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R.H. Macy’s Need For Speed

NEW YORK -- Despite statements by R.H. Macy & Co. to the contrary, there can be little doubt that the sudden entry last week of Federated Department Stores as a possible buyer will speed up its reorganization.<BR><BR>It's been just about two years...

NEW YORK — Despite statements by R.H. Macy & Co. to the contrary, there can be little doubt that the sudden entry last week of Federated Department Stores as a possible buyer will speed up its reorganization.

It’s been just about two years since Macy’s filed its Chapter 11 petition and the retailer is still plodding along, working out its operating problems before tackling the chore of dealing with its creditors.

The fact that its top merchant, Roger Farah, doesn’t start until July 1 is a clear indication that Macy has not seemed to be in any hurry to emerge from Chapter 11.

This sharply contrasts with Federated, which was able to complete its Chapter 11 plan in two years, wipe out much of its debt through a debt-for- equity swap and emerge in February 1992 as a slimmed-down, profitable retailer.

Federated came out of Chapter 11 with its debt reduced from $8.2 billion to $3.5 billion and its annual interest costs cut from $606 million to $259 million. It also turned a $1.7 billion deficit into a net worth of $1.5 billion. By the spring of 1992, Federated was able to tap the stock market to raise some new money and further reduce its debt by $950 million. The issue came out at $11.50. The stock closed Friday at 221/8 on the New York Stock Exchange.

The Federated move last week generated an orgy of speculation about breaking up Macy’s, with Dillard Department Stores and possibly May Department Stores said to be interested in picking out some choice pieces. At the moment, however, Federated is the only company that has said publicly it would like to merge with Macy’s.

It remains a long way from a done deal. To start with, Federated’s purchase of one-half of the $1 billion mortgage claim of Prudential Insurance Co. just places Federated on the periphery of the Macy Chapter 11. A major reason Federated bought the claim is that it is regarded as a pretty safe bet to be paid in full with interest. But for that very reason, Federated would not have a vote in the final Chapter 11 plan unless it gets the cooperation of other creditors or buys up other claims.

Under Chapter 11, only creditors whose claims are “impaired” by the reorganization plan get to vote. That is, a creditor who’s not going to get paid in full gets the opportunity to say whether or not the offer is acceptable. A creditor who gets full payment has nothing to accept or not accept.

If Federated was merely making an investment for the spread between the 12 percent interest rate on the mortgages and its money cost of around 5 percent, nobody would get too excited.

But since Federated is clearly in it for much more, the pressure is on Macy’s to come up with something to head off the Cincinnati-based company. Just talking about reducing expenses and improving its buying procedures in a five-year plan is no longer enough to keep its creditors at bay.

Although Macy’s still holds the exclusive right to file a plan until March 15 and will probably get a further extension when that expires, if Federated can come up with a plan supported by Macy’s creditors and move to dissolve the exclusivity, the bankruptcy judge would have to take Federated seriously.