THE PRICE OF A REPRIEVE
ROBERT CAMPEAU’S BIGGEST GAMBLE CAME UP SHORT, BUT TORONTO’S REICHMANN FAMILY IS HELPING OUT
The glittering celebration in Bloomingdale’s in April of last year was Robert Campeau’s crowning moment. It marked his bold assault on U.S. retailing, in which he won two of the world’s largest department store chains. As champagne corks popped, he mingled with glamorous movie stars, including Brooke Shields and Douglas Fairbanks Jr. And the French-Canadian entrepreneur repeatedly flashed his famous Cheshire cat grin into the TV cameras—a signal to all the world that Robert Campeau had arrived. But last week, the tycoon was in retreat. Behind the towering iron gates of his baronial French chateau in Toronto he wrestled privately with the embarrassment of losing control of his company, Campeau Corp. His spectacular takeovers had been derailed by his mercurial temperament and cruelly high interest payments. A four-man management committee will now run his retail empire.
Still, Campeau faced that prospect with equanimity. Last week, he responded in writing to Maclean ’s questions: “This is a fifty-fifty partnership. It is not about power and who has won and lost.”
Under the terms of a rescue package put together by Toronto’s billionaire Reichmann family, and finally approved by creditors last week, the 65year-old entrepreneur’s wings have been closely clipped. He will surrender control of his U.S. retail operations, Allied Stores Corp., for which he paid $4.9 billion in 1986, and Federated Department Stores Inc., which cost him $8.2 billion in 1988, to two new executives whom Reichmanns’ corporate financial genius Lionel Dodd will appoint.
The committee will oversee the company’s financial restructuring, leaving Campeau to focus on real estate, which represents less than 20 per cent of the company’s current assets. As well, Campeau’s German-born wife, Ilse, and 33-year-old son Daniel have been removed from Campeau Corp.’s board of directors—leaving the family with only three representatives on the 10-man board.
But despite the dramatic shift of control, many of his usual wholesale suppliers have expressed concern that Campeau will not survive. At least Rev. Ovila Campeau, Robert Campeau’s older brother, was able to be positive. Said the priest: “It will be hard for Robert to share that control, but it will be better for him in the long run.”
Previous setbacks have caused prolonged
depressions in Campeau, the youngest of seven surviving children of an impoverished Sudbury, Ont., family. According to reports, in 1970, Campeau visited Montreal regularly for weekend treatments at the clinic of psychiatrist Dr. Alan Mann, whom he later named to the Campeau Corp. board of directors.
But Campeau’s current situation is a constructive one. Said Hollinger Inc. chairman Conrad Black, one of the newly appointed Campeau Corp. directors: “Do not play any dirges for Bob Campeau.” In an interview with Maclean 'son an overseas call from his car phone in London, England, last week, he added: “His basic fortune is still intact. He is like the guy who went to the race track, bet $2 on the first race, got a big payoff and put it all on the last race. So? He lost $2—and he was gambling with other people’s money.”
Campeau’s personal wealth is still above $300 million. He owns an 11,000-square-foot mansion in Toronto’s posh Bridle Path area, a chalet in Quebec, a winter retreat in Jupiter, Fla., and an apartment in the fabled Waldorf-Astoria Hotel in New York City. And some leading analysts say that Campeau does not even resent the Reichmanns’ growing presence in his boardroom because he has long perceived the billionaire family as his natural successors. Declared Campeau: “The Reichmanns are my friends.”
Black and others describe the relationship between the highly private Orthodox Jewish Reichmann family and the publicity-conscious Roman Catholic former machinist as extremely
friendly. However, there are obvious differences in temperament between the reserved Paul Reichmann and the irascible and explosive Campeau. Said one analyst, who asked not to be named: “Campeau knows that he has no one in the family to take over when he retires. He has always viewed the Reichmanns, who are also in real estate, as naturally acquiring control of Campeau Corp.”
As well, Paul Reichmann told Maclean ’s last October, as the family was becoming more involved with Campeau, that his firm was “probably a very undervalued company on the stock market.” If so, Reichmann, who also described Campeau as a man who has the “courage of [his] convictions and is very, very capable,” may now be in a position to maximize the values of assets in Campeau Corp.—assets that perhaps only he sees and fully understands.
The warmth of the Campeau-Reichmann relationship is also reflected in the actual terms of the rescue package. Analysts say that the Reichmanns, as lenders of last resort, could have exacted a much higher price from Campeau in return for their assistance, but gracefully chose not to. And Campeau told Maclean’s: “I would never have done this deal with anyone else, only with the Reichmanns, because I trust and respect them.”
