Campeau Corporation

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Campeau Corporation

40 King Street West, Suite 5800
Toronto, Ontario M5H 3Y8
Canada
(416) 868-6460

Public Company
Incorporated: 1968
Employees: 91,800
Sales: C$12.13 billion (US$10.46 billion)
Stock Exchanges: Toronto Montreal NASDAQ

Once a successful Canadian real estate development company, Campeau Corporation struggled in the late 1980s and early 1990s under the burden of debt incurred in its ambitious, some have said ill-advised, leveraged buyouts of U.S. retailers Allied Stores Corporation and Federated Department Stores, Inc. Retained as subsidiaries, both Allied and Federated filed for Chapter 11 bankruptcy protection soon after they were acquired, developments that would seem to threaten their parent company’s long-term welfare. In 1991 Campeau Corporation planned a restructuring that would take it back to being primarily a real estate developer and manager.

The story of Campeau Corporation is inseparable from that of its founder and longtime guiding light, Robert Campeau. Born in 1924 to a poor French-Canadian family in the Ontario mining town of Sudbury, Campeau dropped out of school at the age of 14 to help support his siblings. He started out as a factory laborer, but ventured into real estate at the age of 25 after building a house for his family. Instead of moving in to it, he sold it for a hefty profit, and from then on construction and development were his life. During the 1950s and 1960s he would make a successful career by building houses in the Ottowa area and developing several prominent commercial real estate projects on Toronto’s lakefront. His residential developments proved quite popular, and the term “Campeau-built house” became synonymous in Canada with high quality. In 1968 he consolidated seven of his companies into Campeau Corporation.

Campeau confined his activities to real estate through the 1970s, except when he tried to acquire Bushnell Communications from Vancouver-based Western Broadcasting Company in 1974. The Canadian Radio-Television Commission voided the deal, ruling that Campeau had insufficient expertise and interest in operating television stations to make a suitable owner of Bushnell.

Campeau reached something of a turning point in 1980 when he tried to acquire Royal Trustco, Canada’s largest real estate trust company and a stalwart member of the country’s English-speaking banking establishment. He already owned 5.4% of the company and wanted to gain access to its considerable real estate holdings. Royal Trustco’s directors vetoed the offer on the grounds that Campeau did not yet have approval from the U.S. Securities and Exchange Commission, which was required because of the trust company’s 17 branch banks in Florida. When this did not deter him, Royal Trustco management, appalled at the prospect of being controlled by an outsider, secretly persuaded some of the nation’s largest corporations to buy up the majority of its stock and keep it out of Campeau’s hands. Campeau professed no bitterness, but likely harbored some resentment over the Royal Trustco affair, which convinced him that Canada’s business establishment would always be closed to him.

To a substantial extent Robert Campeau’s quest for respectability had influenced the course of his career. As a French-Canadian, Campeau is likely to have seen himself as a representative of a minority group that believes itself to be an underdog in a nation dominated by its English majority. “There aren’t enough French-Canadian businesses,” he once said. “It’s very much my plan that my business should stay in the hands of my children and that it represent part of the French-Canadian business world.”

Campeau’s ambition soon took him south of the U.S.-Canadian border. He saw U.S. society as free and open, unlike what he saw as the closed and snobbish Canadian establishment that he had just tried to join. He also viewed an acquisition in retailing as a way of building a U.S. commercial real estate empire— Campeau-owned stores would provide ready-made tenants for Campeau-developed shopping centers. He spent five years casting about for a suitable target before settling on Allied, then the sixth-largest department store company in the United States.

Allied was founded in 1929, when 27 department store companies—including Boston, Massachusetts’s Jordan Marsh Co. and Seattle, Washington’s The Bon Marche—merged to form Hahn Department Stores, Inc. The next year, Hahn added Joske Bros. Co. of San Antonio, Texas, and Tampa, Florida’s Maas Bros. The early years of the Great Depression inflicted such hardship, however, that the company soon felt that it ought to look outside its ranks for financial guidance. It brought in real estate baron B. Earl Puckett, who would run the company for 25 years. In 1935, Hahn Department Stores changed its name to Allied Stores Corporation.

