Compact Changes Direction : Drugstores Are Now Entertainment Firm’s Mainstay

Ronald O. Perelman, the corporate takeover artist who has been making waves on Wall Street lately because of his attempt to gain control of the giant Gillette Co., has also been making a few waves in--of all places--Burbank.

The reason is a company called Compact Video, founded 16 years ago in Burbank to assemble and provide “studios on wheels,” large mobile vans equipped with the latest in video technology that offered post-production services for the entertainment industry. The 44-year-old Perelman, through his New York-based MacAndrews & Forbes Holdings, owns about 40% of Compact’s outstanding stock.

Compact, which has a reputation as a leader in the post-production field, has traveled a long way from its roots in recent weeks, acquiring three companies previously owned entirely or in part by other Perelman concerns in a fast-and-furious buying binge.

Although two of the companies Compact acquired are in the entertainment field, a third, Brooks Drug, is not. Purchased from Perelman’s Revlon Group, the Brooks acquisition has turned Compact into a company whose revenues are now largely derived from a chain of drugstores.

“The name doesn’t match with the company anymore,” said Carol Ramsey, a portfolio manager with Fidelity Investments in Boston, a money management firm that owns 58,500 shares of Compact stock.

Compact, which beginning in 1986 changed its financial-reporting year to end on Dec. 31 instead of April 30, posted revenues of $155.7 million for the year 1986. That was up sharply from $41.4 million for the year ended April 30, 1985, and reflected the addition of the drug stores and other acquisitions.

Compact reported pretax operating income of $1.01 million last year, but interest costs on its sharply higher debt load--again reflecting the acquisitions--left it with a $3.7-million net loss. In the year ended April 30, 1985, Compact had lost $4.24 million.

Compact, which still operates its post-production facilities out of Burbank but has its corporate headquarters in New York, has announced that it soon will change its name to Brooks Holdings. The company, which now trades over the counter, also has said it will seek a stock exchange listing.

For the most part, the public pronouncements have stopped there, however. Perelman, who serves as Compact’s chairman, has been characteristically tight-lipped about the firm. The silence, in turn, has led those who follow the company to wonder what its--or, more precisely Perelman’s--next move might be.

Daniel J. Offen, an analyst with Gruntal & Co. in New York, said some people are probably “confused or unaware of what is going on” at Compact. The company simply has not made a serious effort to tell anyone its plans, he said.

Despite the dearth of information, Offen said he believes Compact’s recent acquisitions will eventually pay off for investors--a prognosis he concedes he arrives at largely from looking at Perelman’s record as a man with a Midas touch.

“I think Perelman is committed into making Compact into a substantial company” Offen said, adding that he believes the company’s stock, which closed Monday at $4.625 bid, is trading at, or slightly below, its book value.

Acquisition Questioned

But one longtime Compact investor who has followed the company since it first began selling stock to the public in 1978, questions the wisdom of the Brooks acquisition. He said he believes the purchase was a convenient way for Perelman to rid his Revlon company of a concern it did not want.

“It was crummy acquisition,” said the investor, who did not want to be identified. “From all appearances, Perelman is dumping” companies he does not want on Compact, he said.

Perelman, who acquired Revlon in late 1985 and then took the company private this year, declined to be interviewed about Compact. So did his chief associate, Howard Gittis, who is vice chairman of MacAndrews, Revlon and Compact.

However, Gittis previously has defended Compact’s acquisitions, which, besides Brooks, include Four Star International and VidAmerica, companies involved in the syndication and distribution of films, television series and videocassettes. Gittis has asserted that the acquisitions bolstered Compact to the point where it could consider other acquisitions should a good opportunity present itself.

Had ‘Golden Touch’

Whatever the future holds, the recent acquisitions mark yet another turning point for Compact. The company, which has been losing money in recent years, flourished at one time. For five years in the late ‘70s and into the early ‘80s, its revenues grew at an average rate of 58%. During the same time, net income jumped an average of 65% annually.

“It was a company with a golden touch,” the anonymous investor said.

