Riklis Family Corp.

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Riklis Family Corp.

725 Fifth Avenue
New York, New York 10005
U.S.A.
(212) 735-9500
Fax: (212) 735-9450

Private Company
Incorporated: 1980
Employees: 21,000
Sales: $1.5 billion
SICs: 5331 Variety Stores; 5199 Nondurable Goods, Nee; General Merchandise

Riklis Family Corp. is a privately-held conglomerate of variety retail businesses that have included Rapid-American Corporation, McCrory Stores, Faberge/Elizabeth Arden, Samsonite luggage, Collagen, Schenley Industries Inc., and E-II Holdings Inc. The company is almost wholly owned by the Riklis family, including Meshulam Riklis and his second wife, singer Pia Zadora, as well as his three children and six grandchildren from a previous marriage. Besides closed ownership, Riklis Family Corp. is private in another fundamental way: Mr. Riklis’s deals have been so labyrinthine and secretive that few Wall Street firms or investors have been able to follow them. Fulfilling his reputation as a financial wizard, Riklis combined a penchant for complex financial transactions with $750,000 borrowed in the 1950s to create a multibillion dollar empire. By the 1990s, with substantial losses in McCrory Stores and numerous legal and financial setbacks, some analysts questioned whether the debt that had fostered the company’s growth would prove too heavy to bear.

The history of Riklis Family Corp. reflects the unconventional profile of its founder. Meshulam Riklis was born in Turkey in 1923, while his parents were en route from Russia to Israel. He grew up in Tel Aviv, where he graduated from the Herzliya Gymnasia. In 1947, he traveled to Columbus, Ohio, and enrolled in Ohio State University. After receiving a B.A. degree in mathematics in 1950, he taught Hebrew in the Talmud Torah School in Minneapolis. A year later, he joined the investment firm of Piper, Jaffray and Hopwood in Minneapolis as a junior stock analyst.

Riklis quickly demonstrated his insight, talent, and ambition. As a stockbroker, he developed his conglomerate philosophy of paying with debentures and selling for cash. After talking several clients into creating a pool of $750,000, he began a spree of acquisitions that would culminate in the formation of Riklis Family Corp. and would situate him on the Forbes list of the 400 wealthiest people in the United States by the 1980s.

By 1956, Riklis had advanced from stockbroker to chairperson and CEO of Rapid Electrotype Company and American Color-type Company. In 1957 he merged the companies and became president of Rapid-American Corp., an office machine, printing, and Christmas-card company. Largely through high-yield debt and stock swaps, he began buying merchandising, tire, apparel, and packaging companies.

In 1960, Riklis acquired 38, and later 50 percent of the stock of United Stores Corporation, a subsidiary of H. L. Green Company, Inc., which had merged McCrory Stores, McLellan Stores, and H. L. Green Stores in 1959. The McCrory-McLellan-Green (M-M-G) relationship resulted in approximately 850 stores with an estimated annual volume of more than $310 million. Within 15 years, M-M-G, renamed McCrory Stores (a subsidiary of McCrory Corporation), would represent the keystone of Riklis Family Corp’s variety store business.

The McCrory acquisition brought to Riklis a legacy extending back to 1882, when John G. McCrorey joined the country’s earliest variety retailers by opening his first five-and-ten store in Scottdale, Pennsylvania (the ‘e’ was later removed from his name, allegedly to save costs on the growing number of store signs). The stores offered wide varieties of items at bargain prices, including brooms for ten cents and Boss handsaws at 24 cents each. In 1901, with 20 stores grossing roughly $498,000 a year, McCrory established a New York City headquarters. Operations quickly expanded to 69 stores in 1911 and 128 stores in 1915, when McCrory was incorporated under the laws of Delaware.

In 1922, McCrory Corporation opened one of the world’s largest variety stores—two floors with 2,500 lineal feet of counter space—in Brooklyn, New York. The company had expanded to 159 stores with annual sales of $14,400,000.

