Managers Drop Bid for Wickes, Citing Possible Losses at Firm

A week before they were to conclude a controversial buyout offer for Wickes Cos., a group of Wickes executives on Friday withdrew its $574-million bid, citing a “significant deterioration” in income at the Santa Monica-based owner of Builders Emporium.

The management group, led by Wickes Chairman Sanford C. Sigoloff and backed by the New York investment house Drexel Burnham Lambert Inc., announced the decision early Friday, and the group warned that Wickes might lose money on continuing operations in the third and fourth quarters and for the fiscal year. A number of analysts and investors reacted angrily to the disclosures.

While the management group held open the possibility of submitting a new offer to Wickes’ board sometime in the future, Wall Street analysts said that because of the company’s cloudy financial outlook and the manner in which the management offer was handled, they were doubtful that anyone would bid on the company in the near future.

“There’s a credibility issue now,” said Anthony Pearce-Batten, a Wickes analyst at the Baltimore investment house Legg Mason Wood Walker Inc. “The investment community is going to think very hard before they believe any other management offer for Wickes.”

“People on Wall Street think this is an amazing fraud,” added a New York arbitrager who did not wish to be identified. “From the beginning something seemed to be fishy and now it’s out in the air.”

Cyclical Nature Cited

Wickes is a major supplier of upholstery to the automobile industry and a leading producer of wallpaper and decorative fabrics. It also operates home improvement and furniture stores, including Builders Emporium.

Wickes issued a statement Friday forecasting that its operating income for 1989 could be $40 million less than the $256.9 million the management group had predicted when it made its buyout offer on Aug. 21. Operating income for August and September was $15 million below projections, the company said.

Company officials and analysts agree that weak demand in the automobile and home building industries for the fabric and textile products produced by Wickes’ Collins & Aikman unit in Dalton, Ga. are contributing to the income erosion. But analysts also point to poor management of the unit.

“Part of it is due to the cyclical nature of the automotive and housing industries,” said Pearce-Batten. “But you’ve got to figure they didn’t manage well either. . . . They’ve started to lose money in a serious way.”

Shortly after acquiring Collins & Aikman in January, 1987, Wickes replaced the company’s chairman, Donald F. McCullough, with Alfred S. Crimmins. The change was made amid speculation that Wickes wanted new leadership to deal with disclosures that the unit, which had sales of about $1.1 billion in 1987, had supplied phony flammability test results to commercial customers. Wickes ultimately set aside a $20-million pretax reserve to cover costs associated with the sale of substandard carpets.

Last May, in what Wickes described as a cost-cutting measure, executives at Wickes headquarters assumed management of the unit after Crimmins left to pursue “alternative business opportunities.” One analyst said that with scaled-down and absentee management Wickes may not have been able to oversee the unit as closely as it should have.

Losses at the key unit could be the most important factor in dampening any new interest in Wickes, analysts say. Future earnings are critical to a leveraged buyout transaction because the buyers must rely on cash flow to help repay loans used to finance the purchase.

A Wickes spokesman Friday issued a statement saying the “management group, along with its financial adviser Drexel Burnham Lambert, may consider formulating a new proposal to submit to the . . . (Wickes) board which will reflect Wickes’ current financial outlook and future prospects.” The spokesman, Michael Sitrick, would not elaborate.

The withdrawal of the management buyout offer is likely to increase shareholder discontent at Wickes, whose battered stock closed at $7.375, down $3.25 in heavy trading Friday on the New York Stock Exchange. The company is already facing several shareholder lawsuits over the management offer. And Jeffrey Kahn, a Los Angeles lawyer and dissident Wickes shareholder, said he is going to renew his bid to press shareholders’ interests by gaining appointment to Wickes’ board.

“The so-called deterioration in the company’s profits was not surprising and was merely an excuse to withdraw the offer,” Kahn said. “The board must give serious consideration to seeking Mr. Sigoloff’s resignation. His credibility and image have now been shattered.”

Sitrick said he finds the attitude of disgruntled shareholders such as Kahn “very surprising” and doubts his position “really reflects the attitude of very many people.”

Last month, a management group led by Sigoloff and Drexel announced a $12-a-share buyout offer for Wickes. Anticipating that other interested buyers might make a higher bid, the management group decided to wait 60 days, or twice the legally required time, before buying stock.

But unlike Wickes’ old television commercials in which smiling employees tell their boss, “we got the message Mr. Sigoloff,” Wall Street turned a deaf ear to Wickes’ financial entreaty. None of 200 potential buyers communicating with Wickes’ investment banker--Bear, Stearns & Co.--made a solid offer for the company. While Drexel represented Wickes’ managers in the proposed buyout, Bear Stearns represented the company in soliciting higher offers.

Criticism has mounted in recent weeks about whether the management offer was ever intended to be consummated and whether Bear Stearns was creating an unwarranted impression of substantial interest from other buyers.

Michael E. Tennenbaum, vice chairman of investment banking in Bear Stearns’ Los Angeles office, defended his firm against such criticism.

“Bear Stearns’ work product has remained consistently accurate throughout this entire process,” Tennenbaum said, adding that the firm has “always maintained that there was a wide range of possible opinion about the value of Wickes.” He took note of Wickes’ high debt and major fluctuations in its stock price.

But Laurence C. Baker, a Wickes analyst at Dillon Read & Co. in New York, disagreed. “This has been badly handled for nine months,” Baker said. “I would assume the message for him (Sigoloff) is that things have gotten very bad at Wickes.”