Under Puckett, Allied pursued a policy of opportunistic expansion. From the mid-1930s through the 1940s, the company accumulated retailers and real estate from coast to coast as good bargains became available. By the end of World War II Allied had become the largest department store holding company in the United States, as well as the most profitable. Puckett also foresaw many of the most important developments to affect retailing in the postwar period, like the flight of the U.S. middle class to the suburbs and the decay of downtown areas, and positioned Allied to take advantage of them. In 1950 the company opened one of the first suburban shopping malls—the Northgate shopping center in Tacoma, Washington, just outside Seattle, with a Bon Marche branch as its centerpiece.

Allied continued to expand in the early 1950s. In 1951 it acquired New York-based Stern Bros., through which it hoped to establish a substantial presence in the New Jersey suburban market. At the same time, the company began to show the ill effects of its lack of coherent planning. Puckett had acquired properties haphazardly, more or less without giving thought to how they would integrate into the company or affect Allied’s long-term position in a given market. They were simply bargains too good to miss. As a result Allied wound up with many stores in small towns, away from the lucrative metropolitan areas. Although it dominated Boston through Jordan Marsh, Florida through Maas Brothers, and the Pacific Northwest through Bon Marche, it was unrepresented in fast-growing markets like Chicago, Washington, D.C., and Los Angeles and San Francisco, California. In many cities in which it was present, its position was weak or its growth potential was limited. So while its rivals boomed amid the general prosperity of the decade, Allied suffered, its return on sales in 1960 being only half of what it had been ten years earlier. In 1957 the company lost its position as the leading U.S. department store company to its future companion in the Campeau fold, Federated Department Stores, Inc.

Puckett retired in 1959 and was succeeded as CEO by Theodore Schlesinger, an Allied executive who had already logged 30 years with the company. Schlesinger tried to revitalize Allied by decentralizing authority, giving more autonomy to its units in big cities, while grouping its stores in small cities under regional managers. He also tried to attract customers by giving some units, like Stern Brothers and Joske, a more upscale image, and turning others into discounters. In I960 Allied also acquired Cincinnati-based Mabley & Carew Co. and merged it with its own struggling Rollman subsidiary, formerly Rollman & Sons Co. Discounting proved to be an unsuccessful strategy at first, but the company learned from those early mistakes and opened a chain of stores called Al-mart in the mid-1960s.

Allied showed considerable financial improvement under Schlesinger, but the retail slump of the late 1960s practically wiped out those gains. To make matters even worse, recessions in the aerospace and paper industries slowed the economy in the Northwest and hurt Bon Marche’s sales. Thomas Macioce succeeded Schlesinger in 1971 and immediately revived Allied by reducing store size and changing the merchandise mix to include more high-margin, high-turnover soft goods like clothes and less low-turnover hard goods, like housewares and furniture. Believing that discounting would soon become a thing of the past, he also began to close down Almart stores, selling the last of them to Montgomery Ward in 1979.

Macioce wanted to upgrade Allied’s image. In 1979 the company purchased several fashion chains: the stores of the Bonwit Teller Division and Plymouth Shops Division of Genesco. In 1981 it acquired Garfinckel, Brooks Brothers, and Miller & Rhoads, which also owned the AnnTaylor chain of women’s clothing shops. Allied’s profitability continued to improve as it terminated unprofitable subsidiaries; in 1982 it merged Gertz ’s, formerly B. Gertz, Inc., into Stern’s, and in 1984 it closed down its Pennsylvania-based Troutman’s division, formerly A.E. Troutman Co. Under Macioce, Allied regained its footing—although its most recent acquisitions had saddled it with a debt slightly higher than normal—and anchored itself in a handful of upscale, high-profile department and speciality stores. This, in short, was the state of the company when Robert Campeau set his sights on it.

