BUSINESS

Vultures closing in

Eaton's creditors may decide the empire's ultimate fate

JENNIFER WELLS March 31 1997
BUSINESS

Vultures closing in

Eaton's creditors may decide the empire's ultimate fate

JENNIFER WELLS March 31 1997

Vultures closing in

BUSINESS

Eaton's creditors may decide the empire's ultimate fate

JENNIFER WELLS

There was a time when Eaton’s was a pretty big customer in Morey Chaplick’s books, maybe $ 1-million big in annual orders for the video games, computers and other products that Chaplick distributes through his company, Beamscope Canada Inc. But the relationship never quite jelled. The retailer, says Chaplick, was heavy with what he calls an “old guard of management who certainly did not adapt to the ’90s. No way, no how.”

When Eaton’s filed for bankruptcy protection on Feb. 27, Beamscope was one of a slew of trade creditors who were owed a total of $150 million. Beamscope had a relatively small $150,000 outstanding, an amount that the company could have easily absorbed. But Chaplick did not have to do that. By mid-March, he was called un-

expectedly by New York City brokerage BDS Securities. BDS represents a number of so-called vulture funds, high-risk investors who buy up the debt of bankrupts and near-bankrupts. BDS offered Chaplick 80 cents for every dollar owed to him by Eaton’s. “We couldn’t say ‘yes’ fast enough,” says Chaplick. The advantages? Chaplick gets his money now without, as he puts it, having to wait out the details of “some cockamamy restructuring plan.”

Chaplick has been burned by financial workouts before, in one instance reaping mere pennies on the dollar for his receivables. And he has had more than enough headaches of late, what with such Beamscope clients as Consumers Distributing going under. So Chaplick took the money and ran. “Look,” he says firmly of his relationship with Eaton’s, “we’re done.”

As are untold other Eaton’s suppliers. Scott Donahue at BDS, which stands for bankrupt, distressed and special situations, says

that his company has “transacted in size.” That is Wall Street-speak for having brokered the transfer of millions of dollars in Eaton’s trade debt from Canadian suppliers to publicityshy U.S. investors, who hope to see an investment return of, says Donahue, “north of 20 per cent.” For Morey Chaplick, taking the vulture offer was a no-brainer. “Once we go into a reorganization, the customer is not the customer we had, and when we come out of the reorganization it’s a new company,” he says.

In fact, after only four weeks under the Companies’ Creditors Arrangement Act (CCAA), Eaton’s is already much changed. Last week, the com-

pany announced it had retained investment advisers RBC Dominion Securities in Toronto and Goldman Sachs in New York with a view to merging or selling the restructured chain. That news came just days after Eaton’s announced that it had put 31 Eaton stores across seven provinces on a “review list” that will see the stores closed, sold, or, in the best-case scenario, hanging on thanks to renegotiated leases. The list spans the Tillicum mall in Victoria to the historic Portage Avenue store in Winnipeg to the Carrefour Angrignon mall in LaSalle, Que. The news, says Winnipeg Mayor Susan Thompson, who at 19 sold ladies’ wear in the store’s bargain basement, was “devastating.” But hardly surprising. Last

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year, Eaton’s closed off the top two floors of the Portage store, a toolittle, too-late decision to try to fix the chronically troubled store.

It is not that such problems were not apparent at Eaton’s head offices in Toronto. “We recognized that we had these losing stores,” says an ex-Eatonian executive. The company’s expansion in the 1970s took it into markets that were not large enough to support an Eaton’s, particularly when the chain was last-in after such competitors as Woodward’s and the Bay. In some cases, the stores were too big, and in almost all they were tied to 30-year real estate leases that landlords refused to break or, in most cases, modify. One suburban Toronto store lost a half-million dollars a year through the 1980s, says the former executive. “It was an absolute loser.” When interest rates rose to 22 per cent, “the whole structure of financing these things just went into the tank.”

As for the legendary Winnipeg store, built in 1905, there were other considerations.

When faced with the need to pare the store more than a decade ago, Fred Eaton, who then ran the chain, said “I’m not going to do it. That’s something my grandfather built.”

And there were complications.

