The Bid for Federated Stores : Campeau Has a Record of Beating Odds

Real estate developer Robert Campeau shocked many of his fellow Canadian businessmen in 1986 when his Campeau Corp. launched a hostile takeover bid for Allied Stores, a far-larger U.S. department store holding company.

Campeau surprised them again when he defied the odds and won that battle, and, later when he artfully restructured Allied to make its huge debt manageable. So if his fellow Canadians were surprised to hear Monday of his $4.2-billion bid for Federated Department Stores, the news may not have come as a total shock.

Campeau “seems to be in the habit of doing the unexpected,” said William Chisholm, analyst with the Toronto securities firm of Loewen Ondaatje McCutcheon & Co. “At this point, the financial community here almost expects surprises from him.”

Canadians and Americans are likely to hear more of Campeau and his surprises.

The one-time building contractor from the mining town of Sudbury, Ontario, has assembled a $2-billion (assets) company that has made him one of the most powerful French Canadian businessmen. In recent years he has turned his attention to the U.S. market, which he believes holds better growth prospects in real estate as well as in retailing.

If he wins the fight for Federated, the Canadian company would be the largest owner of American department stores. Some analysts believe that if he fails, he will set his sights on another big U.S. retailer.

Campeau represents the new generation of French Canadians who take a greater interest in business than did those in the past. Among the fastest-growing Canadian firms are such French Canadian concerns as Provigo Inc., the second-largest food distributor in Canada, and Power Corp., a holding company with interests in forest products and financial services.

French-Canadian energies “are really devoted more and more to commerce, and Campeau’s one of the best examples of that,” said Donald Tigert, an analyst with the securities firm of Burns Fry Ltd. in Toronto.

Campeau, known for a dry Gallic wit and flashes of temper, now spends nearly half of his time in the United States. He is the owner of what is said to be the largest home in Toronto, but reportedly spends nearly half his time these days in New York where he has a suite at the Waldorf Astoria Hotel.

Built Office Buildings

He is a friend and skiing companion of former Canadian Prime Minister Pierre Elliott Trudeau, and an unabashed admirer of American free enterprise. Yet he also says he would like to see more French Canadians in the upper ranks of Canadian business.

Campeau Corp. got its start in Ontario, where Campeau built dozens of office buildings for the Canadian government as well as homes. Campeau has claimed that the company’s revenue from building makes it Canada’s biggest builder.

In 1980, Campeau failed in an attempt to take over Royal Trustco Ltd., a major financial services firm. He has blamed that defeat on the prejudice of Canada’s English-speaking business Establishment.

The company entered a new league with its September, 1986, bid for Allied, which had revenue of $4.14 billion. The company owns such stores as Ann Taylor, Jordan Marsh and Brooks Bros.

The battle brought a bitter legal fight with Allied management and was won when Campeau--in a controversial strategy--accumulated stock in the open market rather than by tender offer.

Many financial observers were skeptical that Campeau would be able to handle the debt incurred in the $3.4-billion takeover. Indeed, the company was forced to sell 15 of 22 Allied’s units for $1.1 billion, including such slower-growing units as Joske’s, a Houston-based department store chain, and Donaldson’s, a department store chain in Minneapolis.

Many Were Skeptical

But Campeau convinced many of the skeptics as he sold all but eight units that represented about two-third of Allied’s sales but 88% of its profit. He cut expenses by $90 million a year by trimming the payroll, including, for example, cuts of about 500 jobs at Allied’s headquarters.

“A lot of people were skeptical about the deal, which seemed too expensive,” said Chisholm. “As time passed, though, it looked more and more attractive.”

Wall Street and Bay Street--its Canadian counterpart--were impressed that Campeau’s proposed asset sales held together at agreed prices even after the October stock market crash.

Analysts expect that Allied will report a loss of about $125 million on sales of about $3.15 billion for 1987. But, significantly, its cash flow--profit plus amortization and depreciation--will come to about $225 million in a sign that prospects will improve, analysts say.

Also, Campeau has only $350 million of Campeau Corp.’s equity tied up in Allied, with the remainder provided in “junk bond” proceeds and bank debt, analysts say.

Campeau, however, may have to give up some of that equity to finance a takeover of Federated.

In a filing with the Securities and Exchange Commission, the company disclosed that it may offer equity in Campeau, or in Allied Stores as part of the deal for Federated; it also disclosed that it has held discussions with other companies, including British retailer Marks & Spencer, about purchasing an equity interest in Campeau, its U.S. unit, or Allied Stores.

Interests Intertwined

Campeau has been able to attract high-profile retailing executives that he may need to keep Allied going. Among them are Howard Leppo, former president of Lord & Taylor chain, and Robert H. Morosky, who was vice chairman of the Limited.

Campeau’s bid for a second retailing giant might appear to suggest that his interest lies in retailing. Indeed, Campeau has said he believes that many retailing concerns are now drastically undervalued by the stock market.

But his interests in retailing and real estate are closely intertwined since owners of major department stores can often win important real estate holdings, analysts say. Department stores often agree to become the anchors for shopping centers in exchange for equity stakes in the underlying real estate, or discount leases.

“For a big name like Bloomingdale’s or I. Magnin, a shopping center will give up a lot,” said one real estate analyst, who asked to remain unidentified. “Over time, Campeau could get his hands on equity that could really expand his holdings.”

How Campeau Dismantled Allied

In late 1986, after a fierce takeover battle, Campeau Corp. purchased Allied Stores, a major department store firm, for $3.6 billion. Since then, Campeau has sold 15 of 22 divisions for $1.2 billion and is negotiating the sale of another.

Among specialty chains, Campeau sold Bonwit Teller in New York to Hooker Corp.; Garfinckel’s to Washington, D.C., retailer Neal J. Fox, owner of Raleigh’s; Plymouth Shops in New York and Washington to Tribeca Holdings; Catherines, a nationwide chain, to an investor group led by management, and Jerry Leonard in the Midwest and Southwest to King-Size L.P. of Brockton, Mass.

Among department stores, it sold Block’s in Indianapolis and Herpolsheimer’s in western Michigan to Federated Department Stores; Cain-Sloan in Tennessee and Joske’s in Texas to Dillard’s; Higbee in Cleveland to developer Edward J. DeBartolo Corp. and Dillard’s; Heer’s in Springfield, Mo., to management; Miller’s in Knoxville, Tenn., to Hess’s Department Stores; Pomeroy’s in Pennsylvania to BonTon; Miller & Rhoads in Virginia to an investor group led by managers and a Philadelphia developer, and Donaldsons in Minnesota to Carson Pirie Scott of Chicago. Negotiations for the sale of Dey’s in Syracuse, N.Y., are proceeding.

Campeau retained Brooks Bros., Ann Taylor, Jordan Marsh (in New England, including Read’s), Jordan Marsh (in Florida, including Maas Bros.), Stern’s and the Bon, which accounted for 62% of Allied’s revenues and 88% of its profits.