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Tiffany's Sparkle May Have Blinded Investcorp


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TIFFANY'S SPARKLE MAY HAVE BLINDED INVESTCORP

A decade is a lifetime in the buyout business, and most of the outfits that engineered the big retail deals of the 1980s have long since turned to other things. But Investcorp, the Bahrain-based investment bank with hefty assets and a low profile, has continued to snap up retailers. Founded in 1982 by Chase Manhattan banker Nemir A. Kirdar, the firm did its first big deal when it bought Tiffany & Co. in 1984 and took it public in 1987 at a profit of more than $100 million. Since then, Investcorp has bought retailers with an ardor that would make Robert Campeau blush.

After spending billions on acquisitions, the firm has quietly assembled a massive retailing empire. Its holdings range from the tony to the homey--from Saks Fifth Avenue and Gucci to floor-covering retailer Color Tile and the Circle K convenience-store chain (table)--as well as stakes in some non-retailing properties, such as trucking company Burnham Service Corp. and Dellwood Foods Inc. But if Investcorp hoped to duplicate the Tiffany magic with its subsequent retail acquisitions, it has been sorely disappointed. "Tiffany was a comet that went through the atmosphere and blinded them for a long time," says a former Saks executive. "Investcorp thought every deal was going to be a Tiffany."

Instead, Investcorp has learned some hard lessons about the vagaries of retailing--in particular, that it takes merchandising savvy, not just financial engineering to turn around a beleaguered chain. With several of its properties either losing money or reporting declining earnings, it has so far been able to take just two other units public--the Sports & Recreation Inc. chain, in 1992, and Catherines Stores Corp., a large-size-apparel chain, in 1991. In 1993, Investcorp's return on equity slipped to 19%, the lowest in its history, from a 1988 peak of 31.6%. Return on assets fell to 5.4%, down from 7.5% in 1990. Net income reached $67.3 million, a 7.3% increase from 1992 but almost flat with 1990's results.

MUM'S THE WORD. Neither Investcorp nor any executives at the companies it owns would speak to BUSINESS WEEK on the record. Although Investcorp is publicly traded on the Bahrain Stock Exchange, a spokesman says it is "adamant" about not discussing its investments. Not that the company is likely to be feeling much heat about its performance. Unlike other buyout firms, which are under pressure to flip a company or take it public so they can provide quick returns to investors, Investcorp has patient capital behind it. The firm's investors include members of the Saudi royal family and other wealthy Middle Easterners eager for a place to park their money. Last year, Prince Alwaleed Bin Talal Al-Saud bought an 11% stake in Saks from Investcorp. "Investcorp's whole purpose for being is flight capital," says Fred Taylor, director of corporate bond research at Salomon Brothers Inc. "These guys are in no hurry to liquify."

Still, they can't be delighted with Investcorp's results of late. In May, the firm sold New York Department Stores Puerto Rico, a moderate-price chain, to Melville Corp. at a $100 million loss, estimates Kidder, Peabody & Co. analyst Michael Exstein. But its biggest woes have come in the glitzy end of its portfolio. At Saks, former executives say, Investcorp had counted on cutting costs, expanding operations, and going public quickly. Instead, the firm has watched sales stagnate and earnings shrink. In 1990, when Investcorp shelled out $1.6 billion to buy Saks from British American Tobacco Industries PLC, the retailer was earning $111 million on $1.3 billion in sales. The following year, an internal document reported that Saks's earnings fell to $90 million on flat sales. In 1992, Investcorp gave Saks a $300 million capital infusion that went toward refinancing debt and renovating stores.

STAYING POWER. Results have improved somewhat since then. For fiscal 1992, ended in January, 1993, Saks reported that sales had topped $1.3 billion--though it didn't specify by how much--and operating income had jumped 40%. Results for 1993 and 1994 aren't available. But don't expect a public offering soon, says Errol Glasser, a former investment banker who bid for Saks. "[Investcorp] paid an incredible amount of money for that business," he says. Indeed, former Saks executives say Investcorp overpaid by $300 million. "They're not going to get out of it above water any time soon," says Glasser.

