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The RevCo Bankruptcy

The Company
Drugstores are a simple enough business. They are relatively insensitive to
business cycles. Good times or bad, people will need medicine and toiletries. The huge
discount drugstore chain, Revco D. S. (Revco Discount Drug Stores), based in Twinburg
Ohio, was one such major drugstore chain. Founded by Sidney Dworking, who served as
CEO, it grew tremendously and had 2,200 stores operating through the Ohio Valley, Mid-
Atlantic States and Southeastern United States and over $2.2 billion in sales by 1983. The
RevCo business model of Everyday low prices attracted masses of consumers.
In 1983, RevCos troubles began. Vitamin E supplements it sold were blamed for
the deaths of a number of premature infants, and a civil suit was filed. In order to prevent
a hostile takeover and increase short-term profits, Dworkin made a mistake that would
bring RevCo to distress. He deviated from the principal business model of being a
discount drug store through the purchase of Odd Lot Trading, a seller of merchandise
purchased from struggling manufacturers. The Odd Lot Trading stores did poorly and
that, coupled with the infant deaths that civil lawsuit pertaining to infant deaths severely
damaged RevCos revenues.
The LBO
The 1980s was a time when LBOs were the new fad. This is where Dworkin saw
the solution to RevCos troubles. On December 29, 1986, he bought out RevCo from
shareholders for $1.28 billion by assuming massive amounts of debt. The buyout
increased management ownership from 3% to 31%, but also raised the companys
indebtedness from $309 million to $1.3 billion, $700 million of which were in the form
of junk bonds. Post-buyout, RevCo had $35 million in common equity outstanding on
$1.7 billion in capital, for an equity ratio of only 2%. For a discount drug store with
measly margins, any minor hiccup through the company into distress. This is precisely
what happened in 1988.
On April 15
th
1988, amidst intensifying competition in the drugstore industry and
lesser than expected earnings, RevCo announced it would not be able to make a $46
million interest payment on its subordinated notes, or junk bonds. RevCo was not yet in
Chapter 11 bankruptcy though, as the company and credits wanted to avoid the
cumbersome and costly process of chapter 11. Right about when RevCo defaulted on its
interest payment, Magten Asset Management bought up $100 million worth of RevCos
junk bonds and forced RevCo into Chapter 11. On July 28, 1988, RevCo filed for Chapter
11 Bankruptcy Protection.
Chapter 11
Post-filing, many reorganization plans were proposed but many failed because of
disagreements between creditors, owners and management. In September 1991, creditors
filed a plan in which they would retain ownership of the entire company in return for
restructuring its massive debt load of $1.5 billion. Banks restructured their notes from
$306 million to new $205 million 12% notes due December 1988 and some preferred
stock in the newly reorganized business. This was a recovery of about 60 cents on the
dollar. Eventually, RevCo was sold to CVS Corporation in May 1997 for $2.8 billion
plus the assumption of $900 million in debt. With RevCos 2,600 stores and $5.4 billion
in 1996 sales and CVSs 1,425 stores and $5.53 billion in sales, the merger created the
nations largest drug store chain.
RevCo stock Price

Works Cited
[1] Wruck, Karen What Really Went Wrong at Revco, Harvard Business School
[2] Bruner, Robert F, The Crash of the Revco Leveraged Buyout
[3] Rosenberg, Hilary. The Vulture Investors. Wiley, January 2000. Print.