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Levitz, as Debt Woes Persist, Looks Wobbly Following Failure of Montgomery Ward Deal

October 24, 1995

Levitz Furniture probably isn’t a frequent shopping stop for very many wealthy investors. But it’s a showcase of the kind of retailer investors should be wary of betting on amid the current industry shakeout.

Once a successful pioneer warehouse retailer, Levitz, based in Boca Raton, Fla., piled on debt in a 1985 leveraged buyout aided by former junk-bond king Michael Milken. It promoted its down-market merchandise with television ads promising ``You’ll love it at Levitz.″

Even after going public again in 1993, Levitz was hindered by debt and failed to adapt to changing tastes as, say, Ethan Allen has done. Now, even if it can stave off financial trouble, ``Levitz is probably history,″ says retailing consultant Kurt Barnard.

Investors who were hoping Levitz would be bailed out of its errors took brutal losses last week when Chicago retailer Montgomery Ward suddenly dropped an offer to funnel a much-needed $65 million into Levitz by paying $9 a share for a 19.6 percent stake.

Since then, Levitz stock has fallen 44 percent to its current price of around $3.375 on the New York Stock Exchange. And its junior junk bonds have tumbled almost 20 percentage points to a price of 59 percent of face value, traders say. The company announced slightly better-than-expected third-quarter earnings Friday.

Neither Montgomery Ward nor Levitz will say exactly why their deal fell apart. But it’s a big comedown for Levitz, which once attracted a takeover offer from Chicago’s Pritzker family. The Pritzkers ultimately joined in the $318 million Levitz buyout in 1985, along with Drexel Burnham Lambert officials and Citicorp Venture Capital.

To reward its owners in 1986, Levitz piled on more debt to pay a one-time dividend of about $200 million. Citicorp still is a big Levitz holder, as is the government of Singapore.

How unhealthy is Levitz, which appears close to hiring a new chief executive officer?

The good news is that Levitz has been hacking costs and claims cash flow from operations is strong. ``They haven’t violated any bank covenants,″ says Mark Levin, a Dabney/Resnick analyst and a Levitz fan. Such a violation, of course, would make lenders and vendors nervous. Moreover, says one Levitz insider, Levitz doesn’t depend much on factors, who finance short-term trade and who helped throw Caldor Corp., for instance, into bankruptcy court.

The bad news is that the warehouse retailer is getting hammered in the big California market. Overall, monthly sales at older stores have been tumbling alarmingly for a year. Same-store sales dropped by 9.7 percent in the latest quarter and the company could get into trouble if they keep falling, admits the same Levitz insider.

Levitz’s problem, the insider says, is that it short-sightedly targeted blue-collar shoppers during the ``white-collar recovery″ of recent years, when it should have gone upscale.

``On paper, Levitz can get through the year,″ says Nomura Securities International analyst Marc Kutik, but he doesn’t sound optimistic. Levitz could ill-afford to lose Montgomery Ward’s $65 million investment, which would almost have equaled Levitz’s cash flow for the past 12 months. And if vendors get nervous, Mr. Kutik adds, they won’t ship Levitz any more furniture.

When the Ward investment fell through, the Standard & Poor’s rating agency cut its ratings on Levitz’s junior junk bonds from single-B-minus to triple-C, a red flag that sometimes heralds a future default on debt. S&P noted that cash flow from operations fell slightly below interest charges in one recent quarter.

In April 1996, some of Levitz’s debt will become payable, as happens every year, the Levitz insider says. A year later, about $100 million of junk bonds fall due. They’ll have to be refinanced, or paid off, and Levitz can’t afford to do the latter.

For more than a month after Sept. 5, when the Montgomery Ward deal was announced, it appeared that Levitz’s investment bankers at Donaldson Lufkin & Jenrette and Morgan Stanley had pulled off a rich deal for their client. Besides its initial investment, Ward had options to buy more shares at $14 apiece.

Free-standing furniture stores are considered the wave of the future. And Mr. Barnard, the consultant, says the Chicago retailer had a strong incentive to gain control of warehouse stores to compete with Sears Roebuck’s Home Life stores.

The Levitz insider blames antitrust issues that would have prevented Ward from influencing Levitz with only a minority stake, as well as the strong-minded personality of Montgomery Ward Chairman Bernard Brennan.

But others believe Montgomery Ward, during its month-long review of Levitz, concluded that $9 a share was too much. And they are betting Levitz will have trouble finding another savior willing to pay the same price.

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