ROBERT CAMPEAU’S DREAMS OF U.S. RETAILING GLORY CRUMBLED UNDER A CRUSHING DEBT LOAD
FALL OF A TYCOON
ROBERT CAMPEAU’S DREAMS OF U.S. RETAILING GLORY CRUMBLED UNDER A CRUSHING DEBT LOAD
Bud Konheim surveyed the brightly colored clothing samples in his Manhattan showroom with a smile that was almost as striking as his tie. Covered in fluorescent pink, orange and blue airplanes, the tie is made by Konheim’s firm and sold in one of the world’s most glamorous department stores, Bloomingdale’s. Konheim was one of the few suppliers who could afford to smile as Bloomingdale’s glitz became tarnished last week by the largest retailing bankruptcy action in U.S. history. The store, once part of a vast retail empire owned by Canadian real estate tycoon Robert Campeau, is now protected by rules that ensure suppliers like Konheim will continue to be paid. And Konheim expressed sympathy for the fallen Canadian: “Everybody is blaming Campeau’s ego for this foolhardy business. But how about Citibank’s ego? How about the egos of the guys who put the deals together?
How about everybody who was kissing his ass all along?”
The dramatic rise and fall of Robert Campeau’s U.S. empire in just over three years has shocked the American public and raised concerns in the financial community. Campeau made his first, splashy foray into the United States in December, 1986, by paying $4.9 billion for Allied Stores Corp. of New York City. Then, he acquired Federated Department Stores Inc. of Cincinnati for $8.2 billion in April, 1988. But most of the money he used was borrowed, and Campeau was increasingly unable to service his huge debt of more than $10 billion. In an effort to reduce the debt, Campeau sold such assets as Ann Taylor Inc. and Brooks Brothers. In the end, even the financial support of Toronto’s powerful Reichmann family failed to save him. Campeau lost control of his own company and was forced to sit by helplessly as his lenders pushed the company towards bankruptcy on Jan. 15. Now, Campeau is in danger of losing his Canadian real estate empire as well.
Some analysts say that Campeau Corp.’s problems, and the uncertain future for more than 100,000 employees who once worked for him, symbolize the unrestrained corporate takeover
greed that marked the 1980s. In Washington, Representative Jack Brooks, chairman of the House judiciary committee, announced plans to investigate the Campeau case and the potential for a wave of new bankruptcies resulting from debt-financed takeovers in recent years. Campeau’s attempts to cut costs forced thousands of people out of jobs. And many U.S. consumers are expressing resentment at foreign takeovers. Said a Bloomingdale’s shopper Cathleen Cahill, 69: “What’s happening to America? They come in here and take over businesses and then ruin them.”
Mania: The origins of the Campeau collapse he not only in the general atmosphere of merger-mania that marked the 1980s, but also in the the near-obsessive drive for success that both friends and enemies say has propelled Robert Campeau himself (page 52). A vigorous 66, Campeau has had a roller-coaster career since leaving behind his impoverished upbringing in Sudbury, Ont. Clearly, he has achieved at least the trappings of wealth: he has luxurious homes in Toronto’s prestigious Bridle Path area and in exclusive Jupiter, Fla.
But last week’s events showed that the very aggressiveness that pushed Campeau to the front of the line may have also led to his downfall. Critics claimed that his sometimes high-handed personal style drove away the talented senior executives who could have saved him. Former employees described screaming matches with experienced advisers, and some retail analysts said that Campeau stubbornly failed to employ retailing strategies.
Kay Shadley, a lawyer and former employee of Allied Stores who was laid off, said: “I think he was trying to show the people of Canada that this was a poor boy who could make it. I think he was driven by something that blinded him.”
Other executives who have left Allied and Federated also blamed him for refusing to listen to outside advice. Campeau, they said, refuses to accept anything other than positive support. Said Howard Davidowitz, of the New York retail consulting and investment banking firm Howard Davidowitz & Associates Inc.: “He was the guy at the head of the table who was pounding his fist and yelling ‘Do the damn deal.’ No one could have stopped him.”
