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on the dollar. Neither management nor the creditorsexpressed much enthusiasm for the deal. There wererumors that the Acadia/Bass plan did not includeRevco’s management team.24And Schulte indicatedthat noteholders were disappointed both with the22. Comment from “Bankruptcies, Workouts and Turnarounds: A RoundtableDiscussion,”Journal of Applied Corporate Finance, this issue.23. See Frederick, James, “The future for Revco hinges on creditors,”Drugstore News, August 28. 1989; Vaczek, David, “Revco’s bondholders battle forcontrol,”Drugstore News, September 25, 1989; and Frederick, James, “Revcoreorganization battle heats up: Court rules bondholders can query chain’s board,”Drugstore News, October 23, 1989.24. Acadia owns Reliable Drugs whose CEO, Roger Grass, formerly anexecutive of Rite Aid, has years of industry experience. Observers speculated thathe would run Revco.Stating that too much leverage was the fundamental causeof Revco’s problemsdoes not offer much insight into what went wrong. Management disarray, a weakand inexperienced LBO sponsor, a fee structure almost guaranteed to produceoverpayment, and a disastrous midstream shift in strategy all conspired with theuse of debt financing to put Revco into Chapter 11.
90JOURNAL OF APPLIED CORPORATE FINANCEprice and the minority equity stake they wouldreceive, although he felt the offer should be “recog-nized.”In the face of such resistance, this plan didnot progress farther.25On June 12, 1990, Revco’s bankruptcy took along and expensive detour when the court ap-pointed an examiner, law professor Barry Zaretsky,to assess the validity of fraudulent conveyanceclaims against Revco’s pre-LBO shareholders andadvisors. Zaretsky determined that there were groundsfor these claims, and the resolution of this issue isprogressing slowly.26As Schulte commented, “Wewound up in the Revco case with an examiner eventhough no party of interest wanted it, and theexaminer added a year to the case.”27From Revco’s filing date, July 28, 1988, untilOctober 31, 1990, management was granted theexclusive right to file a reorganization plan. Finally,the court refused to grant management an extension.Creditors petitioned the court for the right to proposetheir own plan, but still progress is slow. As Schulteremarked, “We ended exclusivity in the Revco caselast November. And here it is April, and the worlddoesn’t feel any better to me. We are the creditorsand we have a plan on the table, but we’re still inthe swamp.”28WHAT REALLY WENT WRONG AT REVCO?As the analysis above suggests, stating that toomuch leverage was the fundamental cause of Revco’sproblems does not offer much insight into what wentwrong. Management disarray, a weak and inexpe-rienced LBO sponsor, a fee structure almost guaran-teed to produce overpayment, and a disastrousmidstream shift in strategy all conspired with the useof debt financing to put Revco into Chapter 11.