Atari to buy CE chain: opportunity to expand distribution - The Federated Group, consumer electronics chain

Atari to Buy CE Chain

The beleaguered CE chain, The Federated Group, has agreed to a $67.3 million merger with computer and video game manufacturer Atari Corp. The deal not only brings an infusion of much-needed capital to Federated, but also affords Atari the opportunity to expand its product distribution.

Atari commenced its $6.25 per share tender offer on August 28, for the 10.8 million outstanding Federated shares. The merger is subject to Atari receiving approval from Federated's bank lenders and to obtaining at least 51 percent of the chain's shares.

However, Federated's founder, chief executive officer and chairman Wilfred Schwartz, and his family-member partners, own 55 percent of the company and have agreed to tender their shares.

"The merger with Atari affords the company continued capital and expertise for the growth necessary to be a formidable competitor in the CE market,' explained Merrill Lyons, senior vice president for the City of Commerce, Calif.-based Federated.

"Federated has needed to become a certain size and mass in order to compete in the market,' Lyons said. "But in order to continue to compete effectively, the mass of stores needed to grow.'

However, Federated is not yet alluding to any immediate plans for growth once the merger is complete, and Atari is taking the same position. "First, the company will work on expanding the profitability within its existing markets,' Lyons explained.

Earlier in the year, Federated posted net earning losses in its fourth quarter, year-end and first quarter results. Federated said poor sales at its stores in economically depressed Texas and expenditure outlays required chainwide to expand contributed to the poor results.

Since going public in 1983, the 17-year-old chain has grown from 15 superstores to 68 in California, Arizona, Texas and Kansas.

In its first year as a public company, Federated posted net income of $963,000, and by its March 1986 year-end, earnings had grown to $10.7 million. The plunge came this past March as the company showed a $5.23 million net income loss.

In May, Federated announced it had restructured its bank credit lines in order to increase the company's working capital. To shore up its losses, Federated implemented some cost-conscious measures. According to Lyons, the company is still devoting its efforts to controlling costs and trying to increase sales through better-informed store employees.

The chain recently held its second training seminar, with manufacturers working directly with store personnel on product knowledge.

Federated's recent financial problems, however, do not seem to worry Sunnyvale, Calif.-based Atari. Since the manufacturer's recent financial resurgence, lead by chairman Jack Tramiel, the company has been poised for expansion and support of its computer products.

"We feel comfortable and think we can get them [Federated] profitable,' said Atari chief financial officer Greg Pratt. The cfo said Federated offered three favorable characteristics.

First, Federated was for sale, and second, Atari could get it for "a fair price,' Pratt said. And third, he added, both company's leaders have similar work philosophies.

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