Merry-Go-Round shares at risk?

July 31, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

Major shareholders of Merry-Go-Round Enterprises Inc. are increasingly worried that Fidelity Investments and other creditors will make a bankruptcy-court power play for a big piece of ownership in the Joppa-based fashion retailer, sharply reducing or even wiping out the holdings of existing stock owners.

The fear is fueled in part by the track record of Fidelity and other so-called "vulture investors" who have reaped spectacular profits using their institutional muscle to exchange debt for stock in recent bankruptcy cases.

The concern also is prompted by Merry-Go-Round's continuing financial problems, which could play into Fidelity's hand in a contest for ownership.

This risk to Merry-Go-Round's shares, believed genuine by some of the savviest players on Wall Street, may be an eye-opener to the many small, local investors who have been buying the stock in hopes of a turnaround.

The large, trendy boutique chain may indeed emerge from bankruptcy court and recover from its difficulties. But by the time it does, bankruptcy experts believe, Fidelity and fellow vulture player Bear Stearns & Co. might hold most of the marbles.

That could make Merry-Go-Round stock worth far less than the $2 a share it has been fetching, eating into some prominent fortunes that have already been hurt by the company's problems.

Leonard "Boogie" Weinglass, local folk hero and Merry-Go-Round's co-founder, still holds 5.13 million shares, worth $10.26 million at $2 a share. Beth H. Goldsmith, widow of co-founder Harold Goldsmith, controls 5 million shares.

At the least, yielding a big ownership stake to creditors would substantially reduce the benefit existing shareholders could gain from Merry-Go-Round's revival.

The vulture funds "have got to make a 25 to 35 percent return" to satisfy their investors, said one large shareholder, who spoke on the condition of anonymity. "The only way they can do that is if they take the shares away from the equity holders. Anybody who thinks Bear Stearns and Fidelity are in it for any other reason is out of their mind."

Fidelity, a large, Boston-based mutual fund company, and Bear Stearns, a New York investment firm, declined to comment.

A big grab for stock by Merry-Go-Round's creditors won't be easy. The creditors will be firmly resisted by stock owners and their lawyers. They'll have to secure the bankruptcy court's approval. A sudden recovery by Merry-Go-Round could thwart the plan.

Large shareholders aren't unloading their stakes.

Mr. Weinglass, Merry-Go-Round's chairman, discounted the risk to Merry-Go-Round stock. "I don't know about that, Fidelity taking a lot of equity in this company," he said. "Things are going well. I don't think that's going to happen."

But Fidelity owns enough Merry-Go-Round debt to block any reorganization proposal that doesn't dish out a generous helping of stock to creditors. Fidelity has hired one of the toughest law firms in the "corporate reorganization" business -- Weil, Gotshal & Manges, of New York.

And it's accustomed to wringing large gains from bankruptcy situations, as demonstrated by the case of R.H. Macy & Co.

Defending the value of Merry-Go-Round shares against the interests of Fidelity and other creditors "is the general tactical problem in this bankruptcy right now," said Hubert M. Stiles Jr., ,, who manages a big chunk of Merry-Go-Round stock for Baltimore-based T. Rowe Price Associates Inc. and its investors.

It didn't always seem that way.

A few months ago, analysts believed Merry-Go-Round might be among the few big Chapter 11 cases in which the value of the company's shares wouldn't be wiped out or reduced to pennies.

Merry-Go-Round seemed to have the wherewithal to pay off creditors in cash or IOUs, without touching its stock. The company's mistakes -- putting unpopular clothes in its stores -- were deemed quickly fixable. When it landed in bankruptcy court on Jan. 11, its reported assets of $463 million outweighed liabilities by almost $200 million, which was unusual in a bankruptcy case.

Some of the smartest money was buying Merry-Go-Round common stock, which had been beaten down from more than $17 a share last year to the $2-$3 range. Fidelity itself acquired 5.12 million shares -- 9.5 percent of the company.

Smaller players took the plunge, too. Clients of regional brokerage Ferris, Baker Watts Inc. currently hold more than 100,000 Merry-Go-Round shares, said research director Jeffrey Saut. "There were a lot of people -- old-line Baltimoreans -- who bought it on the flop, at 1 7/8 or $2 a share," Mr. Saut said.

But Merry-Go-Round didn't rebound.

The company lost $17.1 million for the three months ended April 30, not counting $7.0 million in reorganization costs, on revenue of $169 million. Managers had trouble getting enough merchandise for spring and summer. Sales have been down sharply every month so far this year.

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