BUSINESS

CAMPEAU’S DAY OF RECKONING

ANN WALMSLEY September 25 1989
BUSINESS

CAMPEAU’S DAY OF RECKONING

ANN WALMSLEY September 25 1989

CAMPEAU’S DAY OF RECKONING

BUSINESS

It was one of the most important days in Robert Campeau’s long and tumultuous career. While the Toronto developer’s company, Campeau Corp., faced a life-and-death debt crisis, Campeau, hands in his pockets, his grey hair flying back from his face, strode out alone from his downtown Toronto office building and deftly avoided cars in the 10 a.m. traffic as he crossed Bay Street. On this morning, Campeau desperately needed to appear agile and confident as he headed into a meeting with his creditors. If the representatives from some of the most powerful banks in the United States failed to accept his refinancing plans, he would be cut adrift and lose his vast chain of companies, piece by piece. Then, on Friday evening, Sept. 15, Toronto’s billionaire Reichmann family bought the embattled tycoon a limited reprieve when they agreed to lend him $300 million. But the price was high.

THE REICHMANNS STEP IN TO RESCUE THE EMBATTLED TYCOON’S DEBTRIDDEN U.S. RETAILING EMPIRE

Campeau was forced to yield control of his firm to a management team that will oversee its restructuring.

Known worldwide as the Canadian who bought Manhattan’s famous Bloomingdale’s

department store, the Sudbury, Ont.-born Campeau announced last week that the board of Campeau Corp. had approved the sale of the glittering retail showpiece. At the same time, Campeau, 65, was embroiled in a weeklong battle to retain control of the rest of his U.S. retail empire. And although Campeau received the loan from the Reichmann family, owners of Olympia & York Developments Ltd., other Campeau creditors could still veto the rescue, leaving them free to claim large chunks of Campeau’s empire. Although the specific details surrounding the rescue package were not released, leading retail analysts predicted that Campeau may lose up to 10 per cent of the company to the Reichmanns, increasing their share to about 35 per cent and dropping Campeau’s to about 44 per cent. And while all of Campeau’s major creditors had yet to ratify the change, a statement issued by Campeau Corp. on Friday night said that the new management team would “take charge” of the firm’s restructuring. The colorful tycoon’s grip on the empire that he founded had slipped.

Campeau met late into the week with his bankers, but what he desperately needed was breathing space—enough time to sell Bloomingdale’s, immediately pay about $60 million on an outstanding $481.6-million loan and restock his other retail outlets for the critical holiday season. The Reichmanns may have allowed him to accomplish all three plans, but the investment community still seemed dubious. Said Janet Mangano, a retail analyst with the securities firm of Josephthal & Co. Inc. in New York City: “Strong Christmas sales will not cure Campeau’s financial woes. You might

consider Campeau to be sinking.”

And that was a feeling shared by some members of Campeau’s own family last week. Campeau has been locked in an emotional court battle with his son Jacques Campeau, 36, over who has the voting rights to a block of Campeau Corp. shares that are held in trust. And as the value of shares in Campeau Corp. plunged on Sept. 13 to $13.50 from their all-time high of $22.25 before trading was halted on the Toronto Stock Exchange later the same day, Jacques Campeau tried to sell the shares, worth roughly $44 million at their peak. But, on Sept. 15, the Ontario Supreme Court ruled against releasing the stock. Said Jacques Campeau: “If I had been able to sell these shares last week, I would have done so in order to protect my interests.”

Despite his setbacks, Robert Campeau has still come a long way from his modest Sudbury roots. His father, Joseph, shod horses for a living in Sudbury until he bought a used Chevrolet and taught himself auto mechanics, a skill he passed on to his son. Robert left school after Grade 8 to become, at age 15, a floor-sweeper and later a garage mechanic at the nickel mining and smelting firm Inco Ltd. He later worked at a munitions plant in Cornwall, Ont., during the Second World War, opened a confectionery store and later moved to Gatineau, Que., to become a millwright at the Canadian International Paper mill. Campeau did not begin his career as a builder in Ottawa until 1948, when he erected his own home in the nation’s capital and quickly sold it for a profit. He eventually put up about 20,000 homes in Ottawa, as well as 40 per cent of the city’s office space.

And last week’s problems were not Campeau’s first taste of defeat. He lost several celebrated and widely followed takeover battles. His most painful setback came in 1980, when he tried to buy Royal Trustco Ltd. of Toronto. That bid, in what many analysts said

amounted to an attempt by Toronto’s business establishment to block Campeau, was stopped after a group of Bay Street businessmen bought large blocks of Royal Trust stock. The move kept control of Royal Trust out of Campeau’s hands and effectively stopped what was seen as his assault on Canada’s corporate elite.

Following his stinging defeat in the Royal Trust takeover bid, Campeau said that the Toronto establishment simply did not like his style. But in the United States, Campeau added, “it’s totally different. There, the market governs the game.” And last week, the market was being extremely harsh on Campeau. In a worst-case scenario, Campeau could still fail to pay back the $481.6-million loan to three U.S. securities firms by Jan. 31, 1990, and trigger the complete bankruptcy of his empire. He was badly hurt by last week’s events, and the loss of his entire empire would be the ultimate defeat for Campeau, who only began acquiring his American-based, billion-dollar retailing empire in 1986. In October of that year, he shocked the financial community by paying $4.9 billion for New York-based Allied Department Stores Corp. Little more than a year later, he made another surprise move, purchasing Cincinnati-based Federated Department Stores Inc. for $8.2 billion. The money was borrowed, and, ever since the twin acquisitions, Campeau has struggled to balance his huge debt against sluggish profits.