The 1930s marked significant changes in management and planning. In 1931, John G. McCrory vacated the president’s office after nearly 50 years of service and was succeeded by C. T. Green, who had been with S. H. Kress Company for 30 years. Green, and his successors, R. F. Coppedge and R. W. Paul, moved to modernize operations through construction of new stores, personnel training programs, and extended price ranges and merchandise assortments. However, McCrory Corporation and its 203 stores slipped into bankruptcy in 1933.

In 1936 the Morrow Brothers bought the debentures and preferred stock of both McCrory and its competitor, McLellan Stores, which was founded in 1916 and had also declared bankruptcy in 1933. Working through their United Stores Corporation, they negotiated a reorganization wherein they received about 37 percent of the new common stock. Under the direction of R. F. Coppedge, the “dime store” image was elevated with improved facilities and presentation, including more accessible window displays and consumer-friendly color schemes for store interiors. The June 1950 issue of Chain Store Age reported that “McCrory had become one of the leaders in the chain variety store field in fashion and ready-to-wear assortments.” By 1957, sales reached approximately $112 million and net profit after tax totaled $3.5 million.

In 1958, Albert M. Greenfield, chairperson at Bankers Securities Corporation and Variety Stores Corporation, acquired a large percentage of United Stores Corporation stock. In January 1959, McCory and McLellan, 37 percent owned by United, effected a merger. Then on February 18, 1959, H. L. Green Company, Inc. acquired Greenfield’s equity in United Stores Corp. H. L. Green Co. dated back to 1932, when Harold L. Green acquired five retail companies in the limited price field. With its 1959 McCrory-McLellan-Green acquisition, United had control over 850 stores.

Meshulam Riklis appeared on the scene in 1960, when he acquired a significant amount of the stock of United Stores. In 1961, the financier bought full control of the H. L. Green Company, Inc., temporarily taking over as president of Mc-Crory Corp. but soon passing on responsibility to a line of carefully chosen managers. The new officers upgraded existing stores while expanding to new locations. They decentralized and realigned field management and appointed regional and district managers to better control sales and profits. Despite such efforts, M-M-G experienced several difficulties. Profits during the 1962-63 fiscal year were negligible. Declining earnings at McCrory Stores forced Riklis to liquidate all Rapid holdings except 51 percent of McCrory. From 1960 to 1964, the company had gone through four presidents and one acting president, contributing to general malaise and low morale.

This downswing was in part reversed by Samuel Neaman, who assumed the presidency of M-M-G in 1964. In addition to streamlining operations, Neaman focused on incentive plans, increasing salaries across the board and tripling bonuses over 1963. In a 1966 plan to increase efficiency, the company headquarters were moved from New York City to York, Pennsylvania, home of M-M-G’s distribution center. The company experienced a dramatic upturn in profits.

Also in 1966 Riklis completed his master’s degree in finance at Ohio State University. In an MBA thesis examining the early years of his career, he outlined his strategies for buying companies with borrowed cash. In the thesis, Riklis lauded “the effective use, or rather non-use, of cash.” This strategy governed his dealings with McCrory and with the rapidly growing Riklis Family Corp. in general.

M-M-G continued to grow into the 1970s. In 1969 the company purchased 22 superstores in the south. In order to better service small variety chains and independent variety stores, M-M-G established the York Distribution Company (YDC) in 1970. Two years later, Rapid-American Corp. acquired the J. J. New-berry Company and merged it with McCrory Corporation, joining 650 M-M-G stores with 439 Newberry units, including select William Tally House Cafeterias. Renamed G. McNew, the resulting chain was decentralized and broken into six separate subdivisions, referred to as MAC companies.

After severe losses in 1973 and the 1974 resignations of McCrory Corporation’s chairperson as well as the G. McNew division’s president, the company again moved to stimulate growth. Emphasis was shifted from decentralization to strong central control from the Pennsylvania headquarters. On February 1, 1975, the chain’s name was changed from G. McNew to McCrory Stores. In addition, measures were taken to close unprofitable stores, to rehabilitate low budget stores, to monitor and tighten overall efficiency, to launch an aggressive sales program, and to tailor cost-effective distribution in face of escalating transportation costs.

