Here’s a scary thought. Gottschalks (troubled West Coast-based department store chain) announced yesterday that it has received a $30mm capital investment from Chinese based Everbright Development Overseas, to establish an ‘exclusive sourcing and sales partnership’.
So let me get this straight… Values on marginal US assets are justifiably falling due to inability to maintain margin in an environment characterized by weak spending and rising imported inflation. At the same time, factory dynamics in China are dramatically changing in a way that is limiting capacity and giving the large factories long-sought-after pricing power. Then we see the Chinese use this leverage plus stronger FX to invest in said US assets after the initial margin hit?
Under the terms of the deal, Everbright will be issued 5.6mm shares, 29% of the total shares outstanding, and a $20mm convertible secured note that convert at $1.80 per share. In addition, Everbright can acquire up to 60mm shares of Gottschalks common stock at $120mm in cash if shares trade above $6 for more than 60 day and performance thresholds are met. This would be another $300mm payday.