NEW YORK — The battle for Macy’s moves into a new arena this week.
R.H. Macy & Co. and Federated Department Stores Inc. — its unwanted suitor — submitted their competing plans for reorganizing the bankrupt Macy’s on Friday, moving the struggle onto the desk of court-appointed mediator Cyrus R. Vance.
This week, both parties will launch intensified negotiations with creditors. Next week, Vance will begin meetings with Macy’s and Federated. By the end of this month, sources said, Vance is expected to submit his recommendations to bankruptcy court.
As for the plans submitted on Friday, Macy’s revised term sheet boosts the payout to unsecured creditors and improves the contingency payouts.
Its proposal distributes $3.67 billion in value to creditors in cash, debt and common stock for Macy’s emergence from Chapter 11, which is projected for January 1995.
The proposal from Federated, which is seeking a combined Macy’s/Federated operation, puts a value of $3.51 billion on Macy’s.
Sources said Macy’s has been able to line up strong support for its new plan — with the exception of junior bondholders — and is not likely to greatly alter it in the days ahead.
On the face of it, Macy’s plan seems better because it offers a higher payout to the trade while not alienating its senior creditors by putting too high a valuation on the company. A revision of the plan submitted to Vance on March 23, it offers bondholders and unsecured creditors stock purchase rights and warrants of $260 million. That brings the total value of the payout to $3.93 billion.
But Federated is counting on a cleaner valuation to convince creditors that it has the more attractive offer and could still come up with significant revisions to bolster its position.
Federated did not disclose what each class of Macy’s creditor would receive. The company said its proposed payout to creditors consists of $1.8 billion in debt, $1.48 billion in stock and $222.4 million in cash.
Federated also did not disclose how it would merge with Macy’s and what divisions would be consolidated. According to sources, Federated prefers to keep those plans under wraps for now, so as not to worry SA suppliers. A Federated/Macy’s combination could result in fewer doors for vendors to sell.
Meanwhile, bondholders — who have already said they want a plan putting Macy’s value at no less than $4 billion — could also submit a proposal. Robert Miller, counsel to the bondholders’ committee, could not be reached for comment following the release of Macy’s revised proposal.
In addition, secured creditors, including Fidelity Investments, have also talked about submitting their own proposal — but that has become less likely now that Macy’s has made revisions to its original plan.
With Macy’s and Federated’s proposals now public, the bankruptcy process will speed ahead. The two department store chains are expected to further discuss the proposals with creditors this week, and Vance said in a statement that he will have “intensive discussions” with all the parties beginning the week of May 9.
Market observers said Vance is expected to submit his own report to Bankruptcy Judge Burton R. Lifland by the end of May. Vance’s contract as court-appointed mediator expires toward the end of June, although it is renewable.
A look at the Macy and Federated proposals shows the strengths of each.
Macy’s proposal can run $420 million higher than Federated’s and pay unsecured creditors a higher sum. Federated’s proposal, though, pays out Federated stock, which has a true market value. Federated stock has been traded on the New York Stock Exchange since 1992, when it emerged from Chapter 11. It closed on Friday at 21 3/8, down 1 1/4. The Federated proposal was released after the market closed.
Macy’s equity has never been traded and has no firm value.
Macy’s $3.9 billion potential value, with contingency payout, including rights and warrants, confirms a report in these columns on April 29.
The difference between the immediate value of Macy’s and the potential value — the so-called contingency payout — depends on the market value of Macy’s stock over time.
Macy’s unsecured creditors had complained that the contingency payout under the original proposal was worthless. It offered unsecured creditors Macy’s stock in two years if the retailer’s shares increased at a predetermined rate.
Macy’s said that “based on feedback from creditors,” it has made vast changes in its contingent equity portion of the plan.
The revised contingent payout provides five-year warrants for unsecured creditors and the senior bondholders. Lower priority bondholders receive no initial payout, but will be issued rights to purchase up to 25 percent of Macy’s outstanding stock. Other highlights of the revised term sheet proposal include:
An increase in the payout range to unsecured creditors in January 1995 from 30 cents to 37 cents in cash, and equity and bonds from 25 cents to 32 cents.
The payout to unsecured creditors of five-year warrants representing 6.5 percent of Macy’s fully diluted shares.
A reduction in Macy’s outstanding debt after the reorganization to $1.6 billion from $2 billion under the initial proposal.
A reduction in the upfront payout to senior bondholders to $165 million from $292.9 million.
In the revised proposal, $3.67 billion in payouts to creditors on confirmation will comprise $1.9 billion in stock, $1.6 billion in debt and $172.7 million in cash.
The $3.4 billion in administrative costs and secured claims will be paid in full when the plan is approved, principally with equity and new debt. As news of the Macy’s plan — with its lower payout to bondholders — spread in the marketplace, prices of Macy’s bonds began to fall. Junior bonds were hurt the worst.
Macy’s 14.5 percent subordinated debentures maturing in 2001 traded at 16 late Friday afternoon, off 5, or 24 percent from 24 hours earlier. The retailer’s zero coupon bonds maturing in 2006 hit a low of 2. They had traded at 5 the previous night.
One person close to the unsecured creditors’ committee said the group was happy with the revised plan and with how Macy’s had handled the negotiations throughout the week.
“There was a series of negotiations last week, and Macy’s has been aboveboard and pretty open,” said the source. “The plan looks like good news for unsecured creditors because it boosts the payout upon confirmation and provides for an additional payout that is worth more to us than the additional payout under Macy’s initial proposal.”