Mention the name Revco to your average shoppers on Main Street, and they think of a discount drugstore. But when you mention the name to your average investors on Wall Street, they think of a bottomless pit into which money and reputations vanish without a trace.
So far, Revco Inc., which is struggling to emerge from bankruptcy, has cost investors around a billion dollars and has tarnished the reputations of some of the best and brightest junk-meisters on Wall Street.
The securities issued to pay for Revco's leveraged buyout in 1986 are trading from 13 cents on the dollar down to virtually nothing. The suburban Cleveland company, valued at $1.5 billion in the 1986 LBO, is now valued at just $600 million by the financial markets. Not only has $900 million of value plus uncountable legal fees and other expenses been poured into the pit, but so have the jobs of Revco employees tossed out of work as the company tries to deal with its problems.
If the Revco situation weren't so awful, it would be almost funny. Almost everyone I know among vulture capitalists -- investors who speculate in securities of financially distressed companies -- has been burned by Revco at some point. In fact, even as you read this, a vulture whose identity I couldn't learn seems to be accumulating Revco bonds. Good luck, whoever you are.
Revco, with more than 1,100 stores in 10 states, wasn't always corporate carrion; at the time of its leveraged buyout, it was the biggest discount drugstore chain in the country with more than 2,000 outlets; it also owned the Odd Lot Trading Co. chain of closeout stores.
The idea was that Revco would grow fast enough to carry the new debt with ease. But growth was below projections, suppliers got nervous and cut back credit, two sets of top management were tossed out and Revco went Chapter 11 in 1987, the first big LBO to hit the bankruptcy courts. The current managers, opposing Revco's board of directors, are supporting a creditor-inspired reorganization plan now wending its way through bankruptcy court in Akron, Ohio.
The biggest victim of Revco is Talton Embry, who is the closest thing to a gentleman in the business. Embry, an astute investor who runs New York-based Magten Asset Management, bought Revco bonds by the bushel at sharp discounts from face value. His analysis was that he would make a ton of money if Revco straightened out; and if Revco ended up in bankruptcy court, his bonds would get a majority of the stock in New Revco, and he would make money that way.
Embry, known in the vulture biz as Tally, bought so many of Revco's senior subordinated notes that they're known as Tally bonds. Embry, who said he didn't want to talk to me about Revco, bought at least $100 million of Tally bonds for Magten's investors. His average cost: 55 cents on the dollar, close to five times the current price.
What makes all of this even more embarrassing is that a year ago, Embry and the other bondholders ran off two bidders for Revco. Both of these buyers were offering prices much higher than Revco's current $600 million valuation.
The first buyer was Jeffrey Steiner, who controls Banner Industries of Cleveland and a holding company called Transcontinental that owns Revco's common stock. Steiner, who had an effective cost of nothing for Transcontinental's Revco shares -- he took over Transcontinental after Revco had already gone Chapter 11 -- tried an end run around the bankruptcy laws that would have let him buy 100 percent of the stock in New Revco for a relative pittance, while inflicting huge losses on the bondholders.
The bondholders, understandably suspicious, ran Steiner off. They said that the offer, which valued Revco at $800 million to $825 million, was insultingly low.
Enter Robert Bass, the New York-based takeover artist out of Texas. A Bass partnership offered $925 million for Revco, in a deal that would have valued the Tally bonds at 65 percent or more of face value. The bondholders spurned Bass, too, saying the price was too low.
Seeing this action, the vultures piled in, figuring that if existing investors had turned down 65-plus for the Tally bonds, they were a steal at prices in the 50s, which is what they sold for a year ago.
What no one realized, though, was that in less than a year, they would be praying to have the Steiner or Bass offers back. Revco's inability to post profit margins approaching those of other drugstore chains, combined with the vaporization of the junk bond market, has caused Revco's value to drop like the price of Christmas cards on Dec. 26.
David Schulte, a Chicago-based consultant to the Revco bondholders, says that it's not clear whether Steiner or Bass would have actually bought Revco. Schulte has been saying privately that Revco is being undervalued in the financial markets. The Delaware Bay Co., a New York-based junk bond firm, is recommending the Tally bonds, saying they could triple in price.
Who knows? Someone, someday, will probably make money on Revco. But the only people ahead of the game so far are the Revco shareholders who sold out to the leveraged buyout in 1986. The 1980s are really over.
Allan Sloan is a columnist for Newsday in New York.