Investors to Buy Wherehouse for $118 Million, Foiling Shamrock

Wherehouse Entertainment, fighting a hostile takeover bid from Roy E. Disney’s Shamrock Holdings, said Monday that it has found a friendly “rescuer” in Adler & Shaykin, a New York investment firm that agreed to buy the chain in a deal valued at $118 million.

The agreement, approved Sunday night by Wherehouse directors, means the Torrance retailer of records, tapes, compact discs, computer software and videocassette rentals, would become a private company. Its management would remain intact if shareholders agree to the buyout and no higher bid emerges.

It was unclear whether Wherehouse, which had $225.5 million in sales in the year ended Jan. 31, will have to sell or close any of its 212 stores.

John Quigley, general partner of Adler & Shaykin, downplayed suggestions that assets would be sold to help finance the deal.

“We are known as a group which supports the growth of our companies. We tend to grow them, not shrink them,” Quigley said.

No Shamrock Comment

A spokesman for Shamrock said the company had no comment. The Burbank investment company is owned by Roy Disney, nephew of the late Walt Disney, and his family.

Shamrock last month offered $91 million, or $12 a share, for the 89.7% of Wherehouse shares it does not already own. On Sunday night before the directors’ meeting in New York, however, Shamrock officials told Wherehouse that they were prepared to raise the bid to $13.75 a share, which Wherehouse directors rejected.

Adler & Shaykin, through a new company called WEI Holdings Inc., will pay $14 a share for Wherehouse through a leveraged buyout. In such sales, investors buy a company using borrowed money that ultimately is paid off with funds generated from the company’s operations or through the sale of assets.

Wherehouse currently has 8.4 million shares outstanding, although the company said Monday that it may repurchase about 1 million shares on the open market at no more than $14 each.

Expansion Slowdown

The buyout by Adler & Shaykin is a classic “white knight” rescue, the result of scrambling by Wherehouse over the past two months to find a friendly suitor to prevent it from falling into Shamrock’s hands. Sources close to Wherehouse said that while the company held discussions with other parties, they believe Adler & Shaykin’s offer was the only one besides Shamrock’s that was seriously considered.

Adler & Shaykin, which specializes in leveraged buyouts, will finance the purchase using money borrowed from Chemical Bank in New York and Equitable Capital Management Corp.

Unlike many leveraged buyouts in which management joins with an investment group, it appears that Wherehouse’s management will not participate

Quigley said there were no provisions in the agreement now calling for management’s participation in the buyout, and another source close to Wherehouse said that management will not participate. Wherehouse officials could not be reached for comment Monday.

Keith E. Benjamin, a securities analyst with Silberberg, Rosenthal & Co. in New York, said the most likely change in Wherehouse’s operations would be a slowing of expansion plans and possibly the sale of some of its roughly 20 stores in enclosed shopping malls. He said the mall stores are smaller than stores Wherehouse prefers to operate and are less attractive as video rental locations.

If Shamrock makes a profit on its 10.3% Wherehouse stake, it is likely to be small. SEC filings indicate that the company will make a profit of about $1.8 million on the shares it bought, based on an average purchase price of $11.87 for the 867,700 shares it owns. Much of that, however, could be wiped out by such expenses as brokerage fees, costs to solicit proxies, legal fees and advertising expenses.

Few Shares Tendered

Shamrock first bid $14.25 for Wherehouse in early October. At the time, Wherehouse’s stock had fallen from nearly $24 a share last year to less than $10. Some analysts have attributed the fall to disappointing earnings, although the company has maintained that heavy spending on such things as new stores and a computer system designed to improve its inventory cut into profit.

Shamrock, citing the stock market tumble of Oct. 19, then lowered its bid to $12 a share in November and threatened to lower it further to $10 a share if it failed to get an agreement by today.

Wall Street sources said they believe that relatively few shares had been tendered to Shamrock, although many institutions and speculators wait until shortly before an offer expires to do so.

For the nine months ended Oct. 31, Wherehouse’s earnings dropped 63% to $1.3 million, or 15 cents per share, on a 28% rise in sales to $187.4 million.

Wherehouse’s stock closed Monday at $13.625 per share, up $2.50, in trading on the American Stock Exchange.