Family Bargain inks buyout deal

Discount Store News, Jan 20, 1997

SAN DIEGO - Through a $27 million buyout of a controlling interest expected to be completed earlier this month, Family Bargain Centers has received the expansion cash it sought through a debt offering that proved too onerous.

More important, the infusion of equity is expected to end seven years of struggles to obtain trade credit, a problem that has plagued the heavily indebted company since a 1989 leveraged buyout.

In its debt offering prospectus last fall, Family Bargain showed common stockholder equity of just $26,000, compared with $39.6 million in long-term debt.

The new cash will "de-leverage the company," cfo Jeff Gerstel told DSN. Also, it should end problems with obtaining merchandise credit.

Upon completion of the equity transaction, Family Bargain will officially scrap its proposed debt offering, a move it alluded to Dec. 15, Gerstel said.

The equity terms are more favorable than the debt offering, which would have been "too dilutive," Gerstel said.

The buyer is Three Cities Research, a New York buyout firm. Its investments include the Garden Ridge Pottery chain. Three Cities acquired the crafts megastore chain in 1992 and took it public last year.

The buyout deal, which comes in three parts, gives Three Cities as much as a 50% stake, including the 3% stake now held by Family Bargain chairman Benson Selzer and his son, John Selzer.

Family Bargain remains a public company and will continue to trade on NASDAQ, Gerstel said.

The Selzers (New York merchant bankers) acquired General Textiles, the parent company of Family Bargain, in 1992, while it was in Chapter 11 bankruptcy. They then led it out of bankruptcy in '93. In '95, the Selzers acquired Factory 2-U from Capin Mercantile, Nogales, Ariz., another off-price apparel and housewares chain that caters largely to Hispanic customers. Stores for the two chains are clustered along the Mexican border from Texas to California, while Family Bargain also operates stores in the Pacific Northwest in Oregon and Washington that cater to rural customers.

The deal also calls for Benson and John Selzer to resign their positions as chairman, president and ceo, and directors, respectively. Additionally, Joseph Eiger is quitting as vice chairman and director.

Eiger is another New York merchant banker involved in the 1992 buyout of General Textiles.

The reorganization entails closing offices of the Family Bargain holding company in New York and consolidating executive functions to the San Diego operating headquarters of General Textile and Factory 2-U. That will reduce overhead, Gerstel said.

William Mowbary, previously chief operating officer of the holding company and chief executive officer of the operating company, will become ceo of both.

In announcing the equity investment, Mowbary said that Benson and John Selzer, and Eiger took control of Family Bargain as it was emerging from bankruptcy reorganization. The chain then operated 80 stores with annual revenues of $140 million.

Family Bargain now runs 150 stores, with sales of about $250 million, Mowbary said. "The additional capital will provide Family Bargain with a strong equity base for continued growth of the company."

Family Bargain was planning to raise $40 million though a debt offering proposed last year.

But the collapse of the Mexican peso in 1995 led to a net loss of $3.3 million for the 12 months ended July 27, 1996, and it left the company ill-prepared to obtain favorable terms for additional long-term debt. Family Bargain also had to scrap its plans to expand into Mexico because the peso devaluation made American goods too costly for the low-income customers that the chain serves.

The restructuring also includes a charge against earnings to buy out the employment contracts of the Selzers and Eiger. Gerstel said the company hasn't finished calculating the exact amount of the restructuring charge but that it will result in a net loss for the fiscal year ending this month.

Through the third quarter of 1996, Family Bargain showed an operating profit of $2.6 million, compared to $251,000 for the first nine months of 1995. Sales were $172.9 million, up from $115.7 million for the same period of 1995.

Of the 150 stores, 29 are Factory 2-U stores.

A company spokesman said that the Selzers sold the company because they had taken it as far as they could.

The new controlling owners expect to expand store count by about 25 units in 1997.

Rob Wright, an associate of Three Cities, declined to comment on expansion plans.

Wright said that his firm. was attracted to Family Bargain because it is "a great retail concept with a lot of potential."