When J.C. Penney (JCPN.Q) filed for bankruptcy back in May, lawyers for the company acknowledged that quickly moving through the Chapter 11 process was essential. The company agreed to a July 15 deadline to negotiate a business plan with creditors, with the goal of emerging from bankruptcy before the critical holiday season.

J.C. Penney eventually struck a deal to sell its retail operations to a joint venture of retail REITs Simon Property Group (SPG 1.18%) and Brookfield Property Partners (BPY). However, the process has dragged on longer than expected. Fortunately, J.C. Penney has finally filed a draft of the asset purchase agreement, providing a glimmer of hope that the sale to Simon and Brookfield can be finalized before Black Friday.

Delays, delays

Following a competitive bidding process over the summer with three major contenders, J.C. Penney identified the Simon/Brookfield joint venture as the top bidder in August. Yet near the end of that month, talks between the parties broke down, forcing the ailing retailer to consider selling itself to its lenders instead.

On Sept. 9, J.C. Penney announced that it had revived the deal with Simon and Brookfield. The REITs' joint venture signed a letter of intent to buy the company's retail operations for $300 million of cash plus the assumption of some debt and a potential performance-based payout.

The exterior of a JCPenney store

Image source: J.C. Penney.

Alas, it hasn't been smooth sailing since then. At the status conference on Sept. 9, J.C. Penney said it would file a draft asset purchase agreement spelling out the detailed terms of the sale to Simon Property Group and Brookfield Property Partners within 10 days. A month later, the asset purchase agreement still hadn't materialized. Last week, Bloomberg reported that the sale was in jeopardy after Simon and Brookfield missed several deadlines, and that the parties were entering mediation in an attempt to resolve their differences.

Progress, at last

On Tuesday, J.C. Penney filed the long-awaited draft asset purchase agreement with the bankruptcy court. The company said the terms are roughly in line with the letter of intent that Simon and Brookfield signed last month. J.C. Penney and the Simon/Brookfield joint venture are now working to finalize the language in the asset purchase agreement so they can get it approved by the bankruptcy judge.

J.C. Penney plans to seek approval to complete the sale of its retail operations at a hearing on Nov. 2. Lawyers for the company stressed that there is "no room for error or delay" in closing the deal. Assuming J.C. Penney gets the green light from the bankruptcy judge and meets the other closing conditions, it will close the sale to Simon and Brookfield sometime next month.

If the sale goes through, it will be good news for J.C. Penney's employees, vendors, and customers. It won't help shareholders, though. Under the Chapter 11 reorganization plan filed this week, J.C. Penney stock will be canceled, making it worthless. Even holders of the company's unsecured debt are set to walk away with nothing.

Lots of risk ahead

While J.C. Penney still has a chance of selling its retail business before Thanksgiving, it's cutting things awfully close. Any further delays could cause the company to miss that target.

The stakes are high because it appears that vendors are wary of doing business with J.C. Penney right now. Last year, the retailer entered November with nearly $3 billion of inventory; by contrast, it had just $1.4 billion of inventory as of Oct. 10, 2020. In fact, inventory has been declining steadily throughout 2020. Some of this may be deliberate, but J.C. Penney is now at risk of having far too little merchandise to meet holiday demand.

A dreadful holiday season with bare shelves could alienate customers and spoil J.C. Penney's recovery efforts before they begin. That, in turn, would hurt Simon Property Group, Brookfield Property Partners, and other mall owners counting on J.C. Penney to survive -- at least in the short term -- to limit the number of vacancies at their properties.

Thus, it's in everybody's best interest to complete the sale of J.C. Penney's retail operations to Simon and Brookfield as soon as possible. Whether that will actually happen remains to be seen.