Christopher Byron: How Dick Snyder Turned Golden Books to Dross

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To filch a line from Richard Nixon, it's beginning to look as if we won't have Golden Books (GBFE) to kick around for much longer.

One way or another, the flailing two-year struggle of

Richard Snyder

to reverse the declining fortunes of the company ravaged by his predecessor, Richard Bernstein, seems to be coming to an end. By the week of Sept. 14, Mr. Snyder had just about finished the company off.

Recent days have brought desperation financings, a credit downgrade as a result of a missed interest payment on a $150 million loan and a collapsing stock price -- all in the name of transforming Golden Books from a struggling publisher of children's books into something grand and grown-up. Now, either the company's asleep-at-the-wheel board of directors -- among whom are literary agent

Mort Janklow's

wife, Linda Janklow, as well as

Lorne Michaels

, the

Saturday Night Live

guy -- will be giving Dickie Boy his second heave-ho in four years (he was bounced from the top job at

Simon & Schuster

in 1994), or Golden Books will soon be collapsing right out from under them all.

After six straight years of losses, the death rattle emanating from 850 Third Avenue has grown so deafening you can almost see the vultures circling overhead. The trouble is, there's no meat left to be picked from the bones; literally the whole of Golden Books' net worth (and more!) has been wiped out by Mr. Snyder since he arrived on the scene at the start of 1996.

Under his helmsmanship, this once grand enterprise has undergone an incredible shrinking act of such proportions as to have turned the entire company into the financial equivalent of a party favor. At the time Mr. Snyder took over from the oily Mr. Bernstein, Golden Books' balance-sheet equity stood at $84.4 million and the stock languished at 8 -- down from a high of more than 23 at the start of the 1990s. Mostly, that had been the fault of the room-emptying Mr. Bernstein, a Manhattan real estate cardsharp who once made a futile run for New York City comptroller, then scrounged some money from

GE Capital

, bought Golden Books in 1984 and proceeded to run it into the ground.

With Dick No. 1 in the corner office, revenue plunged 35% to $402 million by 1995, and losses yawned to more than $30 million. Then came Dick No. 2, bursting with enthusiastic pronouncements about developing the company into a multimedia powerhouse on the cutting edge of everything. In reaction, the company's stock rebounded to 15 as Wall Street waited for the payoff to come -- and waited and waited.

Yet all that followed was a relentless bleeding of resources, to the point that Golden Books now looks less like a going concern than a Biafran war refugee. Since the end of 1996, a $140 million cash position has gone right down the toilet. These days, the company's stock is selling for about 59 cents per share, its employee pension fund is in the red to the tune of $30 million, and net losses, which stood at $21 million for the first three months of 1998, ballooned to $51 million by the end of June. Result: As of June 27, the balance sheet showed a negative net worth -- for common stockholders, at least -- of an astounding $217 million.

What those numbers say is this: In the space of barely two-and-a-half years, the utterly shameless Mr. Snyder stuck $3.1 million in cash compensation into his pockets, in return for which he orchestrated the total and complete obliteration of more than $300 million in irreplaceable corporate treasure held by the shareholders who employ him.

One searches the modern history of the traditionally tweedy and civil American book-publishing industry in vain for a comparable example of destruction of a balance sheet in so short a time. The only obvious parallel to Mr. Snyder's rampage:

Albert (Chainsaw Al) Dunlap's

restructuring ministrations to

Sunbeam

(SOC)

, which not only cost him his job and his golden parachute, but positioned him at the business end of a shareholder fraud suit cannonade from the dreaded class-action law firm

Milberg Weiss

. That firm is also now suing Golden Books over much the same allegations: misleadingly frothy statements about the company's prospects.

As a result of these losses, and the stock-price collapse they've triggered, the whole of Golden Books -- complete with its 1,200 employees, $242 million in revenues and more than $220 million in debts and other liabilities -- can now be purchased for a pathetic $16.2 million, or less than the budget of a cheap Hollywood movie. Compare that to its market value of more than $327 million less than six months ago.

With Golden Books' stock now dipping below 2, the Nasdaq- traded security could be characterized as a penny stock. And were the shares to be delisted from Nasdaq for Golden Books' failure to meet minimum capital or similar requirements, they would likely wind up being bumped to Wall Street's ultimate subbasement for actively traded stocks: a listing on the over-the-counter bulletin board.

Recent days have brought even more grim developments, as the company has scrambled desperately to scrape together enough borrowings to avoid bankruptcy. The hunt began back in May and June, when Golden Books announced the negotiation of a $30 million line of credit; as of June 27, some $12 million of the credit line had already been drawn down.

By July, the company was staring at looming insolvency all over again, and in desperation it slapped together a $25 million one-year loan courtesy of its main equity holders, namely the

Warburg Pincus

investment group and its hired-gun chairman and chief executive, Mr. Snyder. This time, the group even included media minimogul

Barry Diller

, who agreed to kick in a few bucks of his own.

