Ralphs supermarkets officially went on the sale block Tuesday as owner Federated Department Stores rebuffed a takeover offer and outlined a tentative plan to revamp the company.
The Cincinnati-based retailer, which also owns Bullock's, I. Magnin and Bloomingdale's, said its board of directors rejected a sweetened $5.84-billion bid by Campeau Corp. because the Canadian real estate developer's ability to finance the cash offer "continued to be questionable."
Federated did not say how much its tentative restructuring plan would be worth to shareholders. Under the proposal, Federated would concentrate on its core department store chains and sell off most other units. Ralphs, a Compton-based operation with 129 stores and more than 15,000 employees, is expected to draw a line of prospective purchasers, including its current management.
Plan Quickly Denounced
Wall Street observers quickly denounced the plan as an attempt by Federated's management to entrench itself.
"This is worth substantially less than the Campeau offer," said Robert Raiff, an analyst with the C. J. Lawrence investment house in New York. "If this were a free country, this plan would be laughed away."
Another observer at a Wall Street investment firm said it was "outrageous" that Federated rejected Campeau's offer on the basis of financing conditions that he said are typical of such deals today. He noted that Campeau has already detailed financing agreements with the wealthy Reichmann family of Toronto, the Edward J. DeBartolo Corp. development firm in Ohio and First Boston Corp., its investment adviser.
"That's as credible as you can get," he said. "It says to me that this is a board looking for a way to reject this thing."
'Left a Window Open'
Wall Street observers theorized late Tuesday that Federated's board might simply be trying to force Campeau to raise the ante again. By not immediately taking dramatic steps, Federated "left a window open" for Campeau that must be exploited "decisively and quickly" if it wants the company, a Wall Street source said.
Federated said its board considered, among other options, a reorganization that would involve the sale of most non-department store companies. In addition to Ralphs, those would include Gold Circle, a discount operation; MainStreet, a Midwest apparel chain; Children's Place, which sells children's apparel in 26 states, and Filene's Basement, a bargain-basement chain in the Northeast.
Raiff estimated that Federated, which had total sales last year of about $11 billion, would probably get something less than $2 billion for the five units, including about $700 million for Ralphs.
According to a confidential dossier circulated by Federated, Ralphs last year boosted income before overhead, interest and taxes to $102.8 million from $59.2 million the year before. Observers speculate that Chairman Byron Allumbaugh and President Patrick W. Collins might attempt to lead a buyout of the chain.
Public Offering Possible
Thomas H. Tashjian, a vice president at Seidler Amdec Securities in Los Angeles, also suggested that Federated could raise a substantial amount of money by launching an initial public offering for Ralphs and spinning it off to a separate set of shareholders.
In addition to selling off most non-department store units, Federated said it would consider issuing preferred stock and making a one-time dividend payment or repurchasing more than half of the company's outstanding shares.
Given Campeau's existing bid of $66 a share, Wall Street observers said Federated management is obligated to come up with that value or higher to placate shareholders. One Wall Street arbitrager said investors will not respond well to Federated's proposal, which was made after the markets closed in New York. "This is insane," she said, adding that "the stock is going to tumble" in trading today.
In composite New York Stock Exchange trading Tuesday, Federated shares rose $3.125 to $63.75, with nearly 2.6 million shares changing hands.