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Atari to Acquire Federated Group for $67.3 Million : Deal Would Give Video Pioneer Access to a Retail Network

August 24, 1987|NANCY YOSHIHARA | Times Staff Writer

Atari, a personal computer and video game company that has struggled to persuade retailers to sell its products, has agreed to buy the Federated Group chain of consumer electronics stores for $67.3 million in cash.

The acquisition would give Atari, which has been on the mend since being discarded by Warner Communications three years ago, the Federated retail network of about 65 stores in California, Arizona, Texas and Kansas.

For Federated, the deal could offer an escape from the financial problems it has suffered following a rapid expansion that began in 1984, when it had 20 outlets.

Federated's seven-member board accepted Atari's $6.25-a-share offer late Sunday. In a news release, the companies said Federated Chairman Wilfred Schwartz and his family have agreed to sell their 55% stake once Atari begins its tender offer for the 10.7 million outstanding shares.

Fierce Competition a Factor

The release said the deal hinges on, among other things, the approval of Federated's lenders. Federated, based in the City of Commerce, was forced to restructure its $48-million line of credit in May with a group of banks led by Security Pacific after posting continuing losses.

It lost $895,00 in the first quarter ended May 31, contrasted with a profit of $662,000 for the same period last year, on sales that rose 2% to $91.1 million.

Federated's recent problems have been attributed to fierce competition in Southern California, particularly from the Circuit City chain, and the troubled economy in Texas, where Federated has 19 new stores. Schwartz founded the company in 1970 in Los Angeles after buying a 25,000-square-foot warehouse from a floundering electronics firm and turning it into a retail outlet.

Gaining retail shelf space has been a major challenge for Atari since home computer pioneer Jack Tramiel bought the company from Warner in July, 1984. Many U.S. retailers have shunned the company's products, apparently in part because they were hurt previously by the collapse of Atari's video game business. The cool response from retailers also is attributed to Tramiel's aggressive price-cutting tactics on home computers in the early 1980s when he headed Commodore International, an Atari rival.

Sunnyvale-based Atari, the pioneer in video games, at times has been the talk of the Silicon Valley because of both its meteoric rise and its subsequent disastrous decline.

Founded in 1972 by Nolan Bushnell, creator of the first commercial video game, Atari was sold to Warner in 1976 for $28 million. Over the next eight years, Atari produced about $650 million in profit for Warner, and its sales peaked in 1982 at $2 billion. A glutted market eventually derailed Atari, however, and it suffered losses of nearly $875 million during an 18-month period in 1983-84.

Under Tramiel, Atari has returned to profitability. In the second quarter ended July 4, Atari's profit was up 39.3% to $13.54 million. Revenue was up 16.4% to $70.69 million.

Federated's stock closed unchanged Friday at $5.75 in over-the-counter trading. Atari closed Friday unchanged on the American Stock Exchange at $14.25.

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