High Stakes On Merry-go-round

June 10, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

Perhaps no one was watching Merry-Go-Round Enterprises Inc.'s dismal first-quarter financial results more keenly yesterday than the junk-bond pros at Fidelity Investments.

Fidelity, the giant Boston mutual-fund company, is Merry-Go-Round's biggest creditor. But unlike many people owed money by companies in bankruptcy proceedings, the Fidelity folks assumed that status voluntarily.

They bought millions in Merry-Go-Round debt at a discount after the large, Joppa-based fashion retailer sought bankruptcy protection in January. Now they hope to collect the debts in full -- and to turn a tidy profit for Fidelity fund owners -- after Merry-Go-Round resurfaces from Chapter 11. Until now, no one knew precisely how much Fidelity was in for. It's an important detail because, with a big-enough stake, Fidelity becomes a quasi-member of Merry-Go-Round's management team, with power to blackball the company's reorganization plan or to muscle through a plan of its own.

Deep in the mounds of filings in U.S. Bankruptcy Court in Baltimore, Fidelity disclosed its holdings. It owns more than $90 million in face value of Merry-Go-Round's unsecured debt -- 42 percent of the $214 million total. That's well over the one-third it needs under bankruptcy law to block a reorganization it doesn't like.

Fidelity fund manager Daniel Harmetz has bought Merry-Go-Round debt for his Capital & Income Fund. He's also purchased 5 million shares of the retailer's common stock, about 10 percent, the recent filing disclosed.

Mr. Harmetz's desires are simple, analysts say. He wants Merry-Go-Round's heavy operating losses to stop. He wants a quick resolution to the bankruptcy case. And he wants 100 cents on the dollar for his IOUs.

With a blocking stake, Fidelity won't be shy about trying to get what it wants. And it won't be happy about financial results such as yesterday's, as Merry-Go-Round reported a $24.1 million loss and sharply lower sales for its fiscal first quarter.

"The numbers are more disappointing than Fidelity realized they would be," said Peter N. Schaeffer, a retail analyst at New York investment firm Dillon Read & Co. "This will be impetus for Fidelity to get more involved than they have been in the past."

Fidelity officials declined to comment on Merry-Go-Round yesterday.

The mutual fund company's desire for a quick resolution may be particularly ardent, given what it paid for some of the Merry-Go-Round paper. A recent Securities and Ex change Commission filing by Melville Corp. indicated that the $30 million in Merry-Go-Round debt that Melville sold to Fidelity went for 86 cents on the dollar.

That's extremely high for a bankruptcy claim, analysts said. In part, it reflects Merry-Go-Round's relatively healthy balance sheet; the retailer might pay off all its debt and still have tens of millions of dollars in assets left. But it also suggests that Fidelity expected Merry-Go-Round to emerge from bankruptcy court this year -- something analysts said is very unlikely.

Peter A. Chapman, head of Bankruptcy Creditors' Service Inc. in Princeton, N.J., believes Merry-Go-Round may not emerge until 1996.

Fidelity won't want to wait too long. The longer the case takes, the less its investment earns.

Fidelity is expected to prod Merry-Go-Round management to speed things up. It may try to persuade another retailer to buy Merry-Go-Round outright. It could propose its own reorganization plan, one that might replace Merry-Go-Round Chairman Leonard Boogie" Weinglass and other managers with executives of Fidelity's choosing.

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