These measures paid off, increasing chain performance and spurring a new round of Riklis acquisitions. Rapid-American Corp., which already held 62.5 percent interest in McCrory Corporation, acquired full control on March 12, 1976. Through the acquisition, Rapid-American operated a total of over 2,000 stores, including 883 McCrory Stores. Later that year, McCrory further expanded by taking over the leases on 15 locations of the beleaguered W. T. Grant Company. Continued expansion included the takeover of eight variety stores from Neisner Brothers in 1980 and the acquisition of 46 S. H. Kress and V. J. Elmore stores from the S. H. Kress Company in 1981.

By the late 1980s, McCrory Stores was again experiencing heavy losses. To address the problem, Riklis retained an elite group of managers, whom he retrained in management, marketing, and sales skills, dubbing them the company’s “green berets.” From this group Riklis chose 30 members to serve as a squad of shock troops, dubbed “unit 101” after Israeli Industry and Trade minister Ariel Sharon’s anti-terrorist unit. These special trainees were sent to McCrory’s top 100 stores equipped, among other things, with a powerful incentive plan shared on all company levels: if the company’s pre-tax profits were 10.4 per cent, all employees would receive a bonus of seven days pay; 11.4 per cent on sales would yield a bonus of 10 days pay. In June 1989, Riklis rewarded 2,000 McCrory employees and their spouses with a company-paid, two-week tour of Israel, Greece, and Egypt.

Other moves to improve McCrory business included streamlining and consolidating operations. In June 1990, the company’s Bargain Time Inc. affiliate moved its main buying office to the McCrory headquarters in Pennsylvania and closed its buying office in Newark, New Jersey.

The 1980s were also marked by a series of new and convoluted financial feats at Riklis Family Corp. Riklis bought out Rapid-American’s public stockholders in 1985 but left its debt in public hands. In doing so, he owned 100 percent of the equity in a debt-ridden but cash-generating conglomerate. By 1988, Rapid and McCrory held 23 debt issues totaling $750 million. Though the company’s bond rating hovered at CCC, Riklis had little trouble raising approximately $150 million per year to service the debt. Even if McCrory’s earnings plunged, as in 1987, other subsidiaries—such as Schenley Industries, Faberge toiletries, and McGregor apparel—provided necessary cash.

Keen on making further acquisitions but short on the necessary assets, Riklis engineered yet another ingenious solution in 1986. In May, he transferred the cash-generating Schenley and Faberge/McGregor assets from Rapid/McCrory to his Riklis Family Corp., paying for them largely in paper: nonvoting, cumulative preferred stock issued by the new Schenley company and the newly merged Faberge/McGregor.

In possession of the Schenley and Faberge/McGregor assets, Riklis was ready to conduct new deals. In 1987, Riklis Family Corp. sold Schenley to the United Distillers plc division of Britain’s Guinness plc for $480 million. Schenley Industries Inc., was the sixth largest distributor of spirits in the United States and included in its portfolio Dewar’s White Label, the country’s leading scotch whiskey.

Like many of Riklis’ deals, the Schenley sale did not pass without controversy. The press issued reports that the sale was a result of Riklis’ entanglement in Guinness’ scandal-ridden 1986 takeover of United Distillers Co. According to a June 19, 1989, Business Week article, among other sources, Riklis feared that Guinness would endanger his U.S. distribution of Dewar’s whisky. Riklis and Guinness allegedly worked out a deal: Riklis purchased more than five percent of Guinness to help boost the price of stock with which Guinness was acquiring Distillers. In return, Riklis earned an indefinite extension of his Dewar’s distribution contract, as well as the U.S. trademark for the whiskey, for a small fee. When Guinness’ top managers resigned after the scandal came to light, new executives threatened Riklis with legal action. Even though the subsequent sale of Schenley incurred a pre-tax loss of $46 million, it enabled Riklis to wash his hands of the deal, according to Business Week.

