Merry-Go-Round plan a compromise Shareholders, creditors benefit in surprise scheme

January 04, 1995|By Jay Hancock | Jay Hancock,Sun Staff Writer

The surprising reorganization plan presented for Merry-Go-Round Enterprises Inc. last week has something for everybody.

Creditors would get what they want most: 100 percent of their money, paid as early as this summer. Present shareholders would receive as much as 25 percent ownership in a reorganized Merry-Go-Round -- far more than what some analysts had been expecting.

Managers at the Joppa-based fashion retailer would benefit, too. The tentative plan would let them focus on running the stores instead of on negotiating with creditors.

"Many creditors have worked hard to bring about this outcome," said Dominic DiNapoli, a partner with Price Waterhouse LLP and financial adviser to the creditors' committee in Merry-Go-Round's bankruptcy case.

But the hardest job remains. Unless Merry-Go-Round shows signs that it can earn money, instead of lose it by millions almost every month, the compromise achieved last week could change.

"It's true that the challenge remaining is to reorganize this company and make it profitable," said Stephen Selbst, a New York lawyer who represents Merry-Go-Round's shareholders' committee.

Under the tentative plan, Merry-Go-Round would have to generate enough cash not only to finance its own operations but also to pay interest on $100 million or so in notes that would be used to help pay off creditors. It also would have to be healthy enough to qualify for a bank loan or other financing.

Lately, hurt by an inability to pick popular fashions, Merry-Go-Round has been markedly unhealthy. For the nine months ended Oct. 29, it had negative cash flow of $22.1 million on sales of $544.1 million. Cash flow is profit before subtracting interest, taxes, depreciation, amortization and bankruptcy expenses.

The retailer's fourth-quarter results, said people close to the company, will again be disappointing.

Merry-Go-Round has been trying to revive profits, to no avail, since it entered Chapter 11 bankruptcy proceedings a year ago. In November, it hired Meridian Ventures, a "crisis consulting" firm, to take over management.

Meridian partners Thomas Shull, Merry-Go-Round's chief executive, and James Kenney, chief operating officer, have moved quickly since then. They've fine-tuned merchandise, cut costs -- laying off 70 workers in Joppa -- and closed 200 unprofitable Merry-Go-Round, Dejaiz, Attivo and Chess King stores.

A stunning spring turnaround for the remaining 1,000 stores isn't necessary for the reorganization plan to work by summer's end, advisers and analysts said. But the company needs to show evidence that it can earn money in the 1995 back-to-school and Christmas shopping seasons.

"Negative cash flow into the summer by itself doesn't mean this deal won't work," Mr. DiNapoli said. "Retail is a very seasonal business, skewed toward the second half of the year."

The reorganization plan, which needs bankruptcy court approval, was the product of weeks of secret negotiations between creditors and shareholders. Not even top Merry-Go-Round managers knew about the agreement until late last week, officials said. Many had expected a prolonged battle between creditors and shareholders.

Compromise prevailed. Big creditors such as Fidelity Investments and Bear, Stearns & Co. agreed to distribute more value to present shareholders in return for a reorganization target date of June 30. Shareholders had wanted to stay in bankruptcy proceedings until 1996.

The stake of present shareholders in a reorganized Merry-Go-Round would be 25 percent, assuming that the amount of unsecured claims owed by the company doesn't change much from an estimated $225 million.

Creditors would get the other 75 percent, plus a mixture of cash and notes.

Given that some people expected shareholders to be wiped out, "25 percent isn't so bad," said Peter N. Schaeffer, a retail analyst with Dillon Read & Co.

For each present share, Merry-Go-Round stock owners would receive a new share valued under the reorganization formula at about 58 cents, said Peter Chapman, a bankruptcy analyst and buyer of Merry-Go-Round's debt.

But yesterday investors were betting that the company will recover and increase in value. Merry-Go-Round stock rose by 38 percent to $1.375 a share.

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