How workers suffered from Shopko's bankruptcy while Sun Capital made money

Private equity is again under fire for bankrupting a longtime retailer and stiffing its employees.

What's new: At issue this time is Shopko, a Wisconsin-based discount chain that was acquired by Sun Capital Partners in 2005 for around $1.1 billion. It filed for Chapter 11 bankruptcy protection in January and later opted to liquidate after failing to find a buyer.

• Shopko employed around 14,000 people at the time of bankruptcy, operating 360 stores in 26 states.
• Some employees say they were promised both retention bonuses and severance at the time of the bankruptcy, but only received the former.
• There are parallels to the Toys "R" Us situation, which was (partially) resolved when former owners Bain Capital and KKR created a $20 million employees fund.

Sun Capital made money on its Shopko investment. Nothing to write home about, particularly given the long hold time, but profits nonetheless.

• Sun put up a relatively small amount of equity and then, shortly after the buyout, sold Shopko's real estate via a sale-leaseback transaction (much like what was done with Toys "R" Us). The result was to add debt onto Shopko's balance sheet while simultaneously stripping it of assets.
• Sun also paid itself several dividends, including a $50 million payback in 2015. Plus quarterly consulting fees of $1 million and 1% consulting fees on at least six Shopko transactions.
• That last one is the most egregious, because it applied to the dividends. In other words, Shopko had to pay Sun an extra $500,000 on top of the $50 million dividend — just for the privilege of weakening its balance sheet.
• And none of this even addresses how Shopko allegedly shortchanged Wisconsin over $8 million in sales tax between 2013 and 2016.

A source close to Sun argues that the company was doing well in 2015, and that its subsequent struggles were largely the result of dollar store pushes into the smaller Midwestern markets where Shopko put its stores — pointing to similar struggles of comparable retailer Fred's. Plus continued top-down pressure from Amazon and Walmart.

Yes, but: Even if we accept this explanation, which is tough to do, it still doesn't explain why Shopko promised severance in January.

• These were written promises from corporate, not from store managers.
• Axios has obtained one, sent by the company's head of HR, and it says nothing about severance being conditional on Shopko finding a buyer.
• All creditors have been made promises — that's why they're creditors — and employees are almost always last in the payback stack. But corporate creditors understand the system. Most retail employees don't, and therefore have every reason to feel cheated.
• Sun Capital declined comment, via a spokesman.

And none of this even addresses how Sun made irresponsible decisions and made money anyway. That's not uncommon in private equity. The question now is if Sun will adopt the Toys "R" Us model, making good to workers who suffered the consequences of those decisions and who were misled, or if that is the private equity anomaly.