Eaton's Goes Bankrupt

It seemed like a simple, last-minute, prenuptial task. Jim Pole and Nicole Pelletier from Thunder Bay, Ont., were to be wed on Aug. 21 in the lush Montreal suburb of Vaudreuil. The day before the big event, they just wanted to pick up the groom's new $1,000 suit. After calling the T. EATON CO.

Eaton's Goes Bankrupt

It seemed like a simple, last-minute, prenuptial task. Jim Pole and Nicole Pelletier from Thunder Bay, Ont., were to be wed on Aug. 21 in the lush Montreal suburb of Vaudreuil. The day before the big event, they just wanted to pick up the groom's new $1,000 suit. After calling the T. EATON CO.'s downtown Montreal store to confirm that the pants had been shortened, they arrived to find locked doors. A security guard with the attitude of a nightclub bouncer told them there was no way he could let them in. Somebody in the small crowd gathered outside the Ste-Catherine Street store asked what Pole would do if he couldn't get his suit. "I'll have to go like this," he said, gesturing to his golf shirt, jean shorts and sandals.

Across Quebec, Eaton's shoppers found more closed stores last Friday. At the end of the most tumultuous week in its 130-year history, the embattled retailer shut all nine of its Quebec outlets, sending 2,000 employees home, and got a trading halt on its shares. Late that night, Eaton's finally imparted the bleak news that almost every retail analyst, supplier, clerk and customer had come to expect - the grand old dame of Canadian retailing was filing for bankruptcy protection.

While Eaton's was open for business across the country by Saturday, there were no words of reassurance for a staff of 13,000 whose jobs are on the line. Instead, management announced that the 64 stores in the chain would start liquidating wares - and shoppers waited to hear how deep the discounts would run.

This will be the company's second trip to the bankruptcy courts: in February, 1997, Eaton's closed 21 stores, laid off 2,000 workers and emerged with a line of credit worth $250 million that was secured by everything the chain owned. This time, there will be no attempted restructuring. If it gets protection under the Bankruptcy and Insolvency Act, Eaton's may be able to avoid liabilities for breaking mall leases and for failing to meet obligations to Norwest Financial Capital Canada Inc., the firm that owns its credit-card operations. This court trip is about protecting assets to wind down a business.

The chain of events that led to the bankruptcy protection move began last Monday. Eaton's executives announced that they had failed to find a buyer for part or all of the chain after three months of trying. Talks with the only interested suitor - widely thought to be Cincinnati-based Federated Department Stores Inc., on behalf of its Macy's stores, and possibly including Sears Canada Inc. as a partner - had collapsed. Eaton's responded by closing its major Toronto warehouse, laying off 300 workers and turning away truckloads of merchandise. Restructuring experts said that shutdown was tantamount to waving the white flag. "You have to remember what time of year it is," one said. "This is August. It may not mean much to you, but it's Christmas to them."

There were many signs through the week that the once-proud chain had reached the end of the road. While staff put locks on the Toronto warehouse, Eaton's chairman and chief executive officer Brent Ballantyne made some brave noises about regrouping and how nothing's over till it's over. But the normally gung-ho executive was noncommittal. He conceded that winding down Eaton's "may be an option."

Then Hap Stephen, the court-appointed monitor who became Eaton's chief financial officer, agreed to moonlight as chairman of Repap Enterprises Inc., a troubled papermaker based in Stamford, Conn. "When the second-in-command gets another job," says bankruptcy expert Richard McLaren, a University of Western Ontario law professor, "that's a pretty clear indication that it's time to turn off the life support."

Investors clearly agreed. Back in June, 1998, the company's shares went on the market for $15 apiece. But once Ballantyne announced that there was no deal to sell the chain, shares tumbled on Monday from $1.85 to a low of 47 cents, before edging up to close Thursday at 71 cents. Out of Quebec came the rumblings that Montreal-based Tommy Hilfiger Canada Inc. had brought in a squad of employees to seize an estimated $500,000 of its popular teen fashions at Eaton's stores. The clothing maker was not taking any chances on getting caught on a list of creditors who might - or might not - see payment in any winding down of the company. Some wholesalers suggested that Eaton's closed Quebec stores on Friday to prevent other suppliers from grabbing back their merchandise, too.

