Wherehouse Entertainment, a leading videotape, record and computer software chain, received a surprise takeover bid Tuesday from Shamrock Holdings, which offered $113.5 million for the Wherehouse stock it does not already own.
Shamrock, a Burbank-based investment company controlled by the family of Roy E. Disney, nephew of the late Walt Disney, offered $14.25 a share for Wherehouse but said it is prepared to sweeten the bid if necessary.
Wherehouse is one of the nation's biggest retailers of videotapes, records, compact discs and other home entertainment "software." With 4,000 employees, the company operates about 200 stores, most of them in California. The others are in Arizona, Colorado, Nevada and Washington.
Value Going Up
Wherehouse, with an estimated $80 million in video rentals and sales last year, is virtually tied with Erol's Inc. as the nation's biggest video retailer, said Tom Adams, editor of Video Store magazine in Santa Ana. Erol's, based in Springfield, Va., operates Erol's Video Club stores along the East Coast.
Officials of Torrance-based Wherehouse had no immediate response to the unsolicited proposal, which they were evaluating in meetings Tuesday, a spokesman said.
One industry analyst, Steven Rosenberg, said the Shamrock bid was significant because it indicated that investors are finding increased value in retailers of video and audio software despite the stores' traditionally slim profit margins.
"Over the last four years, there's been a great value placed on distribution" in other industries, said Rosenberg, an analyst with Paul Kagan Associates, an entertainment research firm in Carmel, Calif. "Just as retail merchandisers and supermarkets have been targets of takeovers recently, I think in the next few years the value of these record-tape hybrids is going up."
The bid for Wherehouse comes as the company is trying to rebound from several problems that crimped its profits in recent quarters. A higher effective tax rate and a sharp jump in overhead costs--stemming from the opening of new stories and the acquisition of others, for a total of about 50 new outlets--were among the factors depressing the company's earnings.
In the six months ended July 31, Wherehouse's net income tumbled 74% from a year earlier, to $909,000 from $3.5 million, despite a 31% jump in sales to $125.1 million from $95.7 million. For its full fiscal year ended Jan. 31, Wherehouse earned $5.2 million on sales of $225.4 million.
"It looked like maybe they were just starting to turn it around," said Sally Schaadt, an analyst with the investment firm Fourteen Research Corp. in New York. "We were looking for improved earnings in the last half of the (fiscal) year."
Shamrock, meanwhile, has used acquisitions to grow rapidly since its founding nine years ago. The company's holdings include four television stations, 14 radio stations, commercial real estate, ranching properties and a 23.5% stake in Enterra Corp., an energy services concern.
Shamrock also owns Central Soya Co., an agribusiness company, although Shamrock agreed last month to sell the firm to the Ferruzzi Group of Italy for $165 million.
In a letter to Louis A. Kwiker, Wherehouse's president and chief executive, Shamrock President Stanley P. Gold noted Shamrock's broadcasting properties and said "our experience in the entertainment and communications industry could substantially contribute to the success of Wherehouse."
Shamrock said it already had purchased in the open market 567,500 or 6.7% of Wherehouse's 8.53 million total common shares outstanding as of July 31.
The offer lifted Wherehouse's stock $3.25 a share to $14 in American Stock Exchange composite trading. Volume swelled to 522,500 shares from 11,300 on Monday, making it the third most-active issue on the Amex.
The price remains well below the stock's 52-week high of $21.63, however. Shamrock paid an average $10.75 a share for its stake, which it began accumulating in mid-July, according to a separate statement Shamrock filed with the Securities and Exchange Commission.
Ronald Rotter, who follows Wherehouse for the investment firm Morgan, Olmstead, Kennedy & Gardner in Los Angeles, termed Shamrock's opening bid "a very fair price" in light of Wherehouse's sluggish profitability of late and the growth of competition in the videotape market.
But Rotter also questioned Shamrock's interest in Wherehouse. "Is their true intent really to take over the company or to elicit a higher offer for the stock?" he asked, referring to the possibility of rival suitor.
WHEREHOUSE AT A GLANCE
Torrance-based Wherehouse Entertainment operates a chain of about 200 retail outlets in California and neighboring states specializing in home electronics, video tapes and rentals, and computer software. Video revenue accounted for 27% of total sales for the 1986-87 fiscal year.
Year ended Jan. 31 1987 1986 1985 Sales (millions) $225 $109 $138 Net income (Millions) 5.21 4.89 6.37
Assets: $200 million
Shares outstanding: 8.7 million
12-month price range: $6.625-$21.625
Tuesday close (ASE): $14, up $3.25