The same may be true of Investcorp's Gucci investment. The firm bought 50% of the Italian luxury-goods maker for $160 million in 1988 and ran into problems with Maurizio Gucci, the chief executive and a grandson of the company's founder. He eliminated Gucci's wholesale business, and Investcorp was irked when he pledged his Gucci stock as collateral for personal debts. In 1992, Gucci lost some $30 million on sales of $180 million. After a legal battle, Investcorp bought Maurizio out for an estimated $170 million last fall. The wholesale business has been reopened and William Flanz, a member of Investcorp's management committee, is now CEO. Dawn Mello, president of Bergdorf Goodman Inc. and Gucci's former creative director, says "there's a very definite turnaround." An Investcorp spokesman says Gucci is now profitable.

Yet another ritzy Investcorp brand languishes in the red. In 1987, the firm bought Chaumet International, a bankrupt French jeweler. At the time, an Investcorp director said Chaumet could go public in five years if it had "been turned around." It hasn't. Chaumet lost $12 million on $29 million in sales in 1993.

Nor have things turned out swimmingly at the more prosaic end of Investcorp's pool. In 1989, for example, it bought Carvel Corp., a troubled 528-store ice cream chain, for $80 million. "It is still not profitable, and having cash-flow problems," says a Carvel insider. Carvel CEO Steven V. Fellingham, a former Kentucky Fried Chicken Corp. executive, has tried to jump-start sales by selling Carvel cakes and ice cream through supermarkets and stadiums.

Another question mark is Color Tile, the $555 million carpet-and-tile retailer Investcorp bought in 1989. Under Investcorp, the chain has boosted operating margins and closed unprofitable stores, but sales in stores open a year or more fell 4.3% in 1993. Sales are now ticking up, and Salomon's Taylor thinks Investcorp will try to take Color Tile public within a year. But a former executive at Knoll International Inc., which sold Color Tile to Investcorp, says the chain faces awesome competition: "We sold [Color Tile] because our chairman went to a Home Depot and got scared to death."

BREAKING EVEN. Investcorp does seem to be making headway with one big acquisition. Last year, it paid $400 million to buy Circle K, which had been in bankruptcy since 1990. Investcorp took the company out of Chapter 11 last summer, and sales have been on the rise. "They have been losing money, but they're close to the breakeven point now," says Burt P. Flickinger III, a consultant at A.T. Kearney & Co. He praises CEO John F. Antioco for consolidating stores and stocking fresh juices and Blimpie sandwiches.

Despite the challenges, Investcorp hasn't stopped funneling petrodollars into American retailing. Besides buying Circle K in 1993, it ponied up some $350 million for Camelot Music, increased its stake in Mondi, a German apparel maker, and paid $250 million for 85% of Thorn Lighting Group, a British lighting-fixture manufacturer. Earlier this month, it paid $285 million for Star Market Co., a Boston supermarket chain. Some hard knocks in retailing notwithstanding, you can't keep a wealthy buyout firm down.

A SAMPLING OF INVESTCORP'S INVESTMENTS

GUCCI Bought first 50% of luxury-goods company for estimated $160 million in 1988, remainder for roughly $170 million last fall. Gucci lost money in 1993.

SAKS FIFTH AVENUE Bought from B.A.T. for $1.6 billion in 1990. Since then, has cut costs, laid off staff, opened clearance centers, closed some stores.

CAMELOT MUSIC Bought 368-store music chain for roughly $350 million in October, 1993. Company did $420 million in sales in 1993 and is profitable.

COLOR TILE Acquired 800-store carpet-and-tile chain for $450 million in 1989. Same-store sales fell in 1993, rebounded in 1994. Company may go public.

CIRCLE K Paid $400 million in 1993 to buy convenience store chain, which had been in bankruptcy since 1990. Still not profitable, but sales are on the mend.

CARVEL Acquired 528-store East Coast ice cream chain for $80 million in 1989. Money-losing chain is now trying to sell products through supermarkets.

DATA: BUSINESS WEEK, COMPANY REPORTSLaura Zinn in New York, with Charles Hoots in Paris, and bureau reports


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