By Thursday, the insolvency world was in high gear. Vulture funds specializing in trade debt were circling the unsecured trade creditors, offering to pay cash for their Eaton's IOUs. Canada's leading bankruptcy lawyers were either in Eaton's meetings or had been asked to stand by. One lawyer said it was clear that "they have run out of cash and they have run out of hope."

Some of the Eaton brothers also arrived at company headquarters in the early hours of Thursday to pack up their offices and to inform the half-dozen employees of their private management company that they, too, should get ready to vacate. (John Craig, Fredrik, Thor and George Eaton, who still own 52 per cent of the company, have seen the combined value of their stock tumble from $190 million in June, 1998, to just under $9 million.)

What is striking in the Eaton's saga, is the speed of its demise as a marketable commodity. In May, when the Eaton family announced that it was putting the company up for sale, the worst scenario was that somehow the franchise name would not survive. The suggestion was that a big American retailer might come calling with a stack of U.S. dollars and wipe founder Timothy Eaton's legacy off the map. By July, Bay Street financiers were calling Eaton's a "real estate play," meaning the famous brand was thought to hold little or no value, and potential buyers like Federated and Sears were looking to pay only what Eaton's store leases and property holdings might be worth. Now, the only question seems to be whether Eaton's is worth more dead than alive.

Even longtime Eaton's fans have decided it may be better to just let the old gal go. Winnipeg mayor Glen Murray, for example, is as sentimental as any Canadian when it comes to the company's history. As a teenager in Montreal, Murray worked part-time in the Ste-Catherine Street store, and he says he has lost count of how many suits he has bought at Eaton's during his decade in municipal politics. But Murray has concluded that Winnipeg will be better off without its landmark Portage Avenue store. It has been allowed to linger, unloved and unrenovated, for so long that it has become an obstacle to rejuvenating the city's downtown. "Portage Avenue needs a strong retailer, and Eaton's is not a strong retailer," Murray says. "There's a sense in Winnipeg of that we have to get on with it. I am just anxious to see it resolved."

Civic officials in Montreal feel much the same way. "Certainly, we would like Eaton's to continue," says Guy Bazinet, the City of Montreal's senior commissioner in charge of downtown development. "But should it come to the point where the Eaton organization cannot pursue its business, there are quite a few other groups that have shown interest in utilizing that space."

If its application for court protection is approved, Eaton's will have 30 days to draw up a proposal for creditors. In the month ahead, it will keep talking to potential buyers of its assets or shares - a situation that interested buyers have been waiting for all along, according to corporate experts. "Nobody ever wanted the whole kit and caboodle," says a leading, Toronto-based restructuring executive. "They knew that if they waited long enough, they could buy [Eaton's] out of bankruptcy a lot cheaper."

Still, some die-hard loyalists hold out hope. "I would not be surprised if tomorrow, or the next day, a white knight comes along and buys it," one former Eaton's executive says. York Management Services Inc. of Somerset, N.J., the firm that bought Canada's Kmart from its U.S. parent and flipped it to Zellers Inc., is considered a possibility. "All I can say is for us to get involved, a handful of issues would have to be addressed," Gary Nacht, York Management's executive vice- president told Maclean's. "But we're watching." Joe Segal, a Vancouver-based Eaton's director, said: "We are still hopeful that something will develop."

While the end of Eaton's unfolds, at least there was good news for the Montreal bridegroom. The security guard finally provided the couple with a phone number to reach the alterations department. A tailor emerged to assure Pelletier and Pole that she would take care of their problem. "Jim," the tailor announced, "will be married in his suit." The guard cracked open the door to pass out the garment bag containing Pole's suit - altered pants and all. The two elated Eaton's customers clutched their prize as they walked past a banner promoting the Ste-Catherine Street store's late hours. "It's never too late," read the sign.

That Sinking Feeling

Eaton's stock has been on a downward slide since it went on the market last year. The higest closing price of $16 was reached on June 5, 1998, the day after the shares began trading on the Toronto Stock Exchange:

June 5, 1998: $16.00

Jan. 29, 1999: $6.30

March 12, 1999: $2.25

Aug. 19, 1999: 71¢

Source: Bloomberg

Maclean's August 30, 1999