In July 1988, an affiliate of the Riklis Family Corporation again attracted media attention with the acquisition of E-II Holdings Inc., a subsidiary of American Brands, Inc. The sale included Culligan International, Samsonite, Samsonite Furniture, Home Fashions, Beatrice Food Ingredients, Frozen Specialties, Lowrey’s Meat Specialties, Martha White Foods, and Pet Specialties. Even before Riklis entered the picture, E-II had a turbulent history. In 1987, Chicago entrepreneur Donald P. Kelly launched the company by patching together a group of strong brands including Samsonite. After trying to use E-II to take over American Brands Inc., however, he lost his fledgling company to American Brands. Eager to bail out of E-II’s massive debt, American Brands sold the company to Riklis in 1987 for $1.2 billion and assumption of $1.5 billion in debt. Riklis installed his long-time friend Steven Green as CEO of E-II and began a pattern of lopping off debt by selling assets.

E-II bondholders resisted the sale to Riklis, whom they feared was using E-II coffers to prop up ailing Riklis Family Corp. enterprises. They also were wary of Riklis’ relatively low credit rating and feared that E-II’s rating would sink to the level of its new parent. John Canella, a federal district court judge, ruled their complaint a “moot point,” and denied an order barring the transaction. Yet E-II’s fears were partly justified. E-II bonds which had sold at 110 percent of their face value fell to about 80 percent after the sale. In addition, many Riklis deals proved less than favorable to E-II interests: in December of 1989, Riklis sold E-II the money-losing Bargain Time Inc. retail chain from McCrory for $170 million plus preferred stock; six months later Bargain Time shut down and dumped its $221 million loss onto E-II’s books; and in August of 1990, E-II paid $16 million for a group of California television stations owned by another Riklis affiliate.

The problems intensified, and, outraged by Riklis’ alleged use of E-II funds for other interest, bondholders ousted him in 1990.

In July 1992, financier Carl Icahn scuttled Green’s restructuring plans for the ailing company, arguing that Green was continuing to serve Riklis’ interests. After filing for Chapter 11 in July, E-II announced a plan to sue Riklis for roughly $500 million siphoned out of the company. By April 1993, court rulings were still pending regarding Green’s plans for overcoming bankruptcy and legally pursuing Riklis.

During this time, Riklis continued to work deals on other fronts. In October 1988 Riklis entered another segment of retailing with the purchase of Odd Lot Trading, Inc. by OLT-I Corp. and OLT-W Corp., subsidiaries of Riklis Family Corp., for approximately $37.1 million. Odd Lot was a 103-store chain specializing primarily in discounted merchandise.

After several years of negotiating a deal with Unilever PLC, Riklis finally sold its Elizabeth Arden cosmetics company to the consumer products titan in August 1992. With the introduction of Red Door, its first new fragrance since 1930, total retail sales jumped 29 percent, sending Arden in a positive direction under its new parent.

By the early 1990s, the highly leveraged debts supporting Riklis Family Corp. were in danger of losing much of their leverage, ensnaring Riklis enterprises in more setbacks. In 1992, Riklis’ Las Vegas casino, the Riviera Hotel, filed for bankruptcy protection after some of its creditors refused to accept a restructuring plan. Riklis was still fighting the bondholder suit filed by E-II Holding Inc. Furthermore, in December of that year, McCrory Corp. announced it would close nearly one-quarter of its 1,000 stores. In February 1992, McCrory missed a payment of $3.37 million in debt securities and hinted that it might file for bankruptcy court protection. “Let’s just say that I’m not eating any milk and honey,” said Meshulam Riklis in a January 13, 1992, Business Week article.

Nevertheless, the story of Riklis Family Corp. was far from over. Known for his resilience and resourcefulness, Riklis would likely find a way to shore up losses, even if it incurred more debt.