Liberty House may be sold

By Andrew Gomes
Advertiser Staff Writer

Retail giant Federated Department Stores is in negotiations to buy Liberty House, and an agreement that could convert at least some of the kama'aina retailer's stores into the Macy's brand may be reached as early as Monday, according to a source familiar with the plans.

Liberty House emerged from a Chapter 11 bankruptcy in March with more-efficient operations, and analysts say the improvement has made the company more attractive for buyers. Advertiser library photo • Dec. 8, 2000

Liberty House President John Monahan declined comment yesterday.

"It's an ownership issue," Monahan said, referring further questions to Liberty House's current owners.

Since emerging from bankruptcy in March, Liberty House has been owned primarily by private investment firms Oaktree Capital Management LLC of Los Angeles and DDJ Capital Management LLC of Wellesley, Mass.

Judy Mencher, a principal at DDJ Capital, said, "We do not comment on our investments."

Patricia Wachtell, a Liberty House director and managing director of Oaktree Capital, could not be reached.

Representatives of Cincinnati-based Federated declined comment. Federated operates 432 stores across the country under the Macy's, Bloomingdale's, The Bon Marche, Rich's, Burdines, Lazarus and Goldsmith's names.

Three of the most senior executives of Federated's San Francisco-based division, Macy's West, could not be reached. But the executives, company Chairman Jeremiah Sullivan, President Robert Mettler and Vice Chairman Rudolph Borneo, are expected in Honolulu on Monday.

Talks between the companies could still break down, as has happened in the past. In 1997, Federated was widely reported to be in negotiations to buy Liberty House. No deal was reached, and Liberty House filed Chapter 11 bankruptcy protection in 1998.

Retail analysts say a Federated purchase of Liberty House is more likely now.

Liberty House emerged from Chapter 11 with more-efficient operations, fewer stores, little debt and profits — four things analysts say make the company more attractive for acquisition.

Reducing outlets

During the past few years, Liberty House has cut its outlets from 41 (11 department stores and 30 resort and specialty shops) to 20 (12 department stores and eight resort and specialty shops).

It has cut expenses since 1998 and has been profitable since at least 1999, earning almost $9 million on about $285 million in sales in each of the last two years.

The company had just $20 million of debt when it emerged from bankruptcy, compared with $149 million of debt before filing bankruptcy.

In addition, Hawai'i is a somewhat familiar market for Federated, which has supplied Liberty House with its brands under a private-label arrangement for at least two years.

Bernard Sosnick, director of research for New York-based securities firm Fahnestock & Co., said Liberty House is a "logical candidate" for a Federated purchase, given Federated's history of buying companies that have struggled through bankruptcy, including the Macy's and Broadway chains.

"Theoretically, it would seem reasonable — given the modus operandi of Federated — that they would have an interest in Liberty House," he said. "The management is familiar with the advantages that are created in the bankruptcy period that can be carried forward by an operator."

Sosnick added that Federated's strong presence in California makes Hawai'i a logical market.

Richard Dole, principal of the Honolulu-based private equity investment banking firm Dole Capital LLC, said a sale of Liberty House would not be surprising because the retailer's owners often buy debt of distressed companies and sell their stakes shortly thereafter.

"You would expect any venture capitalists to be looking for an exit strategy; otherwise they wouldn't have bought Liberty House in the first place," he said.

Oaktree and DDJ, both investment funds sometimes referred to as "vulture funds" for their practice of buying devalued debt of distressed companies, acquired Liberty House for $170 million earlier this year under a bankruptcy reorganization plan approved by a majority of creditors.

If completed, a Federated purchase of Liberty House would spell the end of the 152-year-old kama'aina department store chain following a successful three-year bankruptcy fight for survival.

It could also potentially clear the way for Seattle-based retailer Nordstrom to build a full-scale department store at Ala Moana Center, a move that Liberty House successfully blocked in court.

Publicly traded company

For Federated, acquiring Liberty House would be a relatively small purchase. The publicly traded company had net profits last year of $637 million (excluding unusual items) on revenue of $18.4 billion.

Federated operates 432 stores. Its Macy's West division operates 117 stores in Arizona, California, Minnesota, Nevada, New Mexico and Texas. The division had $4.3 billion in sales last year.

Last year, Federated used $600 million in excess cash to repurchase its stock. The retailer stated in a letter to shareholders that it expects to continue to use excess cash for continued share repurchases as well as strategic acquisitions.

Liberty House, which has about 3,000 employees, operates 12 department stores and eight resort and specialty shops in Hawai'i and Guam. Chicago-based JMB Realty Corp. acquired the retail chain and 55,000 acres of Hawai'i land in the $900 million purchase of American Factors successor Amfac Inc. in 1988.

In the mid-1990s, Liberty House was hurt by reductions in Japanese visitor spending, on which the company had concentrated. Also plagued by debt that rose as high as $245 million under JMB ownership, the retailer was forced to file for bankruptcy in March 1998.

The Chapter 11 case was one of Hawai'i's longest and costliest bankruptcies, with associated costs reaching roughly $16 million over nearly three years largely due to a battle between JMB and lenders for control and ownership of the company.