In the spring of 1986, Campeau began friendly merger talks with Allied, but got no further than a proposal that Allied would sell him five shopping centers. By the end of the summer it became apparent that to acquire Allied, a hostile takeover would be necessary. To the naked eye, the prospect of Campeau buying out Allied seemed like a herring trying to swallow a whale; Campeau Corporation posted revenues of only $153 million in 1985, compared to Allied’s $4.1 billion in sales. With Wall Street feverish and wild-eyed over leveraged buyouts, however, Campeau assumed that he could borrow as much as he needed to do the job. He was right. Help came from First Boston and a Citibank-led syndicate, promising more than $3 billion in credit, and Campeau commenced hostilities in September. Allied tried to escape by making a deal that would allow shopping center magnate Edward De-Bartolo Sr. to acquire it. Campeau responded with a tender offer worth $66 a share, more than $20 above Allied’s share price two months earlier. Then, on October 24, Campeau suddenly dropped his offer and took Allied by force, buying huge blocks of stock on the open market at $67 a share. Within 30 minutes, he accumulated a 53% stake.

For tax reasons, the deal had to be completed before the end of the year, and would require an extra $300 million in financing. Citibank and DeBartolo, the latter of whom wanted to ensure his own long-term relationship with Allied’s real estate operations, obliged, each supplying half. When Campeau’s and Allied’s debts were figured together—along with $210 million in advising fees—the acquisition was estimated to cost more than $5 billion. In order to pay for it, Campeau announced that he would sell off most of Allied’s units, retaining only choice morsels like Brooks Brothers, Jordan Marsh, and AnnTaylor. In March 1987, he launched a $1.2 billion junk bond and preferred stock offering to pay off First Boston. By the end of 1987, Campeau had sold off $1 billion worth of Allied property and paid off much of his debt ahead of schedule.

All was not well at Allied. Thomas Macioce resigned in January, even though Campeau had made him chairman of the new parent company. Campeau succeeded him at Allied on an interim basis, then hired Howard Morosky, a former executive at rival retailer The Limited, as a replacement later that year. Allied’s financial results were not encouraging. The company earned just $44 million in the first three quarters of 1987, while interest payments for that period totaled $244 million.

Casting aside whatever doubts this might have raised, however, Campeau soon made plans to grab Federated. True to its name, Federated Department Stores began as a loose federation of three department store companies. It was formed in 1929 when Walter Rothschild of New York City-based Abraham & Straus, Inc.; Louis Kirstein of Boston-based William Filene’s Sons Co.; and Fred Lazarus of Cincinnati-based F. & R. Lazarus & Co. met on Rothschild’s yacht and decided to band together to spread the risks of the retail trade among themselves. They were joined the next year by New York’s Bloomingdale Bros. Inc.

The arrangement worked so well that it eventually outlived its usefulness. By the end of World War II all of the stores were so profitable that it bred some resentment among those who were contributing the most profits to the groupspecifically F. & R. Lazarus. Instead of disbanding, however, Federated took the opposite approach and established a central management group in 1945, headed by Fred Lazarus. Thus, Federated evolved from a loose tribal alliance into a genuine department store holding company.

After three months at the helm, Lazarus acquired Foley Brothers Dry Goods Co., a Houston department store. Foreseeing that the Sun Belt would attract more and more of the U.S. population in the postwar period, he was anxious to enter the Texas market. Changes were also taking place in New York, where Bloomingdale’s was shedding its image as “the poor man’s Macy’s” to become an upscale fashion store. In 1948 Federated acquired the Milwaukee Boston Store, Inc., and three years later it returned to Texas to purchase Dallasbased Sanger Bros., Inc. Also in 1951, the company began building a chain of department stores in small and mediumsized cities. The Fedway stores, as they were called, never proved to be very profitable, however, and the division was sold off 20 years later. Federated, however, continued to grow and prosper; in 1956 it acquired Miami-based Burdine’s, Inc., and the next year it overtook Allied.