But despite Reichmann-owned Olympia & York’s blue-chip reputation in financial circles, the Reichmanns’ guidance at the Campeau helm has only partially restored confidence in Campeau’s U.S. retail business. The holders of high-interest, high-risk bonds, the so-called junk bonds, in Campeau Corp. last week widely criticized a main plank in the rescue package. The Reichmanns agreed to help arrange an additional $1 billion in financing to enable Campeau to buy back some outstanding junk bond issues.
Any delay in reaching an agreement could be disastrous. Black cautioned that, if the investors do not ultimately sell, they risk losing everything by throwing Campeau’s U.S. subsidiary, Campeau Corp. (U.S.) Inc., into bankruptcy. Black pointed out that, even with the lower price, many of the bond holders will have earned a return of roughly eight per cent because of the bonds’ high interest. He added: “Junkers could take a haircut and no one will shed any tears for them. If they ignore Paul Reichmann’s next substantive proposal, they are running a real risk of going to [bankruptcy].”
While Campeau’s new deal also has failed to fully salvage the company’s reputation among U.S. manufacturers, some wholesalers see a glimmer of hope. When Campeau Corp. an-
nounced last week that its creditors had approved the Reichmann loan, Heller Financial Inc., the second-largest credit firm for U.S. retailers, responded by reopening credit lines on a limited basis to clients dealing with Federated and Allied Stores. Said Kurt Barnard, publisher of the New York-based Retail Marketing Report: “I think that the restoring of deliveries will be cautious. Maybe manufacturers will ship the first third of an order and then wait to see if they get paid before shipping the rest.”
Analysts’ reaction on Wall Street to the entrepreneur’s new deal with the Reichmanns was mixed. Barnard immediately announced: “The crisis of confidence is over. Mr. Campeau is no longer in charge.” But others expressed less certainty. Even though the Reichmanns may end up injecting up to $1 billion of their own money into Campeau’s companies by the end of the year, key analysts estimated that those funds would provide only a short-term solution. Said Janet Mangano, a retail analyst at the New York securities firm of Josephthal & Co. Inc.: “What I am hearing is, ‘Is this enough money?’ ”
In fact, the upheaval of the past three weeks may grow worse, or at the very least be repeated, because Campeau faces major debt repayments in 1990 and possibly 1991. As well, he will have to continue to carry punishing interest payments that now amount to more than $800 million a year. And even Black stated last week that it will take more than debt reduction to buoy up Campeau’s listing empire. Said Black: “It is a reasonable inference that some infusion of equity is likely to be desirable.”
The analysts’ concerns revolve
around not knowing which two people the Campeau board will choose to head the company’s U.S. operations during the critical restructuring. Campeau revealed only what kind of executives the board will hire. Said Campeau: “[The person] will not be a merchant, but someone who has been a chief executive officer of a large company which was involved in a capital restructuring.”
And that could lead to the breaking up of Campeau’s empire in a sweeping restructuring. Several analysts anticipated that Campeau’s new financial team will engage in a fullscale asset sale of Federated and Allied’s nine remaining chains and their 250 individual stores. Campeau has already announced that his prize possession, Bloomingdale’s, headed by Marvin Traub, its president and chief executive officer, is for sale. And Campeau president Ronald Tysoe told financial analysts last week that the 17-store chain of upscale stores would likely go to a foreign buyer. Various analysts have predicted that such stores as Jordan Marsh and Ralph’s Grocery Co., based in California, could be the next to go. Said Kurt Barnard: “I predict that Federated and Allied will soon be defunct.”
But the Reichmanns’ Dodd, the man who will ultimately decide if Campeau’s empire will be broken up and sold, told Maclean ’s that the issue is still not settled. He added: “[The answer to whether we will hold an asset sale is]:
‘not necessarily.’ There is more than one way to maximize shareholder values.” Dodd also emphasized that the committee has not developed a strategy yet and that it still wants to hear the opinion of consultants. Said Dodd: “If we had it all figured out, we would not need a committee.”
Breaking up the long-established store groupings would vastly change the retail landscape in the United States. And some former employees of Allied expressed bitterness last week that the swashbuckling Canadian could break up the retail chains to reduce his own acquisition debt.
Campeau stirred deep anger in the United States when he eliminated an estimated 6,000 jobs following his purchase of Allied and Federated. Said Benjamin Frank, a former senior vice-president of Allied: “Wonderful companies were part of Allied, such as Brooks Brothers and Ann Taylor Inc. They were sold off for no other reason than to reduce debt.” Added Sally Scaadt, a retail analyst with Fourteen Research Corp. in Manhattan: “It is very sad. I have followed Allied and Federated for years, and he has messed up a lot of good stores. There was nothing very wrong with Allied Stores.”
