BUSINESS/ECONOMY

Campeau’s cash squeeze

TOM FENNELL March 2 1987
BUSINESS/ECONOMY

Campeau’s cash squeeze

TOM FENNELL March 2 1987

Campeau’s cash squeeze

It was seen at the time as a stunning financial coup. But increasingly, Wall Street analysts say that Canadian financier Robert Campeau’s New Year’s Eve takeover of Allied Stores Corp., the giant American department and specialty clothing retail chain, is seriously flawed. To help finance the $4.8-billion deal, Campeau borrowed $200 million against 35 per cent of Allied. And to meet his debt payments on the huge purchase he planned to sell some of Allied’s poorest subsidiaries with the aim of raising $399 million by June 30, and a total of $665 million by year-end. But some analysts say that Campeau will have trouble meeting such tight deadlines and, as a result, he may have to attract buyers quickly by peddling some of Allied’s top assets. Said New York’s Korn/Ferry International retail analyst, Ann Hunt: “It is beyond me how Campeau plans to turn things around.”

To reduce his costs, the brash and aggressive Campeau, who built Toronto-based Campeau Corp., hammered the purchase through quickly to beat changes in U.S. tax laws and save about $330 million. But he had to acquire an estimated $798 million in short-term bank debt to complete the transaction. In addition, he turned for help to Edward J. DeBartolo, the Youngstown, Ohio shop-

ping-mall developer. Campeau had outmanoeuvred DeBartolo and Allied’s top management to claim his victory. But when even more cash was needed in December he called on DeBartolo, who provided a $200-million loan. In return, DeBartolo has an option to convert his loan into a 35-per-cent stake in Allied for an additional $80 million. If DeBartolo does not exercise his option by year-end, the loan comes due, squeezing Campeau’s position even tighter.

Further potential pressure on Campeau’s deal, which relied on using Allied’s assets as a lever to help meet the purchase price, was outlined last Friday in an Allied prospectus filed with the U.S. Securities and Exchange Commission in Washington. The prospectus presented potential investors with a proposal to raise $1.1 billion in bond borrowings and additional funds through a preferred stock issue. The document said that Campeau planned to sell 16 Allied divisions to help pay for the cost of taking over Allied. Explained the prospectus: “Even if the company is able to meet such obligations, its highly leveraged capital structure may limit its ability to withstand adverse economic conditions.” If the economy worsens, the prospectus notes that the company will have to

sell off other assets “on less than optimal terms.”

When Campeau arranged the Allied purchase, he said that he planned to sell the 16 weak divisions, keeping only the firm’s top-grossing performers, including the Bon, Jordan Marsh and Maas Brothers department stores and the Ann Taylor and Brooks Brothers specialty clothing stores. But some analysts say that bids have already been made for Allied’s top assets, and Campeau may not be able to hold out. Said Hunt: “Everyone in the market is aware of how desperate he is. They are waiting for the markdowns.”

To ease the pressure on the Allied financing, Campeau wants to quickly raise his target of $1.1 billion in bonds and another $333 million in preferred shares. First Boston has a stake in the success of the public borrowing. The bank loaned Campeau a total of $1.15 billion in November when the takeover struggle was at its peak.

Campeau’s plans to raise cash by selling his high-risk bonds coincide with nervousness on Wall Street over such issues. Dennis B. Levine, a top executive with Drexel Burnham Lambert Inc., a leading New York junkbond dealer, is awaiting sentencing after his conviction on four felony charges surrounding insider trading. And two weeks ago three investment dealers trading in the volatile market were arrested in New York, also on insider trading charges. As a result, Edward Hyman, an economist with C. J. Lawrence, a Wall Street investment firm, said that the junk-bond market is highly unstable and there might be a wide sell-off soon, just as Campeau enters the market.

Those predictions emerged less than two months after Campeau, the former builder and real-estate developer, had expressed his delight over his successful foray in New York. The Allied deal was his first major financial venture in the United States and his first takeover attempt since 1980, when he lost a bitter $400-million battle for control of Toronto’s bluechip Royal Trustco Ltd. After arranging the Allied purchase, Campeau said that he regretted not having moved into the U.S. market years earlier. If he now is forced to devalue his Allied prize by selling off the Bon, Maas Bros, and other top performers in the retailing portfolio, it would be a severe blow to Campeau’s ambition to expand his business activities into the highstakes world of American corporate takeovers.

-TOM FENNELL with DAVID LINDORFF in New York

TOM FENNELL

DAVID LINDORFF