Hills battle with Dickstein heats up; Ames may be next target - Hills Stores, Dickstein & Co., seeks controling interest

Discount Store News, Sept 5, 1994 by Laura Liebeck, James Mammarella

CANTON, MASS. -- The boxing gloves are off in the fight between Hills Stores and Dickstein & Co. over control of the regional discount store chain.

The sparring has gotten so intense in recent weeks, with punches and counterpunches on both sides, that another investor, Heine Securities, entered the ring.

Heine recently upped its stake in the 152-unit Midwestern chain to 5.8% by acquiring 39,000 more shares of Hills stock for a total holding of 749,000 shares. Its motives remain unclear.

Calls to Heine seeking comment about its interest in Hills were unanswered. However. Heine is reportedly assessing Dickstein's position on Hills -- that shareholder equity c d be enhanced -- and will determine later if it will further increase its stake in the chain or sell its shares.

A similar fight with Dickstein may only be beginning at Ames. Dickstein & Co. last month bought 1.436 million shares of stock in Ames, a 7.1% interest. The investor has not indicated any intention to take over Ames, but Dickstein's overtures to Hills started just as benignly.

In August 1993, for example, Dickstein filed a 13D (indicating ownership of at least 5% of a company), then reportedly sold a large portion of shares in early 1994 after a good fourth quarter performance by 305-store Ames pushed the value up.

Industry observers nevertheless asked whether Dickstein might ultimately seek to control a Midwest-to-Northeast super-regional store group. Economies of scale within such a structure could in theory present a stiffer bulwark against competition from national chains.

Eschewing the notion of any grand national designs, a partner at Dickstein, who asked not to be identified, said that the Ames buy was simply a smart investment.

For Hills, the fight with Dickstein is about money and operating philosophy. Dickstein has maintained that it seeks to improve return to shareholders essentially by leveraging the chain's assets -- while avoiding "triggering the change-of-control provisions applicable to the company's [Hills] debt."

Hills management, on the other hand, wants to concentrate on building up the chain, improving bottom line performance and through opening and operating stores, said Michael Bozic, Hills' president, ceo. This management team also wants to avoid saddling the chain with debt, which is what forced Hills into Chapter 11 in 1991. The chain emerged from bankruptcy last October.

Apollo Capital Management and Thomas H. Lee, owners of 5.12% and 5.17%, respectively of Hills, have joined management in opposing Dickstein.

Dickstein seeks to supplant four of eight Hills board members -- not Bozic -- create a new holding company, have Hills buy back 5.5 million shares of stock at $27 per share (about $4 per share higher than the current trading price) in exchange for high-yield notes, and use Hills' operating income "to allow interest on the new debt to be paid in cash."

In response to Dickstein's Aug. 16 filing with the SEC of its takeover plans for the discounter: * Adopted a shareholder rights plan or "poison pill" to limit any investor to a 15% stake in the retailer;

* Filed a preliminary consent revocation document with the SEC to oppose the replacement of the four Hills board members;

* Instructed its legal counsel to begin litigation in U.S. District Court in Massachusetts alleging Federal securities laws violations and seeking among other relief an order enjoining Dickstein's consent solicitation;

* Extended the employment contracts of Bozic and five other key executives;

* Retained Smith Barney Inc. as financial advisor, D.F. King & Co. as its soliciting agent on the consent solicitation, and the law firm of Cravath, Swaine & Moore to advise it on the stockholder rights plans and the matters relating to Dickstein.

Bozic said that Hills' actions are "designed to protect our shareholders from coercive takeover tactics. Neither Dickstein nor any other person should be permitted to accumulate shares without paying a control premium."

In legal documents filed by Hills in the U.S. District Court for the District of Massachusetts, Hills alleges that the "defendants are continuing their scheme to manipulate the market for the shares, and to mislead and deceive Hills, its stockholders and the investing public" by claiming to want to take over Hills by stating its desire to acquire more than 50% of the company's stock. In this legal brief, Hills maintains that Dickstein does not intend to purchase a controlling interest in the company, that it is hoping to "induce the purchase of shares by short-term investors and to improperly influence the outcome of the consent solicitation."

The legal document also reminds the court of Dickstein president Mark Dickstein's 1990 encounter with the Commodity Futures Trading Commission concerning 1987 dealings. Dickstein's SEC filings include the same information.

In September 1991, Dickstein settled the matter, neither admitting nor denying any of the CTFC's allegations of illegal acts. However, he did agree not to engage in commodities transactions for one year and not to trade on the floor of any commodities exchange for two more years.