Did Titan Milk Its Cash Cows?

Appco, Crescent Oil bankruptcies reveal cracks in holding company's methods

Published in CSP Daily News

By
Steve Holtz, Online News Director & Beverage Editor

BLOUNTVILLE, Tenn. & INDEPENDENCE, Kansas -- With debts mounting to between $10 million and $50 million for cash-strapped Appalachian Oil Co. (Appco), the company filed for Chapter 11 bankruptcy protection on Monday, as reported in a CSP Daily News Flash yesterday. The company's second-largest creditor, sister company Crescent Oil Co., is owned $1.6 million and filed for bankruptcy protection of its own on Saturday. Both companies are owned by Titan Global Holdings, a Richardson, Texas-based holdings company that, in its most recent quarterly report, reported a loss [image-nocss] of $9.5 million.

"As of Nov. 30, 2008, the company has a working capital deficit of $51.8 million including current assets and current liabilities from discontinued operations, a working capital deficit of $23.8 million excluding current assets and current liabilities from discontinued operations, and an accumulated deficit of $112.2 million," the company wrote in its quarterly report. "The company generated sales of $78.4 million and $90.0 million for the three months ended Nov. 30, 2008, and 2007, respectively; and incurred a net loss of $9.5 million and $24.5 million for the three months ended Nov. 30, 2008 and 2007, respectively."

Attempts to contact officials at both Titan Global Holdings and Appco for comment were unsuccessful at presstime.

Court documents show Appco's top five creditors to be BP (owed $2.4 million), Crescent Oil ($1.6 million), CITGO Petroleum ($1.4 million), Marathon Ashland Petroleum ($1.2 million) and grocery supplier LP Shanks ($1.4 million).

The filing is signed by Bryan Chance, who is identified as president of Appco and is also the CEO of Titan Global Holdings, which bought Appco in September 2007. Blountville, Tenn.-based Appco operates 55 stores in northeastern Tennessee, southwestern Virginia and southeastern Kentucky.

Appco's bankruptcy filing comes about two months after it stopped providing gasoline to independent convenience stores in those same markets, noting a cash crunch, according to a report in The Kingsport Times News, and about seven weeks after Appco representatives first began saying the company was going to refinance its debt "any day."

Titan Global Holding's Securities & Exchange Commission (SEC) filings show that the company has bought several businesses-including a shoe company and an electronic printed circuit board maker-and eventually closed them.

Meanwhile, Independence, Kansas-based Crescent Oil received court permission to continue to serve its wholesale customers as its bankruptcy proceedings continue, according to attorney Lisa Epps of Spencer Fane Britt & Browne LLP in Kansas City.

"Yesterdaythe court entered an order authorizing the debtor-in-possession financing with M&I Bank, under which we will be able to provide fuel to our stations, either ourselves or through interim supply agreements, and we'll be able to provide product to the stores," Epps told CSP Daily News.

Epps added that Crescent Oil's more than 50 c-stores continue to operate.

Court documents show Crescent Oil has debts totaling between $50 million and $100 million. Its top creditors are listed as Shell/Equilon (owed $6.5 million), the Kansas Department of Revenue ($4.3 million), ConocoPhillips ($3.6 million), CHS Inc. ($915,000) and Apex Oil Co. ($540,000). The filing in signed by Crescent's executive vice president Jon Viets.

In court this week, Viets told the court that Crescent Oil operates more than 50 c-stores and supplies about 290 others. He said Crescent's stores were mostly without gasoline and that many of its other retail customers have been buying fuel elsewhere, according to an Associated Press report.

Viets said Crescent had been unsuccessful in securing new financing to keep its operations afloat. The company was forced to file for bankruptcy after it went into default with creditors and had its accounts blocked, making it unable to buy fuel to distribute to its customers. Titan Global Holdings closed on the purchase of Crescent Oil on January 15.

Crescent owes its primary secured creditor, M&I Marshall & Ilsley Bank, more than $37 million, according to the AP report. Under the debtor-in-possession agreement, M&I will provide Crescent with a $3.3 million revolving line of credit, and ConocoPhillips Co. will provide $950,000 in credit support.

Epps said a credit adviser will be hired to help the company with the liquidation process. A final hearing on the bankruptcy petition is scheduled for March 10.

How the bankruptcies will play out will depend on several factors, Milligan College economist Bill Greer told the Kingsport Times News. "Chapter 11 is generally applicable to a business that is a viable, going concern," he said. "It just needs to be assisted through a transitionary period because of accumulating too much debt, for whatever reason, and Chapter 11 gives a company time to restructure again."

Greer added, though, that Chapter 11 can be misused, and based on his knowledge of Titan Global Holdings, he said Titan's strategies appear to deserve some scrutiny. He said holding companies often have a portfolio of businesses that include stable "cash cows" and other holdings that have good potential but need more cash to grow. Assets can be transferred from cash cows safely and effectively, or they can be used to continue acquiring companies in what essentially becomes a shell game, Greer said. "If you've milked your cash cows for all they're worth, that strategy's run out of steam. You can't continue to perpetuate it."

When bankruptcy results in those types of cases, Greer said, it crosses the line into being questionable in his view. "My ethical reservation about Chapter 11 is it's too often used as a regular finance strategy to reduce debt load."

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By Steve Holtz, Online News Director & Beverage Editor
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