Soft stock market limits Pamida's initial offering

Discount Store News, Sept 17, 1990

Soft Stock Market Limits Pamida's Initial Offering

NEW YORK - A drastically limited scope of Pamida's planned public stock offering dashes its hopes of reducing its debt-to-equity ratio and doubling its expansion rate.

Merrill Lynch, the underwriters for Pamida's attempts to go public again, has slashed the scope of a proposed initial public offering in response to plummeting stock prices.

Before the market headed south July 18, Merrill Lynch had hoped to sell 4 million shares of Pamida, including 3 million shares that would be newly issued. That would amount to a 50% stake, at $13 to $16 per share. The sale would have raised about $58 million to pay down debt and clean up its balance sheet and would have indicated a market value of $116 million for the chain.

In a revised prospectus, Merrill Lynch dropped the idea of raising additional capital by issuing new shares. It now proposes offering only 1.5 million existing shares at $6 to $7 a share, or a maximum of $10.5 million. That indicates a market value of just $35 million for all 5 million shares outstanding.

In comparison, management, Citibank Venture Capital and other venture capital investors paid $168 million in a 1986 LBO, and employees paid founder J.D. Witherspoon $55 million when they purchased the company from him in a 1981 LBO.

At $7 a share, the stock price would be less than half the tangible book value of $14.53 per share.

Merrill Lynch has set no date for taking Pamida public.

Citibank would sell the 1.5 million shares from among its 2.4 million share stake in Pamida in order to comply with banking regulations. Including non-voting, as well as voting stocks, Citibank acquired a 48 percent interest during the 1986 LBO, said Richard Ramm, Pamida's chief financial officer. But federal banking regulations are forcing Citibank to reduce its venture capital stake to less than 25 percent, Ramm said.

If the sale goes through, Citibank will hold a 21.9% stake, Ramm added.

Pamida management holds a 12.3% stake but planned to sell no shares under the original IPO.

Pamida had hoped to raise about $58 million in additional capital to reduce its debt to equity ratio of 25:1. Even if the IPO had gone through as proposed, the debt/equity ratio would have stood at four to one, still twice a comfortable level of 2:1.

Pamida made an operating profit in 1989 of 5.9% of $621 million in sales from 173 stores. But heavy interest expense from two LBOs reduced pretax profit to 1.9% of revenues.

When Pamida employees bought the chain from its founder through an employee stock ownership plan, they financed the deal with borrowed money. Then the management-led LBO piled on still more debt.

Pamida is internally financing the addition of about seven stores a year but had hoped to increase that to 15 with the planned new capital.