How Do You Spell Relief?

By John Greenwald

In the early-morning chill last Thursday, a line swiftly lengthened outside Bloomingdale's department store in New York City. But these were not shoppers eager to get the first crack at a sale in the chic emporium. They were merchandise suppliers clamoring to collect their money from Bloomie's, the centerpiece of Robert Campeau's troubled empire. After the store offices opened at 8 a.m., some 400 red-eyed vendors marched inside to pick up their checks.

Their determination was understandable. Campeau's American operations are tottering near bankruptcy, and the Bloomingdale's chain is up for sale. The setbacks have devastated Campeau, 66, a brash Canadian developer who became the most powerful retailer in the U.S. when he acquired Allied Stores and Federated Department Stores in 1980s takeover fights. Included in the deals were such prominent chains as Jordan Marsh, Bon Marche, Abraham & Straus and Burdines. But while the raids made Campeau a high-rolling business celebrity, they left his Toronto-based Campeau Corp. with more than $10 billion of leveraged-buyout debt and interest charges so high that the stores could not produce enough income to meet them.

The company is lurching from crisis to crisis. Campeau Corp. managed to scrape together $100 million last week to meet the deadline for paying suppliers who shipped the 257 U.S. stores everything from tank tops to tiaras. This week the firm hopes to persuade Citibank and other major lenders to roll over $2.3 billion of loans. But even if the creditors agree, the Canadian company must put its U.S. retail operations on a sound financial footing by taking drastic steps to trim costs and sell properties. Observes Wilbur Ross, senior managing director of the Wall Street firm Rothschild Inc. and an adviser to Federated bondholders: "The Campeau people have to get all the pieces together at once to solve this problem. The stores can get by in the period after Christmas, but they cannot go without spring merchandise."

To reassure creditors, the corporation's directors last week banished Robert Campeau from all U.S. operations and said he would confine himself to developing Canadian real estate. The twelve board members included Albert Reichmann, chairman of Olympia & York Developments, a Canadian real estate giant that has invested $700 million in Campeau Corp. and holds a 38% stake in the company. Emerging from four days of meetings in Toronto's pink marble Scotia Plaza, the directors said they had vested control of the U.S. stores in a voting trust to be run by a board of U.S. trustees.

The shake-up came as Campeau's troubles threatened to spiral out of control. Anxious suppliers have refused to sell their wares to Campeau units for fear of not being paid. At the same time, Campeau's 100,000 U.S. employees are worried about layoffs, and many top officers have begun to seek new jobs. Says Robert Nesbit, a managing partner at Korn/Ferry, the world's largest executive-search firm: "I shudder at what is happening. Never before have the proud people at Allied and Federated sought us out. Now we are talking to three or four top divisional and corporate people every day."

Campeau Corp. disclosed the extent of its financial woes in a Securities and Exchange Commission filing last week. The company said Allied and Federated would incur net losses for the next five years. The report added that even if Campeau liquidated all its Allied and Federated stores, it could not raise enough cash to pay off its total debts. Meanwhile, efforts to sell Bloomingdale's have been disappointing. Campeau hoped to get about $1.5 billion for the 17-store subsidiary when it went on the block last September, but experts say it may fetch less than $1 billion. The most prominent would-be buyer is Bloomingdale's Chairman, Marvin Traub, who has been seeking Japanese support for a bid for the firm.

For Robert Campeau, the American dream that seemed so alluring from north of the border has turned into a nightmare. A relentless overachiever, Campeau once noted how, as a boy in the bleak mining town of Sudbury, Ont., "I thought any house with indoor plumbing was a palace, and I hated the people who lived there." At 14 he became a machinist's apprentice, using the baptismal certificate of a dead older brother to pass for 16. "You have to push yourself to the front of the line," Campeau later noted. He built his first house after World War II, and was one of Canada's largest real estate developers in the 1970s.

Still barging ahead, Campeau acquired Allied for $3.6 billion in 1986. He stunned U.S. retailers two years later by besting the powerful R.H. Macy & Co. in a $6.6 billion battle for Federated. Recalls Jon Levy, chairman of Gillian Group, a leading dress manufacturer: "After a while, it became a contest of wills and ego. Campeau came to feel that it was a game and he had to win the prize." But the price of victory was a debt load that included $2.25 billion of junk bonds that pay as much as 17.75% interest.

To ease the burden, Campeau Corp. may be forced to take refuge in bankruptcy. The move would buy the firm time to trim its debt to more tolerable levels. "I think the best bet would be to declare bankruptcy to protect the store franchises," says Monroe Greenstein, an industry analyst at Bear Stearns. The Federated and Allied chains could then operate under bankruptcy protection, which would entitle them to suspend interest payments and pay suppliers more promptly for their goods. But other Campeau watchers reject that strategy. Says Rothschild's Ross: "There is relatively little that can be done in bankruptcy that cannot be done out of it." He argued that while a bankruptcy filing would reduce interest costs, it would produce legal and other professional fees that could run to millions of dollars a month.

As Campeau Corp. struggled to raise cash, many stores began to lure customers with flashy sales. Bloomingdale's has marked down its winter merchandise twice, and last week offered spring and summer apparel at discounts of as much as 25%. "You just don't do that at this time of year," Greenstein notes. "You put your summer stuff out, but not on sale."

While quite a few suppliers are still cautiously providing goods to Bloomingdale's and other Campeau subsidiaries, the threat of new cutoffs hangs over the stores. Notes Bert Hand, president of Hartmarx: "These stores are going to end up somewhere, whether in the current organization or under new ownership. Either way, we want to make sure that we don't lose continuity. But on the other hand, we can't put ourselves in too much risk."

Most Allied and Federated stores are likely to stay in business no matter how Campeau ultimately fares. The chains are far better merchandisers than B. Altman, a declining retailer shuttered last year by George Herscu, an overleveraged Australian raider who acquired the company in 1987. The problems at Allied and Federated stemmed from no fault of their own but were caused mainly by the audacious price that Campeau paid.

Yet Bloomingdale's and other Campeau chains, which operate in an extremely competitive industry, could be crippled by the financial turmoil. For one thing, the exodus of experienced managers comes at a time when department- ! store retailers are under attack from catalog merchants, discounters and specialty stores. Moreover, a crunch could occur this spring if Campeau's troubles cause more suppliers to defect. Says Gillian's Levy: "All I care about now is for the situation to be resolved as soon as possible, or Federated will no longer be viable. The longer they procrastinate, the longer they go without merchandise. Then customers will start going to other stores, and Federated will lose them forever."

Many suppliers blame the 1980s buyout binge for the Campeau debacle. In the process of arranging enormous loans for overreaching raiders, the lenders and investment bankers paid little or no attention to whether the buyouts could survive over the long haul. The toll has been particularly heavy among retailing companies. In a study of 25 retail buyouts between 1983 and 1985, the Ernst & Young accounting firm found that nearly 40% had gone bankrupt or slashed their operations. For big-eyed shoppers like Campeau, the buyouts might have looked tempting, but they were hardly bargains.

With reporting by Mary Cronin/New York and James L. Graff/Ottawa