And even Campeau told Maclean ’s last week that he had made mistakes during his brief stint in the retail trade. For one thing, he said that he should not have allowed himself to be seduced by the heady leveraged buy-out market into issuing the junk bonds to help finance the purchase of Federated. Declared Campeau:
'Ownership percentages assume that O&Y will exercise Its warrants to purchase 15.6 million Campeau shares over the next two years
Source: Campeau Corp. Annual Reports
“Takeovers were being fed like a fever by a system of high-leverage, high-yield junk bonds that almost forced people to overextend. So we wound up paying 16 to 17 per cent for our money, when two years before we paid 11 per cent for money to acquire Allied. It was too much.”
But high interest payments were not earn-
peau’s only problem. His impetuous optimism and quirky behavior also impeded the success of his retail ventures. Said one former senior Campeau executive, who asked not to be identified: “Being an unconventional, intuitive, insightful guy, you could not get him to focus on just getting a mortgage done.
He could not take steady, small steps in a straight line.”
That became painfully apparent when Campeau turned down a $ 1.68-million mortgage offer from a group of bankers led by Citibank last fall, insisting on launching his own mortgage plan, which offered bankers a share of future profits.
The plan failed when lenders balked at Campeau’s terms for the mortgage, which had him paying a lower interest rate in the early years of the loan and an interest in future sales growth in his department stores. That is a key reason why Campeau was forced to seek help from the Reichmanns. Campeau also had a tendency to alienate his staff. Kay Shadley, an assistant general counsel with Allied at the time of the takeover, said that Campeau had a disconcert-
ing manner of failing to maintain eye contact. She added: “He either rolled his eyes up to the ceiling or turned his chair toward the door behind him. It was very peculiar.”
Observers of the desperate negotiations with creditors that engaged Campeau this month also blame his fall on bad relations between himself and major bankers. And as he
emerged years later as a major business force, he seemed to carry that attitude into bank boardrooms. He often berated top bankers when he should have been courting their favor, and the atmosphere between Campeau and the financial community was often tense and angry.
There had been initial reports that Ohio real estate developer Edward DeBartolo, who holds $576-million in Federated debt that has to be repaid in 1991, was holding back approval for the Reichmann loan. But, in fact,
• it was officials from Citibank and the Bank of Nova Scotia who were demanding stiff g concessions in return for ap| proval. Both banks have been § major lenders to Campeau. I Said one observer close to 3 this month’s negotiations: “The [bank] bureaucrats have used Campeau’s difficulties now as a chance to get even with an entrepreneur who was not afraid of berating them.”
As part of the price exacted by the banks in return for their support, Campeau agreed to a newly constructed board made up of three
Olympia & York appointees, three Campeau appointees and four directors representing minority shareholders. The Reichmanns have also obtained warrants allowing them to purchase 15.6 million Campeau shares over the next two years, which, if exercised, would give them a 38.4-per-cent interest in Campeau Corp. and bring Campeau’s personal stake down to 43.2 per cent from 54 per cent (the remainder of the shares are publicly held).
And tensions are likely to erupt between the volatile chairman and the directors’ special management committee. It is made up of Dodd, Robert Butler, who sits on three Reichmann boards, Tysoe, Campeau’s 36-year-old president, and William Miller, former chairman of the U.S. Federal Reserve Board. Miller is an associate of Ohio developer DeBartolo, who holds the $576 million in debt, which he could ask to have repaid as early as Jan. 1, 1991. Analysts say that DeBartolo voluntarily left his board position because he may be interested in purchasing some of the assets of Allied or Federated as they come up for sale and it would be seen as a conflict of interest if he were to buy those assets while sitting on the board.
— Most observers say that the most surprising appointment to the board is Black as a representative of minority shareholders. Campeau telephoned Black, who has spent the past several months in London overseeing his growing newspaper empire, at the beginning of last week asking if he would agree to represent the minority group. Black told Maclean’s: “Some might say I have a credibility problem because I am friends with both Robert Campeau and Paul Reichmann and they both sit on the Hollinger board. But they dismissed that because they said they had no intention of abusing minority shareholders.” Black added that Campeau was remarkably calm when they talked. Recalled Black: “I was impressed at how serene he was—neither discouraged nor fatigued.”
The removal of Campeau’s wife, Use, from the board is undoubtedly a personal setback. Campeau said that her stable personality is “like a rock for me.” And he credits her support with helping him to complete his retail deals. The future of those operations was clearly weighing heavily on Robert Campeau’s mind last week when he retreated behind the iron gates and into the security of his Toronto mansion.
ANN WALMSLEY with MICHAEL HARRISON and SHONA McKAY in Toronto and DAVID LINDORFFin New York City