Investment Fund Offers to Bail Out Carter Hawley : Retailing: Analysts expect Zell/Chilmark, a Chicago-based partnership, to get a big stake in the department store chain.
In a surprise move designed to pull Carter Hawley Hale Stores out of bankruptcy quickly, a Chicago-based investment partnership offered Wednesday to spend up to $220 million to pay off most of the company’s creditors.
Spokesmen for Los Angeles-based Carter Hawley called the proposal by the Zell/Chilmark Fund a “friendly offer” intended as a long-term investment. Chairman Philip M. Hawley said in a statement that the offer “would represent an important expediting step in the CHH reorganization process.”
But analysts said the year-old investment partnership would probably exact a high price for coming to Carter Hawley’s aid: a major stake--perhaps a majority interest--in the company.
They also noted that Sam Zell, the 49-year-old co-founder of Zell/Chilmark, has a history of playing a strong role in running the companies in which he invests. On Wall Street, the hard-nosed Zell is widely known as the “Grave Dancer” for his investments in troubled firms.
“Zell is a very formidable person,” said Barbara Wedelstaedt, an analyst with the Chicago investment firm Duff & Phelps. “He’s saying, ‘I’ll take care of this (the creditors’ claims), but you have to deal with me now.’ ”
Investors reacted enthusiastically. In trading on the New York Stock Exchange, Carter Hawley’s depressed stock was the biggest percentage gainer, rising 37.5 cents to $1.625. Its junk bonds leaped even more dramatically, climbing from the low-$20 range to more than $38 per $100 of face value.
Carter Hawley, parent of Southern California’s Broadway chain and the biggest department store company in the West, filed for Chapter 11 bankruptcy court protection in February. It was brought down by slowing sales, a cutback in credit from its suppliers and the junk bond debts from its 1987 anti-takeover overhaul.
Before Carter Hawley can emerge from bankruptcy--a process initially predicted to take anywhere from 18 months to several years--it must come up with a reorganization plan that meets with the approval of its creditors and the bankruptcy judge.
Under the plan disclosed Wednesday, the process would be simplified by effectively removing two key groups from the picture: junk bondholders and suppliers. The Zell/Chilmark proposal calls for the investment group to pay 40 cents on the dollar, or up to $220 million overall, to satisfy $550 million in bondholders and suppliers’ claims against Carter Hawley.
If the deal succeeds, Carter Hawley would negotiate a bankruptcy plan only with its mortgage lenders and Zell/Chilmark, rather than a committee representing thousands of creditors.
Analysts, while conceding that Zell/Chilmark would gain enormous bargaining power in bankruptcy negotiations with Carter Hawley, called the proposal attractive to both creditors and Carter Hawley management. Creditors, they said, could avoid the uncertainty of a protracted bankruptcy court battle and receive cash for their claims as early as September.
Carter Hawley management would receive financial strength and extra time to come up with a reorganization plan. Along with paying off creditors, Zell/Chilmark would lend Carter Hawley $50 million to remodel its stores.
The investment group also would grant Carter Hawley the exclusive right to propose a reorganization plan until the end of 1992, although a spokesman for the company suggested that it probably would come months earlier. Its exclusivity period now extends only to March.
The Zell/Chilmark deal hinges on, among other things, the approval of 80% of Carter Hawley’s bondholders and trade creditors. In addition, the bondholders group and the trade creditors each must approve the proposal by a two-thirds margin.
Still, some analysts rated the existing offer or a revised proposal as having a good chance of success because of the quick cash it would bring creditors.
Spokesmen for bondholders and trade creditors were unavailable. But one of Carter Hawley’s biggest shareholders, Robert F. McCullough, chairman of McCullough, Andrews & Cappiello, derided the Zell/Chilmark proposal as an effort to buy assets on the cheap.
He has argued that Carter Hawley has significant value tied up in its real estate holdings. McCullough, whose firm holds 8% of Carter Hawley’s stock, speculated that competing bids could emerge for Carter Hawley.
Philip Hawley and Sam Zell have known each other for years. Carter Hawley and Zell were partners in the development of Broadway Plaza, a mixed-use development in downtown Los Angeles that opened in the mid 1970s.
In a joint news release, Zell, who declined to be interviewed, said: “We are making this substantial investment in Carter Hawley Hale because this is a good company with a bad balance sheet.
The Zell/Carter Hawley Deal The Deal: The $1-billion Zell/Chilmark investment fund will pay off Carter Hawley’s junk bonds and its unsecured trade claims, offering the bond and claim holders 40 cents on the dollar. The bonds had been trading for 20 to 24 cents on the dollar. The Zell fund will also grant the retailer a $50-million line of credit.
The Goal: By paying off the debt and offering a credit line, the Zell fund hopes to speed Carter Hawley’s exit from bankruptcy. In return, the fund is expected to eventually emerge as the controlling owner of the chain.
The Reaction: Carter Hawley’s 12.25% junk bonds maturing in 1996 rocketed to $398.75 per $1,000 face value Wednesday, up $163.75 for the day. The 12.5% bonds maturing in 2002 soared to $381.25, up $176.25. The gains suggested that traders believe that the necessary 80% of bondholders will agree to Zell’s $400-per-bond offer. The company’s common stock also rose, adding 37.5 cents to $1.625, although the stock’s future remains uncertain.
