Revco Drugstore Chain In

Bankruptcy Filing
By JOHN HOLUSHA and SPECIAL TO THE NEW YORK TIMESJULY
29, 1988
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July 29, 1988, Page 00001The New York Times Archives

Unable to restructure its heavy debt load and hampered by increasingly
reluctant suppliers, Revco D.S. Inc., one of the nation's largest drugstore
chains, filed today for protection under Chapter 11 of the Federal Bankruptcy
Code.

The filing came just 19 months after the 2,000-store chain was taken private
in a $1.3 billion leveraged buyout and about three months after it stopped
making interest payments on the high-yield, or ''junk bond,'' debt used to
finance the buyout. Today's filing makes Revco the largest leveraged buyout
to fail financially.

In a leveraged buyout, the management of a company borrows heavily to buy

back its public shares, thus placing an extra debt burden on the company. A
Growing Number of Buyouts
 The buyout technique has been used aggressively in recent years as increasing
numbers of leveraged buyout funds have formed to provide financing for the
deals. In most cases, management of the company and the buyout-fund
investors are able to take over the company by putting up only 10 percent or
so of the purchase price as permanent equity capital.

Analysts said the Revco bankruptcy filing had been anticipated on Wall Street
after news spread of a breakdown in the company's negotiations with the
holders of its junk bonds. The bankruptcy of Revco is likely to produce jitters
among other holders of high-risk bonds from buyouts in which the companies
have heavy debt loads and weak or nonexistent earnings.

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Boake A. Sells, Revco's chairman, said the filing was essential to keep the
stores operating. He also said that the best solution to Revco's problems was
to contine to operate, rather than sell stores or other assets.

Mr. Sells said negotiations with stockholders and bondholders had collapsed
over the terms of a proposed debt-for-equity swap that would have produced
partial payments for the bondholders. ''This is a fight about who owns Revco,
not about how Revco operates,'' Mr. Sells said during a news conference at
the company's headquarters in Twinsburg, Ohio.

Most of Revco's 2,000 stores are profitable, Mr. Sells said, but the company
as a whole was not generating enough cash to operate the business and make
$150 million a year in interest payments.

''When it became obvious what the financial picture was at Revco,'' he said,
''Drexel Burnham did some work and found there was not enough cash in
Revco to give everyone what they were owed.''

Drexel Burnham Lambert Inc. replaced Salomon Brothers Inc. as Revco's

financial adviser earlier this year. Salomon was the adviser for the leveraged
buyout.

Meredith Adler, an analyst with L. F. Rothschild & Company, said the failure
at Revco was a result of the high price paid by the managers who took the
company private in December 1986 and the financing terms that left the
company pressed for cash. 'Paid Too Much'

''They paid too much for the buyout and it was structured badly, with all
interest currently payable,'' she said. ''Basically they were not given time to fix
the problems.''

In some buyouts, she said, managers are given an interest-free grace period
to improve a company's operations before additional demands are made on
its cash flow. Mr. Sells said Revco had to pay $150 million in interest
payments during the fiscal year ending May 31, 1988, but annual cash flow
was estimated at only $125 million.

There were management problems as well. The buyout anticipated rapidly

rising sales and profits. But competition in the $34 billion drugstore industry
stiffened as supermarkets expanded their pharmacy departments and
discount stores fought for non-pharmacy sales. Revco responded by cutting
prices, but that squeezed already-thin margins.

The company ran a huge promotion to clean out inventory, but neglected to
replenish shelves for the all-important Christmas season. In an effort to
broaden margins, the emphasis was switched from pharmaceuticals to
higher-priced, but slow-selling items, like appliances. Sales and Profits Sag

Sales stagnated. The buyout plan projected that sales would reach $3.37
billion in the year ending May 31, 1988. In fact, through early February 1988,
sales were only $1.66 billion.

Profits have disappeared as well at Revco, which was once the nation's largest
drugstore chain. In the last year before it went private, Revco earned $39
million, according to the company. For the current fiscal year through early
February, it has posted a net loss of $51 million. The projections called for
Revco to earn $103.6 million in the full year ending May 31.

Revco was also hampered by the reluctance of banks to finance inventory

buildups for holiday sales. ''They did not even have enough to meet seasonal
working capital needs,'' Ms. Adler said. ''In the previous year, they needed
$90 million in bank financing for the Christmas season, but banks only gave
them $60 million.''

The buyout added $1.1 billion in debt to a company whose previous debt had
been less than $300 million. Although some debt has been repaid through
asset sales, the company remains $1.16 billion in debt.

Revco announced in April that it would miss a $46 million interest payment
on its junk bond debt, causing concern among some merchandise suppliers.
Mr. Sells said some suppliers had refused to ship orders until they had been
paid for previous orders.

The leveraged buyout was led by Revco's founder, Sidney Dworkin, who built
the chain, starting in 1956, from a single drugstore in Detroit. While the
buyout was being arranged, the price was increased by 10 percent to fend off
a competing bid by the Dart Group. Difficulty With Sales

The post-buyout Revco also ran into difficulty selling some assets that were to
have been disposed of to help repay debt. Mr. Sells indicated today that one of
those assets, Odd Lot Trading Inc., a closeout merchandiser, might be
dismantled rather than sold to its management, as had been planned. Revco
paid $100 million to buy out the original owners of Odd Lot when differences
arose between them and Mr. Dworkin.

There has been management turmoil at Revco as well. Mr. Dworkin resigned
last September and his successor, William B. Edwards, resigned in March.

Mr. Sells, a former executive with the Dayton Hudson Corporation, has
emphasized the company's core pharmacy business, which generates 35
percent of sales. He said today that, freed of payments on the junk bonds, the
company has more than enough money to support an advertising campaign
for the back-to-school period and will have adequate inventory for the
Christmas season.

Despite Revco's problems Mr. Sells declined to criticize leveraged buyouts in

general. ''Revco's didn't work out; hundreds of others have,'' he said. ''Value is
not as easy to see in the future as it is in the past.''