But a combination of factors, including stiff competition, a downturn in the economy and the construction of expensive headquarters in Burbank combined to reverse the company’s fortunes, analysts and others said. In the spring of 1983, the company’s stock was selling for less than $3 a share. One year earlier, it had sold at $38.

The company was also saddled with a class-action lawsuit filed against it and three former top executives. The suit, filed by investors in U.S. District Court in Los Angeles in 1982, alleged that Compact and the executives had overstated earnings and inflated its stock price from June, 1980, to January, 1982.

Settled Lawsuit

Under a settlement last year, Compact agreed to contribute up to 85,000 shares of its stock, plus an amount close to $3 million, to a fund that contains $2.5 million provided by the insurers of Compact’s management during the period covered by the suit.

Perelman became involved in Compact in a big way in 1983 when Technicolor, a subsidiary of Perelman’s MacAndrews, sold a post-production company, Vidtronics, to Compact for $12.5 million in stock, cash and notes. By virtue of his ownership of Technicolor, Perelman wound up with 640,000 shares of the company’s common stock in the deal.

Compact’s recent acquisitions began last June when Compact acquired 92% of Four Star, which was 54% owned by Technicolor, in a stock swap deal. Compact exchanged 1.1 shares of the company’s common stock for each share of Four Star’s. In September, Four Star became a wholly owned subsidiary of Compact when Compact purchased the remaining outstanding shares.

Even before that deal was completed, however, Compact, in August, acquired VidAmerica from Video Corp. of America, a subsidiary of Perelman’s MacAndrews, for about $5 million. A month later, Compact acquired Brooks Drug for $95 million from Perelman’s Revlon Group. The purchase price was later adjusted downward to $91.2 million.

Debt Jumped to $1.6 Million

To help finance the acquisitions, Compact, in July last year, sold $80 million in junk bonds through Perelman’s investment banker, Drexel Burnham Lambert. Largely because of the Brooks acquisition, Compact’s debt at the end of 1986 jumped from $1.6 million a year earlier to $160 million.

Some who follow Compact said the acquisitions of Four Star and VidAmerica make sense because they fit nicely with what Compact has been doing all along. But the Brooks purchase has left these same people confounded.

Brooks, founded in 1933, operates about 400 retail stores in the Northeast and Mid-Atlantic regions. Analyst Offen said Brooks, which Perelman earlier had tried to sell, is not considered “one of the shining stars of the drug industry.”

Fidelity’s Ramsey said the company has a good distribution system and name recognition. The company itself has been attempting to upgrade the chain by closing unprofitable stores, modernizing existing ones and opening new outlets. During 1986, it opened five stores, remodeled 27 and closed 22. The chain accounted for $113.5 million of Compact’s total net revenues of $155.7 million.

Ramsey said she believes Compact, for the time being anyway, will be a drugstore chain. It has been five years since the firm has been involved in the mobile video-van assembly business. Although the stock has not responded positively to the moves--last year it fluctuated between a high of 8 3/4 and a low of 3 3/4--Ramsey said she believes investors have to be patient.

“It’s a company being restructured,” she said.

Offen points out that Compact is Perelman’s only publicly held vehicle now. “I think Perelman’s goal is to build Compact into an acquisition vehicle and use it for interesting companies they feel they can buy at the right price,” Offen said.

Not everyone is as optimistic that the shareholders will benefit from Perelman’s moves. The investor who did not want to be identified worries that Perelman could attempt to take the company private as early as this fall, offering stockholders a price for their shares well below what they could be worth.

“My bet is that he is going to frustrate the world,” he said. “He is not going to tell anybody anything.”

COMPACT VIDEO INC. AT A GLANCE Compact Video was founded in 1971 in Burbank. About 40% of its stock is owned by New York-based MacAndrews and Forbes Holdings Inc. Compact Video provides post-production services for the television industry, markets and distributes feature films and television programs and operates drug stores. It has 2,969 full-time and 3,184 part-time employees nationwide, and 6,581,537 shares of common stock outstanding.

Effective Dec. 31, 1985, the company changed its fiscal year ending from April 30 to dec. 31, or a calendar year.