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Minding The Stores

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It's not going to make The New York Times best-seller list, but the reorganization plan for Federated Department Stores Inc. and Allied Stores Corp. will make riveting reading for a horde of bankers, bondholders, and suppliers. The plan, due Apr. 29 in U. S. Bankruptcy Court in Cincinnati, details how the companies' managers will take the two retail groups out of Chapter 11, where they landed last year after their owner, Canada's Campeau Corp., stumbled under some $7 billion in debt.

Executives at the stores are keeping their lips zipped. But according to creditors, bankers, and analysts, the plan proposes to pare liabilities for the two chains to something between $1.5 billion and $2 billion. To wipe away the debt, Federated and Allied Chief Executive Allen I. Questrom wants to swap varying parcels of cash and stock to creditors, depending on their seniority. Since the equity technically belongs to Campeau's U. S. holding company, a swap of stock for debt would end Campeau's control of Federated and Allied. Creditors could then sell these shares in a reorganized Federated Stores Inc. to the public.

The plan has Wall Street all aquiver. "There's a lot of optimism on this credit," says Andrew J. Herenstein, an analyst at Delaware Bay Co., which trades in distressed securities. Certain Federated bonds have rebounded from under 40~ on the dollar to 60~ or so.

Improved operations are fueling the optimism (table). Since the start of Questrom's tenure in January, 1990, 17 stores have been shuttered and another is set to close soon. Buying has been centralized, while inventories have been slashed by as much as $300 million. In the 1990 Christmas quarter, cash flow at Federated rose from 6.6% of sales the year before to 11.4%. At Allied, cash flow widened from 5.4% of sales to 8.9%.

HEFTY TAX LIEN. There are still obstacles. The Internal Revenue Service has put in a claim for $710 million on taxes it says are owed on the sales of some Federated divisions. Lawyers are working on a solution, but the restructuring may also trigger other tax liabilities.

Then there's Citibank, which lent Federated and Allied more than $1.5 billion. Todd Slotkin, a senior managing director at Citibank, wants Questrom to raise more cash by shrinking the retail holdings--which Federated and Allied managers have been reluctant to do. "We can't conceive of a plan without some sale of operating subsidiaries or specific assets," he says. Not all creditors, especially Federated bondholders, agree.

Yet, Slotkin thinks that other creditors might contest a debt-for-equity swap and challenge the exclusivity Federated and Allied now enjoy in filing a plan. That could seriously delay things. Questrom has made a good start, but selling the reorganization plan still calls for a master merchant's skills.FEDERATED AND ALLIED:


Pre-Chapter 11 Post-Chapter 11

Fiscal 1990* Fiscal 1992 (est.)*

REVENUES $7.2 billion $7.3 billion

CASH FLOW** $469.0 million $608.0 million

STORES 261 243

EMPLOYEES 100,000 88,900

* Fiscal years ending in January

** Earnings before interest, taxes, depreciation, and

amortization Company estimate


Laura Zinn in New York

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