Federated did not stop there. In 1959 it acquired Goldsmith’s of Memphis, Tennessee, and Dayton’s Rike-Kumler Co. In 1961 it purchased Dallas-based A. Harris & Co., later merging it with Sanger Brothers to form Sanger-Harris & Co. In 1964 Federated entered the Los Angeles market when it acquired Bullock’s, Inc., the city’s fourth-largest department store, despite bitter opposition from Bullock’s chief executive and founder, Percy G. Winnett. Bullock’s later formed two divisions: Bullock’s and I. Magnin. What made Federated’s continuous growth by acquisition all the more remarkable was that it had always operated with relatively little direction from central management; divisions were granted a high degree of autonomy and had the freedom to develop individual identities. In fact, Abraham & Straus Chairman Sidney Solomon liked to refer to the company as a “states’ rights organization.”

Fred Lazarus’s son Ralph succeeded him as chairman and CEO of Federated in 1967. Under Ralph Lazarus, Federated pushed the limits of its diversity even further. In 1967 the company opened a chain of discount stores called Gold Circle to sell clothing and other soft goods. The next year, it plunged into the supermarket business when it acquired Los Angelesbased Ralphs Industries, subsequently renamed Ralphs Grocery Company. Also in 1968, Federated formed another discount chain, Gold Triangle, which specialized in housewares and other hard goods, and in 1971 it launched a discounting venture, Gold Key, that sold furniture.

Federated rode high during the 1970s, despite the economic stagnation that seemed to mark the entire decade. The company’s sales reached $3.3 billion in 1975, and it solidified its place as the kingpin of the department store industry. All of its units occupied strong or dominant positions in their local markets, and the autonomy that they had under Federated’s management scheme allowed them to stock merchandise independently, according to local customer taste, and adjust inventory levels as justified by the strength or weakness of local economies. The company continued to expand; in 1976 it acquired the Atlanta-based department store Rich’s Inc.

Federated’s prosperity was beginning to sour even as Howard Goldfeder succeeded Ralph Lazarus in 1981. Discounting had failed as a valid concept for department stores, but Federated was slow to catch on to that idea. Finally, in 1981, it closed its Gold Circle stores in California and six Gold Triangle stores. In 1985 it closed its Gold Circle stores in Pittsburgh and sold the properties to Kimco Development, a Roslyn, New York-based strip-mall developer. Poor financial results from several other units also hurt the company, as did Federated’s inability to centralize billing and inventory control because division presidents could not agree on what computer system to use. The company’s celebrated autonomy, it seemed, had finally become a hindrance.

Despite its travails, Federated was still a daunting objective for Campeau, three times as large as Allied; but Campeau would not be denied. On January 25, 1988, he launched a takeover bid valued at $4.2 billion, or $47 a share; Federated had sold at $33 a month earlier. Two weeks later, Federated announced its refusal, after which Campeau sweetened his offer to $66 a share. Then, on February 29, R.H. Macy & Co., Inc., jumped into the fray with a surprise bid worth $73.80 a share. Proposals and counterproposals followed throughout March. Finally, on April 1, all three sides announced a deal in which Campeau would acquire Federated for $73.50 a share-total cost, $6.6 billion—and give Macy a commitment to sell it Bullock’s, Bullock’s Wilshire, and I. Magnin, the units it had wanted all along, for $1.1 billion.

Campeau’s backing for the Federated deal included more than $4 billion in loans from First Boston, Dillon Read, and Paine Webber as well as loan commitments from a syndicate led by Citibank and the Japanese Sumitomo group. For its part, Campeau had to pony up $1.4 billion in equity, most of which was actually disguised debt. The Reichmann brothers, who owned Toronto-based real estate developer Olympia & York, bought $260 million worth of Campeau convertible debentures, and most of their money went into the Federated deal. Edward DeBartolo loaned Campeau $480 million in exchange for a minority stake in Federated. Bank of Montreal and Banque Paribas also made a $500 million, steep-interest loan that had to be repaid in one year. The remaining cash appeared when Campeau sold high-toned, high-income Brooks Brothers to British department store company Marks & Spencer PLC in April for a whopping $750 million. He used most of the cash to pay off bank debt, but sank the remaining $193 million into Federated stock. The move infuriated Allied bondholders, who felt that the money should have been used to satisfy his debt to them.

