Welcome to the 74th Pari Passu Newsletter.

After learning about the Implosion of Voyager a few weeks ago, I am excited for today’s restructuring case study: Party City.

A 2017 Business Insider article once declared that “Party City has a reason to celebrate.” The company appeared to be defying all the odds in an abysmal environment for retail, with moderate growth, a differentiated business model, and clear market leadership. Within two short years, however, the story took on a different tune. Buffeted by numerous headwinds and further hurt by the lengthy COVID-19 pandemic, Party City Holdco was forced to engage in an exchange transaction, and the company finally capitulated to an in-court restructuring in 2023.

This article explores the factors that brought on the decline of Party City–which may have been more predictable than is commonly thought–and the company’s more recent emergence as a stronger entity following an effective prepackaged Chapter 11 process [7].

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A Ballooning Enterprise

In 1986, Steve Mandell recognized that the market for party goods was highly fragmented with a lot of small mom-and-pop shops and large retailers with limited party inventory. His first store, opened in East Hanover, NJ, was an immediate success. Within a year, Mandell opened a second store and began franchising the highly popular concept out to others in 1989. Capitalizing on this momentum, the chain expanded rapidly through the 1990s, becoming a national presence. In 1996, the young company went public. However, after a 1998 audit was not filed on time, the stock price crashed, and the company was delisted. Investor Micheal Tennenbaum used the opportunity to take control of the business for a relatively low price, ousting Steve Mandell. Nevertheless, the business, which by then had also begun to take advantage of Halloween with seasonal pop-up stores, continued to thrive [1, 2].

In 2005, private equity firms Berkshire Partners and Weston Presidio developed a platform in the party goods industry by buying Party City and combining it with another company, Amscan Holdings, under the umbrella of AAH Holdings Corporation. This transaction combined a leading retailer of party goods and costumes, Party City, with the leading designer and manufacturer of party supplies, Amscan. Another previously acquired subsidiary of Amscan, Anagram, was also the largest manufacturer of foil balloons. Under this new, verticalized party goods manufacturer and retailer, the sponsors directed the bolt-on acquisitions of smaller retailers Party America in 2006 and Party Outlet in 2007, turning Party City into the indisputable leader in the retail of party goods in the United States [2, 3].

Capturing quick gains on their investment, both sponsors sold 38% of the combined business to fellow private equity firm Advent International in a 2008 secondary sale. At the time, the company operated more than 950 stores under the brand names Party City, Party Americas, Factory Card & Party Outlet, The Paper Factory, and Halloween USA. According to Managing Director Steven Collins, recent economic concerns were of little concern to the firm: “Party supplies is somewhat insulated from the economy and the times out there…when somebody has their third birthday, you’re not going to wait for the recession to end to celebrate it.” This wager proved to be correct, as the business continued to grow, even going international in 2012 through a push into Canada. Another private equity firm, Thomas H. Lee (THL) Partners, also felt there was potential in the business, and purchased a majority stake in the same year in a recapitalization transaction valued at $2.69bn. Given the company’s leading market position and attractive cash flow profile, the owners were even able to pay out a $338mm dividend recap the following year. Several bolt-on acquisitions, including the acquisition of a distributor of metallic balloons and an online party supplies site, also followed [1, 4].

With THL and Advent holding 93% of the company’s equity, the sponsors decided to take the company public in 2015. Public investor sentiment towards the company was mixed. While a leadership position in both the retail and manufacturing sides of the $10bn party goods industry was an attractive one, the private equity buyouts had saddled the company with nearly $2.2bn in debt, compared to an arguably aggressive adjusted EBITDA of $362mm in 2014, representing a high leverage ratio of ~6.0x. Ultimately, the company, now named Party City Holdco Inc. (NYSE: PRTY), received a public valuation of nearly $2bn. Upon its IPO, the company operated nearly 900 stores (inclusive of approximately 210 franchised stores), as well as a network of over 300 temporary Halloween City stores, posting revenues of $2.27bn in 2014. Management highlighted the expansion of the store footprint, same-store growth, and E-commerce as prime opportunities for the company. Revenue, which had grown at a CAGR of 9.2% over the period 2010 to 2014, continued to grow post-IPO, albeit at a slower rate, peaking at $2.43bn in 2018 [5, 6].

Source: TheStreet

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