Reprieve: Instead, he was stopped by the inexorable logic that governs all businesses: costs, mainly the $800 million in annual interest payments, cut too heavily into revenues. As his difficulties multiplied, Campeau’s lenders became less and less co-operative, until his empire finally suffocated (page 50). The process began last September, when he sought assistance from the powerful Reichmann family of Toronto, owners of Olympia & York Developments Ltd., which controls massive property developments around the world. In return for a $300-million loan from O&Y, Campeau surrendered management control of his company to a four-man committee, which included senior O&Y executives. At the same time, he agreed to sell Bloomingdale’s, although he was subsequently unable to find a buyer. The reorganization was intended to give Campeau Corp. more time to repay
its creditors, but the reprieve was brief.
On Dec. 22, the empire began to crack. New York-based Citibank NA, which leads a syndicate of 90 U.S. and Japanese banks, increased the pressure on Campeau by threatening to call loans of $2.7 billion unless his company could provide assurances of solvency. Meanwhile, the holders of $2.9 billion in highrisk, high-yield junk bonds, used to help finance the takeovers, had already withdrawn their support after a severe drop in the value of their investment. Just before seeking protection under Chapter 11 of the U.S. Bankruptcy Code, some high-yield bonds issued by Campeau Corp. with a face value of $1,000 were trading at only $110. In the end, even the Reichmanns walked away, despite a total investment of almost $800 million.
Control: By the time Campeau Corp. directors had removed Campeau from any involvement with the company’s U.S. retail division on Jan. 11, his lenders had already wrested away control of his U.S. operation. The largest stake is now held by the National Bank of Canada, which seized 35.2 per cent of the voting shares that Campeau had used to secure a $ 150-million loan. Campeau himself still holds about 20 per cent, and the Reichmanns, 10.8 per cent.
Until the last moment, Campeau tried to avoid the embarrassment of filing for bankrupt-
AS DISASTER APPROACHED, LENDERS BECAME LESS AND LESS CO-OPERATIVE
cy protection by seeking emergency loans and restructuring his debt. Last week, he retreated to his office and 11,000-square-foot mansion in Toronto, built in the style of an 18th-century French château. He shares the mansion with his second wife, Use, who Campeau has said is like a “rock” to him. He divorced his first wife,
Clauda, in the late 1960s to marry her. They had already had two children together, and another child was bom after their marriage. Campeau remains on good terms with his son Daniel, 33, a child of his first marriage, but he is no longer on speaking terms with two others
Indeed, Campeau is a veteran of many battles in his business and personal life. In 1980, he was prevented from buying the venerable Royal Trustco Ltd. by a group of Torontobased Establishment financiers who, Campeau charged, resented his French-Canadian roots. Deeply demoralized by the episode, he eventually pulled himself out of a bout of depression and decided to move into the U.S. retail market, where, he said, “it doesn’t matter what your name is.” His confidence restored, in 1986 he purchased Allied, and its Jordan Marsh and Stem’s department-store chains, for $4.9 billion. A little more than a year later, he added the $8.2-billion purchase of Federated, which included his greatest prize, the 17-store Bloomingdale’s chain.
Those who have dealt with him say that his negotiating skills are dazzling. He is renowned for his grasp of financial details—he rarely uses a calculator—and his ability to envision vast commercial opportunities that few others see. Said one former adviser, who requested anonymity: “Campeau is the most creative person I have ever known, Only he understood the numbers.” Deals: Among those who were
presence were the Reichmanns. The head of the clan, Paul Reichmann, is also known for his huge risk-taking deals, and he said that Campeau is a man who has “the courage of his convictions.” As a result, O&Y put $198 million into Campeau Corp. by acquiring 50 per cent of Campeau’s 68-storey Scotia Plaza bank tower
in Toronto, just a few months after the purchase of Allied. The Reichmanns continued to pour money into Campeau’s firm, and by January they held $69 million in Campeau stock, $348 million in convertible debentures and $377 million in secured loans.
