3 Major Bondholders Want Firm to Repurchase Their Securities : Suit Seeks to Block Takeover of Wherehouse

Three investment firms holding $17 million in Wherehouse Entertainment’s bonds are suing to stop the Torrance music and video retailer from being bought by the New York investment firm Adler & Shaykin.

The lawsuit, filed Friday in U.S. District Court in New York, argues that Wherehouse should be forced to buy back its $50 million in convertible bonds at slightly more than face value rather than force investors to convert them into common stock.

The $50 million in bonds, in effect, would be worth only $25.4 million if converted into stock. The bonds currently are trading at about half of face value and mature in 2006.

Last month, Adler & Shaykin, acting as a friendly suitor, offered $14 a share, or $118 million, for Wherehouse’s 8.4 million shares of common stock outstanding. A filing with the Securities and Exchange Commission on Wherehouse says that the $118-million acquisition costs ultimately could rise to as high as $152.5 million if the bondholders convert their debt into common stock and after fees are paid.

In making its bid, Adler & Shaykin topped an unfriendly offer from Shamrock Holdings, a Burbank investment firm owned by the family of Roy E. Disney.

In the lawsuit filed Friday, the investors contend that a clause in the agreement requires Wherehouse to buy the bonds back in the event of a hostile takeover and that the Adler & Shaykin bid, while friendly, came about as a result of Shamrock’s hostile bid.

In addition, the investors claim that the company will be so loaded down with debt that its cash flow will be insufficient to meet bond payments and that the debt they hold is increasingly risky because it will be subordinated to the rest of Wherehouse debt.

Filing the lawsuit are Wechsler & Krumholz, a securities firm in New York; McMahan & Co., a partnership in Greenwich, Conn., and Froley, Revy Investment, a Westwood investment adviser whose clients include the Major League Baseball Players Assn. and the Catholic Archdiocese of Los Angeles. The three firms said they hold more than one-third of the $50 million in convertible bonds issued by Wherehouse in 1986.

Neither Wherehouse executives nor Adler & Shaykin representatives returned telephone calls seeking comment. The suit also names Adler & Shaykin, bond underwriter Furman Selz Mager Dietz & Birney and six Wherehouse directors, including Chief Executive Louis A. Kwiker.

Analyst Keith Benjamin of the firm Silberberg, Rosenthal & Co. in New York said it is likely Adler & Shaykin will fight the lawsuit because the financing appears to hinge on the bondholders converting to common stock.