huge

.ffi'&*HTIffJff

;::i$:1"?#iil:"fJ3:
[##::',lffi ;;'#;;ff Hiifl f mortgage
on

those assets,
Southland's assets declined in value. The bodholders owned a
with the
Even
bonds.
the
value
of
did
the
so
had
declined,
but since rhe underlying value
the
profitable
until
become
to
not
expect
did
the
company
proposed restructuring of debt,
spendits
capital
resEicted
debt
of
large
amount
the
that
LnO of 1993. Southland conrended
ing and left it wlnerable to cornpetition'

SOUTHLAND THREATENS BANKRUPTCY


By early April, Southland threatened to file for bankruptcy if itcould not reach an
agreement with its creditors. Its creditors, on the other hand, thought bankruptcy might
not be a bad thing. One analyst was quoted as saying that the bondholders might be better
off in bankruptcy: "The bond.holders are already unhappy and this is really the only way
out." 5 The finn officially delaulted by missing $70 million in interest payments. Southland
improved is olfer to bondholders, more than doubling the previous equity stake of bondholdcrs and prelerred shareholders to 25o/o and giving bondholders new intermediate-term
debt securities bearing 12Vo-l4To interest. The exisring shareholders, including the Thomp
son family, would have an equity srake of 5Vo, and Ito-Yokado would increase its capital
infusion to $430 million in exchange for l\Vo of the equity. The restructuring plan would
include a one-lor-ten reverse stock split.

7-Eleven Japan was Southland's first. international 7-Eleven licensee in 1973. It is also the largest licensee and
largest convenience store operaLor in Japan, with about 4,000 stores. 7-Eleven Japan purchased Southland s Hawaiis widely
ian-stores in 1989. Ito'yokado owns a 50.37o interest in 7-Eleven Japan, while the remainder of the stock
3

held.7-ElevenJapanexperiencedhighprofitabilityduringtheperodo[t}riscase.a Cal Mankowski,;'Talking Point-southland Bondholders," Reuters News Service, March 23' 1990.
5 "southland Says Bankruptcy Possible Alter Huge Loss," Reuters News Service, April 3, 1990.

SonthlandCorporation

57

PREPACKAGED PLAN
In July, Southland, is bondholder committee,6 and lto-Yokado announced that they
agreed to the restructuring plan. In what may have been a move to cover all the bases, at
the same time Southland asked'bondholders to embrace its proposed exchange terms,
which needed to be acceptedby 957o ofbondholders and two-thirds ofpreferred share-

i;i""ff

i'ffi i:1;,'J;3:1H:*,ffiiil'#HJrl,T:fi :ffi H'* j"{fr ,}::H:#

tance. If the prepackaged plan was subsequently accepted by banlauptcy court, then it
would be binding on all securityholders. Southland estimated that a prepackaged reorganization plan would be approved within six months, whereas a raditional Chapter 11 proceeding might take several years to complete.
Southland did indeed fail to get the supermajority it needed,T and in October 1990, it
officially filed for protection under Chapter 11. The company simultaneously filed the
prepackaged bankuptcy plan with the court, because it did receive the required two-thirds
acceptance by creditors. The prepackaged plan was the first. ever filed by a major retailer.
A syndicate of lenders offered $400 million in debtor in possession (DIP) financing for use
as working capital. Southland planned to continue business as usual during the banlauprcy
proceedings, which began December 14, 1990.

A PLAN IS APPROVED
Bankruptcy judge Harold Abramson dismissed Southland's prepackaged plan and
required a new vote on the plan, despite the previously gained two-thirds majority. Creditors objected to the Thompson family retaining a 5Vo equity stake in the company, and they
were allowed to circulate details of their objections to securityholders. Judge Abramson was
quoted as saying, "We're now in bankruptcy and I want to follow the bankruptcy code."8
A month later the count was in, and securityholders overwhelmingly accepted the reorganization plan, which was in Lum confirmed by the banlruptcy court. This eleared the way
for Southland's relatively quick emergence from Chapter 11 and for a purchase of its
stock by Ito-Yokado. Southland's chief financial officer (CFO), Clark Matthews, said:

will now be able to go forward as a much sEonger company, witlt


significantly less debt, reduced debt service obligations, and, most imporSouthland

'

tantly, a siz-eable cash infusion'from new majority owners who share both our

The bondholders were represented by investment bankers Kidder, Peabody

& Co. and

the law firm Chap-

man and Cutler.

