If you're a master merchant trying to sell goods that are a little tattered, what do you do? Just what Edward Finkelstein, the master merchant who runs R.H. Macy & Co., is trying to do.
You mark the merchandise up sharply, act as if you're selling the crown jewels and then wait for buyers to break down the door. Maybe even lower the ridiculously high price a bit to make a buyer happy. Only Finkelstein isn't peddling sweaters or upscale kitchen utensils. Instead, he's selling Macy's itself.
Macy's, you see, could really use some new capital to help pay down some of the debt it incurred when it went private in a leveraged buyout in 1986 and bought part of Federated Department Stores in 1988.
Macy's asking price -- $15 million for each 1 percent, which values the company's stock at $1.5 billion -- is such a joke that it's amazing that the company can quote it with a straight face. That's five times the value placed on Macy's three months ago by Michael Price, one of its directors, who has a legal obligation to value the stock fairly.
If Finkelstein can pull off this sale at his price, he will be enshrined in the Merchants Hall of Fame. If he can't, Macy's will continue to limp along financially if things go well. If things go badly -- if, say, this year's Christmas selling season is as bad as last year's -- look out below.
What happens to Macy's is important. It's one of the world's leading retailers, whose properties include the Macy's, Bullock's and I. Magnin department store chains, and the Aeropostale, Charter Club and Fantasies by Morgan Taylor specialty chains. If Macy's goes under, it will make an already-gloomy retail climate even gloomier.
Selling new shares, as Macy's hopes to do, would reduce the percentage of the company held by current stockholders, but it would greatly increase the value (if any) that their shares have now. The $285 million that Finkelstein is asking for a 19 percent stake in Macy's would give the company enough money to buy up about $700 million of its junk bonds, which are trading at far below face value. Getting rid of those bonds would cut Macy's interest payments enough to give the company breathing room.
The junk bond market, though, is acting as if Macy's is a goner. The bonds trade at prices that are usually seen only for securities of companies that have a good chance of going bankrupt and reneging on their debts. For instance, Macy's senior bonds traded yesterday at about 52 percent of their face value, the intermediate bonds for about 30 percent of face value and the junior bonds for less than 25 percent of adjusted face value.
If you bought the senior bonds at yesterday's price and they continue to pay interest and Macy's actually pays them off when they mature, you would make a hefty 31 percent a year on your money. Or, as the bond boys say, you would get a 31 percent yield to maturity. The intermediate bonds were trading at an astronomical 42 percent yield to maturity and the junior bonds to yield a loan-sharkish 84 percent. By contrast, a U.S. Treasury bond yields around 9 percent and an AT&T bond yields around 10 percent.
Even Macy's bank debt, which ranks ahead of the bonds when it comes to getting paid, is distressed. Loan Pricing Corp., a New York-based financial news and data company, says Macy's bank debt would fetch less than 85 percent of face value if buyers could be found and would have a yield to maturity "in the 20s."
Even though the junk bond market is more than a tad irrational these days, as Myron "Mike" Ullman III, Macy's chief financial officer, points out, these prices are scary -- the kind usually seen when a company is about to go renege on its debts -- which Ullman insists is not the case.
If the bond prices are even remotely rational, Macy's stock -- for which investors paid $300 million when the company went private in 1986 -- is worth little or nothing.
So how can Macy's say that its stock is worth $1.5 billion -- five times the 1986 price? Ullman says that's based on today's value of the cash that Macy's will generate in the future. The only problem, of course, is that no one knows how Macy's will fare this Christmas, let alone how it will do years from now.
If you take the $1.5 billion seriously, I've got a bridge to sell you.
Ullman says that the $1.5 billion valuation is shared by a sophisticated buyer, Corporate Properties Inc., which paid $15 million for a 1 percent stake in August. CPI happens to be one of Macy's landlords. CPI won't talk about why, but I'll bet it had more to do with enhancing a relationship with Macy's than with looking for the best use for $15 million. When Macy's bonds are yielding up to 84 percent and have a far better claim on the company's assets than the stock does, the bonds are a far more rational investment than the stock.
Macy's stock doesn't trade, so there is no price quote on it. But the aforementioned Michael Price manages mutual funds -- the best known of which is Mutual Shares -- that own Macy's Acquiring Corp. stock. Price has a legal obligation to make his best estimate of Macy's value because investors in his funds buy stock at the funds' net asset value and redeem at net asset value. To be fair to everyone, he has to value the funds' assets as accurately as possible.
Guess what? Price has been marking down his Macy's stock -- sharply. He's dropped it from three times his cost as of June 30, 1989, to merely cost as of June 30, 1990. In other words, Price values Macy's stock at its original $300 million.
Why is Price's 1990 valuation just one fifth of Macy's number? Has he marked the stock down lower now than it was on June 30? Ask him. He wouldn't take my call.
Price is only one of a number of sophisticated investors -- GE Capital Corp., Laurence Tisch's Loews Corp., Michigan shopping center mogul A. Alfred Taubman are among the others -- that invested in the Macy's leveraged buyout. The idea was to have Finkelstein run the show, with more than 300 Macy's employees getting a chance to buy into the company. But there was just too much debt.
The company isn't doing badly -- it's just not doing well enough to climb out of the hole that it dug itself into. If Finkelstein can get his $285 million, things will probably be okay. If he doesn't get it, Macy's may need another "Miracle on 34th Street." Allan Sloan is a columnist for Newsday in New York.