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Bankable Star Eases Way for Ward Buyout

February 03, 1988|JAMES FLANIGAN

It looks like Mobil Corp., the giant oil company, is going to be able to rid itself of Montgomery Ward, the retail chain it bought more than a dozen years ago at the height of the 1970s oil crisis. The purchase unfortunately proved financially and politically costly for Mobil, and it marked a turning point in U.S. business.

But that was then. Now, some of the smartest financial companies in the country are competing for the right to take Montgomery Ward off Mobil's hands in a $1.5-billion leveraged buyout. The proposed deal, still only in informal negotiations, would create a new company run by the retail chain's president, Bernard F. Brennan--a hard driving 49-year-old merchant who is a bankable property in the retail business in much the same way that director Steven Spielberg is bankable in the movie business.

Shortage of Talented People

The Hollywood analogy is not inappropriate, because business today, be it called investment banking or retailing, is more like Hollywood than its pinstripes and board rooms would have you believe. There may be a shortage of talented people and ideas, but there is really no shortage of money. Which helps to explain why smart companies like GE Capital, Merrill Lynch and others want to back a retail operation when the storm clouds of recession are on the horizon. In the movies, even in uncertain times, there's always money for a star.

But more about that later. The roots of business today go back to 1974, when Mobil acquired Montgomery Ward--and a packaging company called Container Corp. of America--for $1.7 billion.

The outcry was immediate. The company was attacked in Congress for spending profits from oil to buy a department store rather than search for oil and lessen America's dependence on OPEC. Mobil's acquisition ultimately led the Carter Administration to levy a windfall profits tax on oil companies.

The business world's reaction was equally negative. Mobil, which had to pump an additional $600 million of capital into Montgomery Ward, was attacked for buying a chronic loser. Investors were furious. "I invested in an oil company," complained one big shareholder. "If I wanted to buy a retailer, I'd do it myself."

Lucrative Buyouts

In a way, the Montgomery Ward deal marked the end of a time when big company managements could invest shareholders' money without much question from investors.

Times changed after that. Pension funds and other institutions began to back Wall Street money managers in opposition to management's investment and diversification strategies. They contributed to the forced merger and breakup of big companies by backing Wall Street firms specializing in acquisitions and leveraged buyouts--a transaction in which a company's managers and employees buy its stock with money borrowed against the company's assets and future cash flows. The new share owners then work to pay off the borrowings and, if they succeed, the equity ownership makes them and their backers immensely wealthy.

The first leveraged buyout took place in the year Mobil completed its purchase of Ward.

The leveraged buyout changed corporate life. Where the big company could promise the bright, energetic individual a good salary and the key to the executive washroom, now Wall Street could promise to make him or her really rich.

That's the prospect facing Montgomery Ward's managers if the deal comes off and they can make the operation work.

Prospects for the deal look good. Mobil is making the price attractive and, as with any retailer, there is real estate behind Ward, either in property ownership or shopping mall leases.

But most of all, financiers like Ward because Brennan has turned it around. Having closed its money-losing catalogue operation, and with fewer than half the stores it had when Mobil bought it, Ward made a profit last year of about $140 million on $4.6 billion in sales.

Brennan has shown a flair by changing Ward into a group of specialty stores, dealing in appliances, home furnishings, auto parts and jewelry. Mall owners like Brennan's idea because it gives them competition against free-standing specialty stores. And Wall Street likes Brennan because his fresh approach has created value in a moribund operation.

If that sounds reassuring, it is. The proposed Ward leveraged buyout means that in American business today, money is available if you have drive and good ideas. And you don't need a Harvard MBA either. Brennan has a BA degree in business administration from College of St. Thomas, in St. Paul, Minn. Retailing may run in his family--his father worked for Sears, and his brother Edward Brennan is Sears' chairman--but the guy clearly has something extra if the smart money wants to back him with $1.5 billion.

If that sounds exciting, it is. With a recession looming, Brennan will have to hustle to keep up Ward's momentum and cash flow. If he fails, the leveraged buyout of Montgomery Ward may come to be seen in the same harsh light as Mobil's original purchase. But, more important, if he succeeds, he'll not only be rich, he'll have built a new business from the ashes of one of the America's oldest companies.

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