-7

The exchange offer was acccptablc to 897o o[ the bondholders, holding 801o of t]re debt, shy of he 957o
required, and to 90Vo of the preferred stockholders, where a two-thirds majority was needed.
8 Lynne Richardson, "Soutlrland Debtholders Agree on Reorganization PIan," Reuters News Service,lanauy 24,
1991.

58

Case

SouthlandCorPoration

store business""Impleenthusiasm for and knowledge of the convenience


financial stability and
mentation of trris pran wilt tr"etp ensure Southland's
in mday's very
greatly enhance o,i, long-,.r* uuitity to compete effectively
e
Erruir.rging convenienci retailing environment''

substantially' The post-confrmaSouthland's govemance and management changed


by existing shareholders, ten selected by
tion board consisted of three members designated
and two
Ito-Yokado and 7-Eleven Japan, two chosen by the bondholders'committee,
of
7-Eleven
and chairman
inO"p.nO.nt directors. Masatfshi Ito, president of Ito-Yokado
John and Jere Thompson'
Brothers
new
board.
Southland's
uoaro, was chairman of
were co-vice-chairmen of the
former Southland chairman and president respecrively,
clark Matthews' southland's
board, and founder Joe Thompson was a board member.
was
*t o shepherded the comiany tkough negotiation and bankruptcy proceedings'

;;;;t
cro

the new president and CEO of Southland'


a B rating' Though still
The market responded favorably. southland's bonds received
better than the imminent default impliat junk bond levels, the bonds were considerably
remained a highly levered comcations of a D rating. In spite of the resructuring, Southland
billion' Its financial position
pany, with long+erm debt of $2.9 billion on total assels of $2.6
paper issue was rated A1+ by
continued to improve, and its september 1992 commercial
looking up, aS the convenience slore
Standard & Poor,s Corp. operating results were a]so
from discounting and price probusiness moved into "eueryday fiir pricing" and away
The company retumed to its polmotions, which resultedin nigner grott op"*,ing margins.
products and through a $200 million
icy of improving sales by prJuidiig moie and varied
still experienced a net loss of
remodeling of otder t*Lt. By the ind of l992the company
losses. Revenues were $7'5 billion' compared
$131.4 million, but this was less than previous
in reven'tes reflects the sale of
with $12.8 billion ar the firm's peat in 1985. The reduction
in 1993.
profit
aisets. southland expected a

large portions of souttrland's

QUESTIONS
exceed i1s assets, or when its
1. A firm becomes financially distressed when its liabilities
used !o dqtermine the point of financash flow is negative. Usually market value numbers are
liabiliries exceeded its assets
cial disress. Uie book ualues to determine when Southland's
look at noncash items in
im cash flows became negative. (l'{ote that you need to
and when
net income')
the income statement, as well as add depreciation back to

particular, look at Southland's cur2. What does ratio analysis show about Southland? In
and cash flow from
rent ratio, times interest earned, return on equity, return on assets
ratio
to plot these ratios over time and look for Uends' The current
operations. it is useful

..Court Confirms Southland's Reorganization Plan;" B usiness Wire, Febrmry 2l , 1991 '

I
t:l

l'

';'- ?
SouthlatdCorPoration

59

is u *ryq= of how well a.comis (cunent assets)/(cunent liabilities). Times interest earned.
(net profit before taxes + interpury .u" meet its interest payments and is defined as

depreciation)/(total assets)' Retum


(revenues
incomeXshareholders' equity). Cash flow from operations is

est)/interest. Return on assets is (revenues

*tq*V

i"t"et

expenses

final reorganization P9'3


3. Was rhere a deviation from absolute priority in Southland's
transfer some of their
Did
bondholders
What might have been ihereasons for thi deviation?
wealth to shareholders?
plan?
4. How did Souttrland benefit from its prepackaged bankruptcy
Thompson family conrol of southland?
5. Were there any agency problems associated with
governance and
Wt at atoot after Souttrtand's bankruptcy change in corporate
purchase?
Ito-Yokado's
after
improve
*"rif Wny did Southland's bond rating

manage-

tfieir equity position go from


6. Southland insiders, primarily the Thompson family, saw
2-5Vo
of new Southland. what
to
LBO
l|vo ofold southland to 507aof the southland
changes in value does this represent?
a company's opti7. What implications does the Southland situation have for determining
mal capital structure?