In Winnipeg’s case, Eaton’s signed an operating agreement in 1976 when it sold its downtown warehouse to Vancouver real estate king Nelson Skalbania. With the plan set to convert the warehouse to a mall, and connect the mall to the old Eaton’s via a pedestrian walkway, Eaton’s committed itself to running the Portage site initially at 54,000 square metres until the year 2016. In 1988, the company was successful in having that reduced to 27,000 square metres.

With an improving economy in the mid-1980s, and with stellar sales performance from, particularly, the Eaton Centre in downtown Toronto, the profitable stores outnumbered the unprofitable ones. That balance shifted after 1990, as another recession, the GST and cross-border shopping hammered the chain. Handcuffed by landlords, the company turned to selling off its real estate investments to stay liquid. (Eaton’s of Canada Ltd., the retailer’s parent company, still owns a 20-per-cent equity position in the Toronto Eaton Centre and has equity stakes in 15 other malls.) According to the former executive, closing individual stores and walking away was deemed too risky, both from a public relations perspective and because the company assumed that spurned landlords, fearing that economic disaster would befall other mall tenants, would seek court orders to force Eaton’s to keep its troubled stores open.

That explains why Eaton’s, having been unable to transfer leases to other retailers, continued to run a string of dreadful stores. Two weeks ago, BDS Securities sent scouts to Toronto to see for themselves what these stores look like. They went to the Eaton’s at Yonge Street and Eglinton Avenue in uptown Toronto, a singlestorey curiosity hidden away in a small mall. ‘We didn’t get it,” says Donahue of the store. They also made a trip to the top-of-the-line

Eaton Centre store, into which the company has recently pumped millions in renovation dollars. Donahue describes the Eaton’s crown jewel as a “sedate Bloomingdales,” a “nice store.”

Not exactly a ringing endorsement. But adding razzle-dazzle is something that U.S. retailers are very good at. It is now the job of RBC Dominion and Goldman Sachs to convince tire-kickers that, once it is pared to its top locations, Eaton’s can be fashioned into a thriving retailer once again. At RBC that job falls to Peter Buzzi, vice-president and director of mergers and acquisitions.

In the meantime, other creditors, including Estée Lauder, which is owed $7 million by Eaton’s, have been ordered by an Ontario Court judge to form a creditors’ committee. Lauder and others had hoped that the court would allow them to retrieve goods shipped to Eaton’s

in the 30 days prior to the CCAA announcement. That application was rejected. Next week, the court will make public for the first time the full list of the company’s creditors, and a breakdown of the sums owed to each. “It’s the first step in finding out who’s on first,” says Toronto bankruptcy lawyer Frank Bennett, who represents appliance manufacturer Inglis, which is owed $1.3 million. Bennett blames the paucity of rules under CCAA for the lack of in% formation that has been made £ available to date.

I One aspect of the Eaton’s tale S that remains particularly con! fused is the company’s credit I card operations, which manage both Eaton’s own credit card I and private label, or “thirdÏ party,” cards for other companies. Eaton’s credit business has been consistently profitable. As initially reported by Maclean’s, T. Eaton Acceptance Corp., a subsidiary of Eaton Credit Corp., earned a profit of $22 million for the year ended January, 1996. Last week, the company said its pretax profit for the following year was $15 million. So far, the credit operations have been sheltered from the restructuring proceedings. Earlier this month, the court appointed consulting firm KPMG Inc. to examine intercompany transactions, a move spurred by the transfer in December of $10 million from the retailer to Eaton’s of Canada Ltd., which is owned by the four Eaton brothers, Fred, John Craig, Thor and George. On March 6, Eaton’s announced that it reversed the dividend payment. KPMG would not confirm last week that its examination of intercorporate transfers will include those out of the credit operations.

While such details hold enormous interest for the creditor groups, others, such as Mayor Susan Thompson, are preoccupied with limiting the damage that the exit of Eaton’s would do to their cities. Winnipeg 2000, the city’s economic development corporation, is desperately trying to find a solution. There is no shortage of ideas. Moving the CBC into the Portage site. Or the Winnipeg Free Press. Putting a call centre on the top two floors and praying that a retailer is interested in the other six floors. Thompson actually talks of Nordstroms. Or Macy’s. Thompson acknowledges that Winnipeg’s downtown has been terribly troubled for years. Without Eaton’s, without that landmark building, it is hard to imagine how the downtown can make a comeback. □