Dive Brief:

• Paper Source named Elliott Investment Management as the successful bidder in a process for the specialty retailer to sell itself in Chapter 11.
• The deal includes $40 million in cash, plus additional cash for incremental financing taken on under Paper Source's debtor-in-possession facility, as well as assumed first-lien debt totaling $51.6 million, according to court papers.
• Elliott also owns Barnes & Noble, which the investment firm acquired in 2019, and the U.K.-based book chain Waterstones. Paper Source listed an affiliate of private equity and investment firm Apollo as a backup bidder. 

Dive Insight:

Susan Lindstrom founded Paper Source in 1983 as a single store in Chicago to bring handcrafted paper goods from around the world to U.S. consumers. Lindstrom grew the retailer to 27 stores by 2007 before selling a majority stake to private equity firm Brentwood Associates, after which the retailer's expansion accelerated.

Paper Source was undergoing a period of expansion when COVID-19 began its spread in the U.S. The retailer capitalized on the fall of rival Papyrus by taking over 30 of the latter's store leases. That represented a 20% expansion of Paper Source's footprint, at the worst possible time. 

Pre-pandemic, Paper Source was "enjoying rapid expansion and sustained sales growth," CFO Ronald Kruczynski said in court papers at the time the retailer filed for Chapter 11 in March. Store closures and sales declines derailed that trajectory, knocking about a third off the company's top line. Paper Source "sustained deep damage to their finances and operations as a result of the ongoing COVID-19 pandemic," according to Kruczynski. 

Elliott already has a toehold in the category as the owner of Barnes & Noble, which devotes a significant amount of its stores to gifts and paper products. Given that, Paper Source could have a lot to offer the book retailer and vice versa. Along with its stores, Paper Source has a substantial wholesale business and designs roughly 40% of its products, Kruczynski said in March.

In a presentation, Elliott described the businesses of Barnes & Noble and Paper Source as "highly complementary, with shared product ranges and a common commitment to excellent customer service." The investment firm noted that Paper Source will continue to operate independently and keep to its core product offering of greeting cards, stationery, office supplies, gifts and other products. At the same time, Elliott noted that "considerable opportunities exist for mutually beneficial retail partnerships."  

After leading a turnaround at Waterstones, Elliott gave CEO James Daunt the chief executive spot at long-struggling Barnes & Noble as well as part of an initiative to apply Waterstones' model to the American bookseller. Elliott said that Gaunt will also have "oversight responsibilities" for Paper Source, while the retailer will be owned ultimately by a subsidiary of an Elliott-owned company dubbed "Book Retail Investco." Elliott did not immediately respond to Retail Dive's request for more details. 

Elliott's acquisition of Paper Source is pending court approval. A federal bankruptcy court hearing to consider the deal is scheduled for May 13.