It got no easier for Campeau once the deal was done. In May 1988 Howard Morosky resigned after it became apparent that his boss had lost confidence in him. He was replaced as Campeau’s retail chief by Federated executive John Burden III. Both Allied and Federated posted huge losses in the third quarter, due entirely to enormous interest costs. Layoffs and consolidations between the two subsidiaries only lowered employee morale even further and failed to yield significant savings. Before the year was out, Campeau sold Gold Circle to Kimco Development, AnnTaylor to former Lord & Taylor chairman Joseph E. Brooks, and Federated’s MainStreet division to Kohl’s Department Stores, but none fetched the prices expected of them. Even junk bond investors were becoming skeptical. In October 1988, a $1.2 billion Federated offering at 14% had to be cut back to $723 million at 16% and 17.75% because of lack of demand.

Campeau’s inexperience in the retail trade had led him to grossly overestimate the revenues he could expect from Allied and Federated. In early 1989 a retail recession, the consequence of all-time high levels of consumer debt, proved crippling. Sales for the two units were only a fraction of what had been projected, and with interest costs, they posted a combined $306.3 million loss in the first half of the year. In September the Reichmanns, who had agreed to loan $250 million to the retail operations, persuaded Campeau to accept a plan under which he would sell Bloomingdale’s and negotiate with his bondholders to buy back 75% of his junk debt at reduced rates. When the plan was made public and the depth of Campeau’s predicament became clear, the value of his bonds plummeted, and they took the rest of the junk-bond market with them. Still desperate for cash at the end of the year, Allied and Federated stores started a brutal and costly price war with their competitors during the Christmas shopping season.

As 1990 began, no buyer for Bloomingdale’s could be found. The Reichmanns were wielding significant influence in the company by now, and in January Campeau’s board of directors pulled the retail operations out from under him and placed them under independent control. The board then put Allied and Federated into Chapter 11 and later reorganized them as Federated Stores, with former Treasury Secretary and Federated director G. William Miller at its head. In February Campeau Corporation dismantled its Campeau Development subsidiary and began selling off its Canadian real estate assets to raise cash.

The trouble did not end even there. The real estate market in Canada had gone soft, and there was little money to be raised there. In March 1990 Campeau Corporation defaulted on $225 million owed to Olympia & York, as well as the $480 million Edward DeBartolo had loaned for the Federated takeover. In August, the final blow fell as Robert Campeau’s own board of directors voted to remove him as chairman and CEO of the company that he had founded. He was succeeded on an interim basis by James Raymond, a representative of National Bank of Canada, one of Campeau’s personal creditors, and Gary Goodman, an Olympia & York executive, both serving as co-CEOs. Three months later, the board appointed Stanley Hartt, a former chief of staff to Canadian Prime Minister Brian Mul-roney, as permanent president and CEO. Observers considered Hartt to be a fortunate choice, not only because of his status as a public figure, but because he had no past associations with the company.

Hartt engineered a restructuring designed to make Campeau a smaller and vastly different company. In 1990 and 1991 it sold 22 office buildings, shopping centers, and development properties for $1.2 billion, which went to pay off debts. It reached settlements with DeBartolo and the Reichmanns, and set up a new subsidiary, Camdev Properties Inc., to operate Campeau’s real estate business. It made plans to sell off its U.S. subsidiaries to their creditors and to create a new parent company, Camdev Corporation, which would be involved primarily in real estate development and management, with its only interest in retailing being a 13% share in Ralphs. U.S. and Canadian courts were scheduled to act on this plan early in 1992. If the plan were approved, the new company would have only 180 employees, thus marking the end of Campeau Corporation’s era as a retailing giant.