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Did Riklis Play It Straight?


Finance

DID RIKLIS PLAY IT STRAIGHT?

Swashbuckling financier Meshulam Riklis is often down but rarely out. Two years ago, he got booted from ailing E-II Holdings Inc. amid charges that he was milking the company. But Riklis is still a player in a nasty battle for control of E-II, which last summer filed for bankruptcy. The company's holdings include Samsonite luggage, Culligan water purification systems, and Botany 500 men's suits. The fight, spearheaded by raider-vulture investor Carl C. Icahn, illustrates how 1990s dealmeisters are often finding the best pickings in corporate junk heaps.

E-II's dissident creditors forced Riklis out in late 1990. Riklis, though, was able to install his longtime pal, Steven J. Green, as chief executive. Then, in early 1992, Icahn bought almost one-third the junior debt on the cheap and promptly became the dissidents' ringleader. Icahn blocked Green's bid to restructure E-II out of court and pushed it into bankruptcy, where as a creditor he has more clout. Now, Icahn is trying to take control of E-II by painting Green as a Riklis front, a charge that Green denies. The entire matter is expected to come to a head in April when creditors vote on Green's scheme to take E-II out of Chapter 11. This would leave Green as CEO and install another large bondholder as majority shareholder: former Drexel Burnham Lambert Inc. investment banker Leon D. Black, who is Icahn's nemesis and Green's ally. By sowing doubts about Green and offering creditors 14% to 25% more cash for their bonds, Icahn hopes to defeat the Green plan, then push through his own (table).

Icahn's central complaint is that Riklis, as CEO, transferred more than $500 million from E-II's coffers to prop up other limping Riklis enterprises, notably McCrory Corp., a five-and-dime chain also in Chapter 11 since Feb. 21. Green, Icahn claims, was a party to this, which Green also denies. The flamboyant Riklis, 69, who lives in the old Los Angeles mansion of Douglas Fairbanks and Mary Pickford, is a study in brazenness--whether it's pushing the problematic singing career of his wife, Pia Zadora, or shuffling finances.

MONEY SHUFFLE. Riklis' moves with E-II cash were dazzling. In December, 1989, he had the company buy the money-losing Bargain Time Inc. retail chain from McCrory for $170 million plus preferred stock. Six months later, he shut down Bargain Time, which dumped its $221 million loss onto E-II's books. In August, 1990, E-II paid $16 million for a group of California television stations owned by a Riklis-controlled partnership. E-II also has paid millions to other subsidiaries of his Riklis Family Corp. for office rental, management services, and computer time. And under Riklis' plan to reorganize McCrory, which he acquired in 1960, he would expand his 90% McCrory stake to 100% while at the same time wiping out E-II's $100 million in the retailer's preferred stock. Riklis, who would not comment, argues in court papers that he was within his rights to yank money out of E-II, a Riklis subsidiary.

To appease Icahn and his cohorts, Green has agreed to set up an independent mechanism to sue Riklis for the money pulled out of E-II. The action would create a $10 million trust fund for legal bills and ensure that an autonomous trustee pursues the claims. Any proceeds would go to creditors. Green insists that he will have no control over the legal assault on his friend. The bankruptcy court concurred on Jan. 29 that the litigation fund is an adequate instrument to do the job. Icahn, nevertheless, contends that the legal apparatus is purposely flawed: "Riklis will be able to hold it up forever" by, among other things, filing counterclaims for money he put into E-II.

What really irks Green is that Icahn wants the trustee to go after Green, too. During an abortive peace meeting last spring at a French restaurant in suburban Banksville, N.Y., Icahn accused Green of being part of the Riklis cabal that depleted E-II's till. Green responded that, up to Riklis' departure, he was out of that loop because he was only an underling who handled divesting company assets.

"Carl, why would you sue the man who'll run the company?" Green demanded.

"Steve, I don't want you to run the company," Icahn retorted.

