Fred's nips Rose's Stores acquisition in the bud - merger canceled

Discount Store News, Sept 2, 1996 by Dawn Wilensky

MEMPHIS, TENN. -- Will the discount store industry lose yet another regional chain?

That question was raised once again when Fred's called off its proposed merger with Rose's at a special shareholders meeting that had been widely considered a formality.

Shareholders never had the opportunity to vote; Fred's board of directors killed the merger prior to the Aug. 20 meeting. Just days earlier, Fred's had said it was postponing any action on the merger.

As part of the deal, Fred's had agreed to pay Rose's shareholders the equivalent of $2.15 worth of its common stock for each share of Rose's stock. Fred's also intended to pay $18.8 million in stock and assume approximately $60 million in debt from the N.C.-based regional chain.

While both parties have agreed not to discuss the merger or why it was terminated, the continual erosion of Rose's financial status almost certainly made an impact on the decision. Now that Fred's has removed its safety net, Rose's undoubtedly will feel more intensely the weight of its growing debt.

Rose's financials had to prove discouraging to Fred's, which has cleaned up its own balance sheet and emerged a stronger company. Fred's reported second quarter 1996 earnings of $414,000, or 4 cents a share, compared with a loss of $427,000, or 5 cents a share, during the corresponding period last year. Second quarter sales were $99 million, an increase of 6% over '95.

Rose's reported second quarter losses of $2.7 million, or 31 cents a share. Sales for the same period were $165.8 million, a decline of about 2% from last year. Included in the results was a $914,000 write-off related to a previous deal for financing with the Bank of Boston that was terminated by Rose's earlier this year.

Ed Anderson, chairman, ceo and president of Rose's, has been very vocal about his optimism for the 105-unit chain's survival without Fred's.

In an interview with DSN, Anderson indicated that he will continue to run the company and asserted that "Rose's is well-positioned to go forward as a standalone company. We have our fall merchandise plans in place, as well as our advertising schedules and budgets."

Anderson said that he has "personally spoken to many of Rose's suppliers, and the support of the vendor community is extremely positive. I don't know of a single vendor that has curtailed credit or terms to the company."

Still, many were surprised by Fred's 11th hour bailout. "We do a sizable business with Rose's in women's and girls' apparel, and were surprised when we heard the news," said one vendor. "Our financial people are still evaluating the situation so that we can see what our next step will be."

The $120 million, three-year financing Rose's secured from Foothill Capital three months ago should help reassure some vendors. But Rose's operates in highly competitive markets that will tighten even further as Target continues its push into the Mid-Atlantic region. It's also possible that the retailer could find another suitor.

What's clear is that Fred's is done with the matter. Ceo Michael Hayes reportedly told shareholders that the company is unlikely to reopen negotiations with Rose's at a lower price. "The complications of re-doing the deal are too much," he said, according to the Memphis-based Commercial Appeal. Instead, 207-unit Fred's will turn its attention to new store openings and could add up to 30 units next year. Fred's also services 32 franchised Fred's stores.