Normally, Mr. Diller's involvement in a company sets its stock to sizzlin'. Yet this time around, the vaunted Diller sizzle fizzled instead, as investors took his arrival on the scene as a telegraphed punch regarding what the company's Chinese fire-drill efforts to scare up a loan really amounted to.

The true purpose of the borrowings? Not to pound yet more millions down the rabbit hole of Mr. Snyder's misguided managerial ambitions, but to dress up the corporate corpse he now presides over for a sale if a buyer can only be found.

To that end, Mr. Diller's main contribution appears to be his close ties with

Allen & Co.

, the Hollywood-wedded investment bank that Mr. Snyder promptly hired to find a way to put the company out of its misery ("explore strategic alternatives" is the official euphemism). As for investors, well, they've sure been faked out. Not! In fact, scarcely had the $25 million deal been announced on July 8 than the stock began the slide that carried it down under a dollar.

Then, on Sept. 15 came the biggest body blow yet, as the company announced that it was, for all practical purposes, defaulting on a mere $5.7 million worth of interest due on a $150 million note that matures in 2002. (Golden Books prefers to call the action a "deferral" under the terms of the loan.) Simultaneously, the company said it was initiating talks with the noteholders to "renegotiate" the terms of their loan based on the expected cavalrylike arrival of the $25 million in bailout bucks from the Warburg Pincus bunch.

Why put a gun to the noteholders' heads that way? The best explanation seems to be that the note is, in fact, senior debt. Yet it also seems to be the case that there's simply not enough collateral left to be spread around among the noteholders and now all the new creditors. Result: To get the deal done, someone is going to have to move to the back of the line in case of default -- and it sure doesn't seem as if Messrs. Snyder and Diller, or the Warburg crowd, want to be the ones.

This could well turn out to be Mr. Snyder's endgame maneuver, for the troubled debt tranche, which carries a 7.65% coupon, represents virtually the whole of Golden Books' long-term debt, as well as more than 50% of its total capital. The fact that his company has intentionally stiffed its own creditors -- in a ploy reminiscent of

Ronald Perelman's

handling of the bondholders in his

Marvel

fiasco -- over a measly $5 million due on such a vital component of the business suggests just how desperate the company really is.

Absent the new loans, Golden Books may simply not have had enough cash on hand to make the payment at all. On June 27, the company's balance sheet showed $16.7 million of cash on hand, down from more than $57 million at the start of the year, and by now, most of that may be gone. After all, for the first six months of this year, the cash loss exceeded $42 million.

In any case, the failure to make payment on the loan has been devastating to the company's credit in the business world. By Sept. 14, rumors were circulating in the book-publishing field that Golden Books was facing bankruptcy. (A Golden Books official denied that any bankruptcy filing was in the offing or even being considered.) The company's position wasn't helped when

Standard & Poor's

reacted to the missed interest payment by downgrading Golden Books' debt from triple-C-plus (lousy, or as S&P puts it in ratings legalese, "vulnerable to nonpayment") to D (payment in default).

The announcement has simply spurred on short-sellers, who have been tearing at the company's innards like hyenas gobbling the entrails of a crippled springbok on the Discovery Channel. Short-interest positions now total nearly 5 million shares, or more than twice the market float of the stock as tallied by

Market Guide

. On Sept. 16, Golden Books' battered stock price actually touched a pathetic 45 cents per share before closing the day at 47 cents.

If Golden Books had been a company with a positive message for investors, that short-interest position might have wound up exploding in a stunning price surge, as short-sellers would have been forced to cover their sales with stock that wasn't available at any price. But Golden Books has no message to deliver except the continued, unconvincing prattle from Mr. Snyder's office that his company's plan to "redeploy assets" into its "core publishing business" is on track.

Redeploy assets? What assets? Golden Books' financials are so downright horrifying they're actually fun to read. Not only did revenue fall 15% during the April-June 1998 quarter from the year-earlier period, but as of June 27 the balance sheet's inventory of unsold books had ballooned to 86% of revenue from 59% in the year-earlier period. Those bulging inventories aren't an asset, they're a liability!

So, too, are $10 million worth of boarded-up factories that Mr. Snyder shut down and is now trying to sell. They're carried on the balance sheet as "assets held for sale," but ought properly to be listed on a special line item labeled "albatrosses." In fact, if you count the preferred shares as debt, which they really are so far as the common shareholders are concerned, book-value equity has swung from $3.06 when Dickie Boy took over to a negative net worth of $7.90 per share. There is no other publicly traded book publisher in America with negative balance-sheet equity. Dick Snyder, my hero!

You can reach me by email at

cbscoop@aol.com

.

Christopher Byron tracks the financial markets for several outlets, including The New York Observer. He appreciates your feedback at

cbscoop@aol.com.