Wherehouse Entertainment, fighting off a hostile takeover bid from Roy E. Disney's Shamrock Holdings, said Monday it found a friendly rescuer in Adler & Shaykin, a New York investment firm that agreed to buy it in a deal valued at $118 million.
The agreement, approved Sunday night by Wherehouse directors, means that the Torrance retailer of records, tapes, compact disks, computer software and videocassette rentals would become a private company. Its management would remain intact if shareholders agree to the buyout and no higher bid emerges.
It was unclear whether Wherehouse, which had $225.5 million in sales in the year ended Jan. 31, will have to sell or close any of its 212 stores.
John Quigley, general partner with Adler & Shaykin, downplayed suggestions that assets would be sold to help finance the deal.
"We are known as a group which supports the growth of our companies. We tend to grow them, not shrink them," he said.
A spokesman said Shamrock had no comment. The Burbank investment company is owned by Roy Disney, nephew of the late Walt Disney, and his family.
Shamrock last month offered $91 million, or $12 a share, for the 89.7% of Wherehouse's shares it does not already own, although Shamrock officials told Wherehouse before the Sunday night directors' meeting in New York that they were prepared to raise the bid to $13.75 a share, which Wherehouse directors rejected.
Adler & Shaykin, through a new company called WEI Holdings Inc., will pay $14 a share for Wherehouse through what is commonly called a leveraged buyout. In a leveraged buyout, investors buy a company using borrowed money that ultimately is paid off with funds generated from the company's operations or through the sale of assets.
Wherehouse has 8.4 million shares outstanding, but the company said Monday it may repurchase up to 1 million shares on the open market at no more than $14 each.
'White Knight' Rescue
The buyout by Adler & Shaykin is a classic "white knight" rescue, the result of scrambling by Wherehouse over the past two months to find a friendly suitor to prevent it from falling into the hands of Shamrock. Sources close to Wherehouse said that while the company held discussions with other parties, they believe that Adler & Shaykin's offer was the only one seriously considered other than Shamrock's.
Adler & Shaykin, which specializes in leveraged buyouts, will finance the purchase using money borrowed from Chemical Bank in New York and Equitable Capital Management Corp.
Unlike many leveraged buyouts, in which management joins in with an investment group, it appears that Wherehouse's management will not participate in the purchase.
Quigley said there were no provisions in the agreement calling for management's participation in the buyout, and another source close to Wherehouse said management will not participate.
Keith E. Benjamin, a securities analyst with Silberberg, Rosenthal & Co. in New York, said the most likely change in Wherehouse's operations after the sale would be a slowing of expansion plans and possibly the sale of some of its 20 or so stores in enclosed shopping malls. He said the mall stores are smaller than stores Wherehouse prefers to operate and also are less attractive as video rental locations.
If Shamrock makes a profit on its 10.3% Wherehouse stake, it is likely to be a small one.
Filings with the Securities and Exchange Commission indicate that the company will make a profit of about $1.8 million on the shares it bought, based on an average purchase price of $11.87 for the 867,700 shares it owns. Much of that profit, however, could be wiped out by such expenses as brokerage fees, costs to solicit proxies, legal fees and advertising expenses.
Original Bid $14.25
Shamrock first bid $14.25 for Wherehouse in early October. At the time, Wherehouse's stock had fallen from nearly $24 a share last year to less than $10. Some analysts have attributed the fall to disappointing earnings, although the company has maintained that heavy spending on such things as new stores and a computer system designed to improve its inventory cut into the company's profits.
Shamrock, citing the Oct. 19 stock market tumble, then lowered its bid to $12 a share in November and threatened to lower it to $10 a share if it failed to get an agreement by today.
Wall Street sources said they believe relatively few shares had been tendered to Shamrock, although they noted that many institutions and speculators wait until shortly before an offer expires to do so. They added that some arbitragers, those who speculate on takeover situations, and institutional investors were displeased when Shamrock announced in November that it was lowering its original offer.
For the nine months ended Oct. 31, Wherehouse's earnings dropped 63% to $1.3 million, or 15 cents per share, on a 28% rise in sales to $187.4 million.
Wherehouse's stock closed Monday at $13.625 per share, up $2.50, in trading on the American Stock Exchange.