Vitamin Shoppe, Pet Supplies Plus owner files for bankruptcy – The Mercury News

By Eliza Ronalds-Hannon, Reshmi Basu and Jonathan Randles | Bloomberg

Franchise Group, the owner of brands including the Vitamin Shoppe, Buddy’s Home Furnishings and Pet Supplies Plus, filed for bankruptcy protection after months of losses and turmoil surrounding its backer B. Riley Financial Inc.

The company, also known as FRG, filed under Chapter 11 in Delaware, listing almost $2 billion of debt, according to court documents. Bloomberg News, citing people with knowledge of the matter, reported late Saturday that FRG was preparing to hand control to lenders including HPS Investment Partners after months of negotiations with the group over a restructuring.

FRG said in a statement it has struck a deal with lenders that own most of its senior debt. Under the proposal, which must be approved by a bankruptcy judge, supporting lenders have agreed to swap out first lien debt for 100% of the equity in the reorganized business.

The company has been at the center of turmoil surrounding Los Angeles-based B. Riley, the investment and brokerage firm that helped arrange a $2.8 billion buyout of FRG last year. The deal was led by founder and then-Chief Executive Officer Brian Kahn.

B. Riley shares fell 10% in New York premarket trading after the company announced it will need to take an additional impairment of $120 million on its equity investment in the parent unit of FRG and a loan to Kahn.

Kahn’s buyout

Just months after FRG’s debt-fueled buyout by Kahn, the founder stepped down from his CEO position amid a criminal investigation into his alleged role in a securities fraud case tied to the collapse of defunct hedge fund Prophecy Asset Management. Trouble at FRG accelerated as its brands struggled to perform as projected, compounded by maturities on its debt.

Kahn has categorically denied wrongdoing or any knowledge of misdeeds by the managers of Prophecy, and said he was among those who were defrauded as a result of Prophecy’s demise.

“FRG’s bankruptcy is a confluence of events that ultimately derailed our original investment thesis,” B. Riley co-founder and Chairman Bryant Riley said in an email to employees. “Unfortunately, the investment was devastated by the precipitous decline in consumer spending in the markets served by the FRG brands, and the fallout and uncertainty from the Prophecy scandal and the related federal investigation into Brian Kahn.”

The group sold its Sylvan Learning business in February, but other possible disposals were hampered by the allegations involving Kahn, FRG’s chief restructuring officer David Orlofsky said in a court filing. That meant “Franchise Group could not deleverage its balance sheet.”