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Deals from Hell by Arthur Levitt Jr., Robert F. Bruner

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6
December 1986: The Leveraged Buyout of Revco Drug Stores
Revco was in trouble from the day it went private. Sales and earnings projections were strictly from dreamland.1
Revco Drug Stores was taken private on December 29, 1986, at a 48 percent premium to the firm’s stock price 12 months earlier. Nineteen months later, it filed for bankruptcy. The means by which the firm had been “taken private,” a leveraged buyout, was a hall-mark of the 1980s and 1990s.2 In this transaction, management and a group of investors, acquired from public shareholders Revco’s common stock with a cash payment that was financed substantially by debt. At closing in December 1986, Revco’s leveraged buyout (LBO) was one of the largest ever ($1.4 billion) and certainly one of the most complex, featuring nine discrete layers of financing.
A counterpoint to the story of Revco is the leveraged buyout of its direct competitor in the retail pharmacy industry, Jack Eckerd Corporation. Eckerd was taken private in May 1986, also in response to a threatened hostile bid. As was typical of most LBOs, Eckerd reported losses but positive cash flows, sufficient to purchase 220 of Revco’s stores in 1990. Subsequently, Eckerd submitted an unsolicited bid to purchase the entire company. Revco’s management and creditors resisted. In 1993, Eckerd went public again, netting its equity investors a hefty return. Why Eckerd prospered and Revco didn’t offers lessons about governance, deal design, and financial leverage.

THE ...

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