Fallen junk-bond maven Michael Milken did a lot of big, complicated leveraged buyouts in the 1980s, but he also did a lot of little ones. OroAmerica Inc. is one of those.
Six years after the 1987 OroAmerica LBO, the Burbank-based jewelry wholesaler is still struggling under a mountain of $31.2 million of debt.
That includes $25 million of junk bonds that are costing the company 14% a year in interest, and those bonds are due to be paid off by 1995.
OroAmerica, with about 300 employees, says it is the largest manufacturer and distributor of 14-karat gold jewelry in the United States.
While some of it is marketed under the company's trademark "Beverly Hills Gold," these are not pieces sold in fancy stores on Rodeo Drive.
They are mostly gold chains, earrings, charms and other baubles--nearly 400 different items--offered on television's QVC Network and in K marts and other discount stores at prices of between $30 and $200.
Now OroAmerica's chairman, president and chief executive Guy Benhamou, who owns 96% of the company, hopes to pay off most of its junk-bond debt with a $39-million initial public stock offering next month.
The offering of about 2.5 million OroAmerica shares is expected to be priced at between $12 and $14 a share in the national over-the-counter market.
But according to documents OroAmerica has filed with the Securities and Exchange Commission, the main beneficiary of the planned stock sale would be Benhamou.
"I don't like it," Robert Mescal, a research analyst at New Issues, a Fort Lauderdale, Fla., newsletter, said of the offering.
"The whole thing just doesn't look good to me at all," Mescal said. "Practically the entire proceeds will go to benefit the president personally. And after all is said and done, he still owns the business and (outsiders) won't have a voice in it."
OroAmerica declined to comment on the stock offering.
Benhamou, a 41-year-old Frenchman, founded OroAmerica in 1977 with a former partner, Gianfranco Proia. Each of them owned 50% of the company.
Nearly all of the cash OroAmerica raised with its 1987 junk-bond sale, or $23 million, went to buy out Proia. The buyout gave Benhamou complete control of the company.
Fast-forward to next month's planned stock sale: Assuming an offering price of $13 a share, $23.5 million from the stock sale would be used to redeem the junk bonds.
Benhamou also plans to sell about 300,000 of his own shares in the offering, for about $4 million.
But even after the stock sale, Benhamou would still own 61% of the new, public OroAmerica.
Kevin Ventrudo, a managing director in the Los Angeles office of San Francisco-based Sutro & Co., the lead investment firm managing the offering, disagreed that Benhamou would benefit from the stock sale unduly.
The $25 million of junk bonds to be paid off with the proceeds "are an obligation of the company," Ventrudo noted, not of Benhamou personally.
Ventrudo also pointed out that it is not uncommon for owners to sell some of their own shares in an initial public stock offering.
OroAmerica's recent financial history has been erratic.
It includes a $2.3-million loss in fiscal 1991, when one of its largest customers, Richmond, Va.-based discount retailer Best Products Co., filed for Chapter 11 bankruptcy protection to shield itself from creditors, including OroAmerica.
The filing forced OroAmerica to add $3.4 million to its reserve for bad debts.
In its latest fiscal year that ended last Jan. 29, OroAmerica's profits fell 13% from a year earlier, to $5.4 million, on a 6% gain in sales, to $176 million.
OroAmerica reported sales of $44.2 million for its quarter that ended April 30, but did not release a profit figure for the period.
The 1987 OroAmerica junk-bond sale was a classic Milken transaction.
Milken's former Beverly Hills office of Drexel, Burnham, Lambert Inc. raised $23 million cash to buy out Proia by placing the $25 million of OroAmerica junk bonds with institutional investors.
As was the custom under Milken, a Drexel partnership took something for itself in the deal--warrants to buy as many as 579,000 of OroAmerica's common shares at $5.31 a share.
The partnership, called Carlton Investments, currently owns 111,060 of those shares, giving it a 2.6% stake in OroAmerica, according to SEC documents.
Carlton plans to sell its entire stake in next month's stock offering, for about $1.4 million.
Stephen Koffler, a Sutro executive vice president in the firm's Los Angeles office, said he considers OroAmerica "something of a gold play," which may appeal to some investors.
The price of gold has been generally rising in recent months.
It is currently about $370 an ounce.
But a drop in the price of gold cuts the other way.
OroAmerica has gold-consignment arrangements with several dealers.
These arrangements let the company avoid some of the risk of price changes by not having to pay for the gold until it is needed.
But OroAmerica usually owns a fair amount of gold outright--primarily in finished goods and work in progress.