Federated Emerges From Bankruptcy After Two Years : Retailing: Analysts say the slimmed-down owner of department stores is now a stronger company.
Federated Department Stores on Wednesday emerged from two years under bankruptcy protection to a polite reception from investors, if an uncertain future with the shopping public.
Although Federated--parent of such upscale chains as Bloomingdale’s, Rich’s and Abraham & Strauss--still has a high level of debt and faces a tightfisted consumer environment, analysts believe that it strengthened itself considerably in the restructuring process.
The company is now a slimmer, merged version of the Federated and Allied chains that Canadian developer Robert Campeau assembled in the mid-1980s with expensive junk bond financing.
The concoction never worked for Campeau because the stores’ cash flow couldn’t cover the interest payments on the bonds. So, on Jan. 15, 1990, Federated and Allied filed for protection from their creditors under Chapter 11 of the U.S. Bankruptcy Code.
The bankruptcy was complicated and divisive, with some creditors complaining that Campeau had shortchanged them in selling off Allied’s Brooks Brothers and Ann Taylor divisions and other creditors screaming for more pieces to be sold to raise cash to pay them off.
A key to the final restructuring was persuading creditors to accept stock in repayment of their loans, which helped slash Federated’s debt to $3.5 billion from $8.3 billion before the bankruptcy. In the process, interest payments have dropped to $259 million a year from $606 million.
And the connection with Campeau has been severed.
To have come this far was “almost miraculous,” said Kurt Barnard, president of the Retail Marketing Report newsletter in New York City.
He praised Chairman Allen I. Questrom for the turnaround, describing the pre-bankruptcy Federated as “a wreck of a company, without any money--nothing but debt and terrible, terrible management.”
During the bankruptcy proceedings, Questrom sold off or closed 42 stores, trimming the number to 223. “The mix of stores is very good now,” Barnard said, “and they’ve made themselves extremely cost-effective and efficient.”
Federated’s critics say that the current climate is cool to upscale retailers, as consumers are pushing for bargains in a tight economy. The retailers who are prospering include Pick ‘N’ Save, Wal-Mart and other discounters.
Federated emerged from bankruptcy court nine days after R. H. Macy & Co., overburdened by its own takeover debt, was forced to seek Chapter 11 protection from its creditors. The timing was ironic, since Macy’s had been a determined bidder against Campeau for Federated in 1988.
As soon as they got the chance on Wednesday, some of Federated’s former creditors rushed to cash in their stock. The shares are trading on a “when-issued” basis on the New York Stock Exchange, meaning that certificates are not yet available.
Still, the price held up well, closing at $17.25 a share, down 50 cents from the opening price of $17.75. The closing price was also up sharply from the $14 price at which it began trading three weeks ago in sales off the stock exchange, the Dow Jones News Service reported.
Wednesday’s volume of 6.66 million shares represented about one-quarter of the stock available for trading. Although Federated has about 80.5 million shares outstanding, all but 24 million are restricted from trading for three years, under terms of the reorganization, company spokeswoman Carol Sanger said.
Analyst Janet Mangano of Burnham Securities believes that Federated’s stock is a good buy, at least for the short term. The company plans to issue more stock within the next 18 months, which would dilute the value of existing shares, perhaps making it less attractive in the long term.