There's no doubt that Riklis and Green remain friends. "I'm concerned for his well-being," says Green, 47, who calls the financier "Rik." "But from a business point of view, I've been objective, and the creditors know that." The two met when they did a real estate deal a decade ago. Before his removal, Riklis gave Green a $7 million bonus. Green also had a 10% piece of Riklis' TV-station deal, but he says he merely got his money back when E-II bought the broadcast operation.

The pair still have numerous joint real estate dealings. According to court papers, McCrory leases 56 locations from Shadrall Associates, which is 46% owned by Green and E-II's chief financial officer. Shadrall's yearly rental income from the retail chain is $4.1 million, although McCrory wants to shed more than half the leases as part of its Chapter 11 downsizing. For three years, Green's Auburndale Management Co. received $200,000 monthly from McCrory for consulting work. McCrory's imminent bankruptcy apparently ended that on Jan. 30. Green finds nothing wrong with these dealings since they don't directly affect E-II's operations.

PAC-MAN PLAY. E-II has had a turbulent history. In 1987, Chicago entrepreneur Donald P. Kelly was looking for a follow-up venture after he sold Esmark Inc. (Swift meats), so he launched E-II by cobbling together a bunch of strong brand names including Samsonite. But after Kelly tried to use E-II to take over American Brands Inc., he ended up losing his new company to the target in an epic "Pac-Man defense" battle. Dismayed over E-II's $1.5 billion debt burden, American Brands promptly unloaded the outfit on an eager Riklis for $1.2 billion, plus assumption of debt. Riklis hired his buddy, Green, to lop debt through asset sales.

After the Riklis ouster, Green has done a creditable job revamping E-II's operations. He stopped paying interest on the debt, now $1.2 billion, so he could plow money into advertising and business development, especially overseas. Culligan landed a contract to build a desalinization plant in Sardinia, and Botany 500 opened a store in Moscow. Green moved the company out of Trump Tower into less pricey New York City digs and sold off its three aircraft. The happy result: Net sales climbed 9.4% in 1992, and operating income went up 10.7%.

The bankruptcy-court tussle over control of E-II focuses on the value of the company, which determines how much is available to pay off creditors. An E-II-financed appraisal by Bear, Stearns & Co. places that between $125 million and $225 million. Under this scenario, Green ally Black, whose Apollo Investment Fund controls the largest amount of senior debt, would be able to convert his bonds to just over half of E-II's equity. Icahn argues that E-II has a much higher valuation--enough to provide more cash to creditors and thwart Black's converting enough debt to take control.

Bitter about Icahn's tactics of guilt by association, Green contrasts his performance with Icahn's disastrous tenure as head of Trans World Airlines Inc. "I haven't laid off any of our 11,000 people," he says. "Ask them if they want Carl Icahn in charge." Icahn, however, may just be playing his familiar game of buying distressed debt cheaply--he bought his E-II junior bonds for 40 on the dollar--then pressuring management to buy him out at a much higher price. Pondering these machinations, E-II creditors are likely asking themselves: Who is the worst bogeyman, Carl Icahn or Meshulam Riklis?RIKLIS AND THE

E-II ESCAPADE

1988 Meshulam Riklis buys debt-burdened E-II Holdings from American Brands for

$1.2 billion and assumption of $1.5 billion in debt.

DECEMBER, 1990 Riklis is forced out by bondholders outraged over his use of

E-II funds for other activities. Steven Green, a Riklis associate, becomes new

CEO.

JULY 15, 1992 A bondholder revolt, led by financier Carl Icahn, scuttles

Green's restructuring plans. Ailing E-II files for Chapter 11.

SEPT. 27, 1992 Under bondholder pressure, E-II announces a plan to sue Riklis

for the $500 million or so he allegedly drained from the company.

JAN. 22, 1993 Icahn files a proposal to take over E-II. He charges that CEO

Green is too close to Riklis and that the plan to sue Riklis is a sham, which

Green denies.

APRIL, 1993 The court is expected to rule on Green's blueprint for bringing

E-II out of bankruptcy and legally pursuing Riklis, who says he had the right

to remove money from E-II, which was his company.

DATA: COURT DOCUMENTS, BW

Larry Light in New York


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