Will J.C. Penney (JCP) Be Roadkill in Icahn-Ackman Battle of Titans?

February 5, 2013 9:00 AM EST
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Price: $6.85 +2.39%

Rating Summary:
    12 Buy, 14 Hold, 8 Sell

Rating Trend: = Flat

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    Up: 30 | Down: 30 | New: 23
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Following news that J.C. Penney Co., Inc. (NYSE: JCP) bondholders of more than 50% of the Company's 7.4% Debentures due 2037 are seeking to push the company into default - which the company said is invalid - there is speculation that Carl Icahn could be behind the move.

A report from ZeroHedge notes that volume in the notes surged in the wake of Icahn's war of words with Bill Ackman on CNBC. Bill Ackman of course is a large shareholder of J.C. Penney and has been a vocal supporter of CEO Ron Johnson's turnaround strategy.

If Icahn is involved or not, the news is not being viewed favorably by the Street. Analysts at Piper Jaffray said the creditor issues risks the company's turnaround strategy. In a worse case scenario, J.C. Penney may have to pull inventory from its credit line borrowing base.

J.C. Penney for its part said while Brown Rudnick LLP, which is representing the 7.4% bondholders, alleges that the Company violated the Indenture by entering into an inventory-secured Credit Agreement in January 2012 without providing for equal and ratable security for the Debenture holders, the granting of a security interest in inventory pursuant to the Credit Agreement does not constitute an event of default under the Indenture. Pursuant to the Indenture, the negative covenant extends only to "principal property" -- which does not include inventory. Furthermore, the Company has never had any loans outstanding under the Credit Agreement, and because the Indenture only covers "indebtedness for money borrowed," the Compan's entry into the Credit Agreement would not have triggered the Indenture provision in any case. The Company today filed an action for injunctive and declaratory relief in support of its position in the Court of Chancery of the State of Delaware. J.C. Penney CFO Ken Hannah said, "We believe this notice of default is invalid, completely without merit and is intended to create self-interested trading opportunities in the market, and we will therefore vigorously defend the interests of jcpenney and all of our constituencies in all appropriate forums."

Shares of J. C. Penney are down 6 percent to $18.18 early Tuesday.

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