Their potential losses, however, are likely to be inconsequential, compared with O&Y’s total worth—estimated to be between $7 billion and $10 billion. The loans are secured by real estate, including the remaining 50 per cent of the Scotia Plaza, and the sale of the debentures.
The Campeau disaster might have been avoided if he had stopped buying after the Allied purchase. At that point, he already had to sell key retail assets, such as Bonwit Teller, for $126 million, and Garfinckels stores, for $114 million, to meet payments on his rapidly increasing debt.
War: But he then became involved in an acrimonious bidding war with R. H.
Macy & Co. chairman Edward Finkelstein over control of Federated. As a result, Campeau paid about $500 million too much for the stores. Afterward, he refused to pay a $ 10-million financing fee his bankers charged to arrange a huge loan package.
Instead, he defied his managers and issued junk bonds—high-risk, highyield bonds—that carried burdensome, and ultimately killing, 17-per-cent interest rates. Said Benjamin Frank, a
former senior vice-president at Allied: “I was convinced that, so long as he could get the financing, he would go as high in price as he could take it—to win.” Frank added: “His moods seemed to swing from a man who was utterly sure of himself to someone who seemed highly uncertain. If I had to use one word, I’d say ‘mercurial.’ ”
Campeau’s old friend and supporter Henry (Hal) Jackman, who controls Toronto-based National Trust, said that the economic forces that propelled Campeau to the top and back again in under four years are unlikely to converge again. Advisers, Jackman said, were as much to blame as Campeau. He added: “This kind of financing is dead. It’s disrupted the whole banking system, and what the hell has it done for Bloomingdale’s? The store exists now just to service the debt incurred to try and make somebody richer.”
Poison: The Campeau debacle has clearly poisoned the attitudes of some Americans to such major takeovers. In an editorial last week, The New York Times commented, “It took the special genius of Robert Campeau to figure out how to bankrupt more than 250 profitable department stores” (page 55). Still, although there is no widespread backlash against Canadian businesses in the United States, some Canadians have reported a subtle shift in attitude. Said Saul Mimran, president of Toronto fashion house Monaco Group Inc.: “Psychologically, it can create an attitude that Canadians are rather inept, underfinanced and don’t care about the marketplace. This is a hindrance to our efforts.”
That perception may take some time to abate if the stores fail to become profitable again. They have been placed under the protection of Chapter 11 of the U.S. federal Bankruptcy Code, which gives temporary relief from the demands of creditors. During the reprieve, insolvent companies are given an opportunity to work out their problems.
The failure rate for Chapter 11 companies, however, is high. Only one in eight manages to pull through, and the success rate for retail firms, where image is critical, is even lower. But, for the moment, the Chapter 11 protection ensures that suppliers will be paid, permitting the stores to stay open. Citibank and New York’s Chemical Bank have also agreed to extend $800 million in new loans, known as debtor-in-possession financing, to keep the stores operating. If the reorganization fails and the stores close or are sold, thousands more of Federated and Allied’s 100,000 jobs could be lost. William Miller, the former U.S. Federal Reserve Board chairman, has been named by the Campeau board to head Federated Stores Inc., formerly Campeau Corp. (U.S.) Inc.
The Chapter 11 proceedings have triggered default on $300 million in loans that are secured by Campeau’s Canadian real estate assets. So far, the Canadian and U.S. banks that hold the loans have not taken action, but the fallen tycoon may ultimately be forced to sell some of his Canadian property to stave off bankruptcy in this country as well. Having waged a lifelong battle to build a fortune that few others could match, he will no doubt fight on, but last week’s events were a bitter defeat indeed for Robert Campeau.
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