As part of his elaborate plan to finance the gigantic acquisitions, Campeau used high-yield so-called junk bonds. Campeau Corp. issued the bonds, about $1.38 billion worth, last fall, but investors bought only about $900 million of the issue, and First Boston, Campeau’s underwriter, has been forced to hold the remainder.

Campeau’s troubles stem directly from disappointing sales results at Allied and Federated, which control such prominent retail chains as Jordan Marsh, Abraham & Strauss, Burdine’s and the jewel of his now-threatened

empire, the 17-store Bloomingdale’s chain. Interest costs on the $ 11.4-billion debt that he incurred to buy the stores in 1986 and 1988 left him dependent on strong sales performances to pay them off. But a slump, particularly in the demand for women’s clothing, severely cut into his ability to service those debts.

And last week, Federated Stores reported a loss of $248 million for the first six months of 1989, compared with $202 million the year before. But, in the final analysis, Campeau proved to be the victim of his own aggressive financing schemes. Analysts say that, earlier in the year, he could have averted the current crisis by placing a $ 1.68-billion mortgage refinancing on his U.S. retail properties. That strategy, which his advisers recommended,

would have enabled him to pay down the $481.6-million mortgage loan to First Boston Corp., Paine Webber Inc. and Dillon, Read & Co. But Campeau turned down the offer, choosing instead to persist with a proposal to borrow $3.6 million, using an unconventional method of mortgage financing that would have given Campeau a lower interest rate in the early years of the loan than the banks had proposed.

That headstrong behavior led to the resignation of his valued president, James Roddy. And now, the gamble may have cost him a piece of his empire. Ultimately, if Campeau fails to repay the $481.6-million loan by next Jan. 31, his bankers could take control of about seven per cent of Federated shares—stock that is now sitting in a trust account.

Since buying the two huge retail chains, Campeau did try to head off last week’s financial crisis by steadily selling off assets. In fact, he had already sold 20 store chains as part of a plan to streamline Allied and Federated. He

even disposed of the respected Ann Taylor Inc. and Brooks Brothers chains—despite earlier assertions that he would keep, and even expand, both of them.

Even so, Campeau was left with an $ 11.4billion debt on $13.68 billion of assets. And at Campeau Corp.’s annual meeting in Toronto last July, Campeau was alternately angry and charming as he tried to convince shareholders that the asset sales, plus a new $ 1.44-billion mortgage financing, would leave him with enough revenues not only to run his business but to expand as well. But the critical mortgage financing did not materialize, and, on Sept. 8, Campeau shocked the retail world by announcing that he would recommend to his board that Bloomingdale’s be sold.

But it may be months before Campeau can count on pocketing the proceeds of the sale. Within three days of the announcement that Bloomingdale’s was on the auction block, three potential bidders expressed interest. But none immediately filed an offer. Marvin Traub, the chairman and chief executive officer of Bloomingdale’s, disclosed that he was working on a management buy-out together with a consortium of investors that could include designer Ralph Lauren. And analysts said that at least three other U.S.-based corporations with retail interests would likely enter the bidding war.

The Reichmann deal could give Campeau enough time to find a buyer and bring his debts under control. Under the terms negotiated by the Reichmanns, Olympia & York’s $300-million loan is convertible into Campeau stock. The conditions for that conversion remained undisclosed at week’s end. But should the Reichmanns exercise their right to convert the debt into stock, they would control about 35

per cent of Campeau voting stock, while Campeau’s holdings would slide to about 44 per cent from 54 per cent. Currently, about 21 per cent of Campeau voting stock is held by the public. Until now, the Reichmanns have operated as silent partners. But, according to George Hartman, a retail analyst with BBN James Capel Inc. in Toronto, the Reichmanns now have a far greater voice in decisions at Campeau Corp.

But even with the Reichmanns’ rescue and the decision to sell Bloomingdale’s, Campeau’s long-term financing problems will likely continue. The sale of Bloomingdale’s may not raise enough money quickly enough to appease his anxious creditors. Last July, Campeau estimated that the Bloomingdale’s chain was worth about $2 billion. But analysts now say that the stores

may fetch only $1.2 billion. Said Kurt Barnard, publisher of the New York - based Retail Marketing Report. “Even with a bidding war, Mr. Campeau’s price of $2 billion may be a little extravagant.” And even with the Reichmanns’ help, Campeau may not be able to proceed with plans for shopping mall developments across the United States. Campeau’s master scheme was to work with Edward J. DeBartolo, an Ohiobased developer, to build shopping malls and locate his upscale stores in them. But one of Campeau’s major creditors is DeBartolo, who holds a $576-million loan due two years from now. And DeBartolo could also veto the Reichmann loan to Campeau.

Clearly, Campeau’s greatest hope for survival now depends on his ability to convince his creditors to give him more time. But Hartman said that the creditors may

not be sympathetic because

they have had a difficult time tracking Campeau Corp.’s financial status. As well, Campeau’s high turnover of financial officers has led to problems in sorting out which assets have already been offered as security and to whom. Hartman predicted that, only with both the sale of Bloomingdale’s and the assurance of the Reichmanns’ support, will lenders be persuaded to give Campeau breathing space.

By the end of the week, Campeau still seemed to be under siege. Campeau Corp.’s offices were patrolled by uniformed security guards who turned away unwelcome guests before they even entered the office-building elevators. And Campeau’s bold dream of capping his spectacular career by building a vast retail empire in the United States was on the verge of becoming a nightmare.

ANN WALMSLEY

LARRY BLACK

WILLIAM LOWTHER