Cost-cutting alone won't fill Harcourt's battle-drained coffers

In May, Harcourt Brace Jovanovich Inc. fended off a hostile takeover attempt from British Printing & Communications Corporation by going $2.5 billion in debt. Now, hoping to raise enough cash to pay for the costly recapitalization plan, the textbook, entertainment, and insurance company is auctioning off its profitable magazine unit - part of its core publishing business - and selling $140 million of undeveloped real estate, company sources say.

When Harcourt took on the debt, the Orlando, Fla., company reassured shareholders that it did not anticipate having to sell any major assets, even though the costly plan tripled the company's long-term debt. Rather, management planned to raise the money it needed by massive cost-cutting and the consolidation of some of its publishing businesses.

When the ambitious cost-cutting plan was outlined, however, some experts questioned whether its goals were too lofty. One analyst was quoted as saying the company's projections ``defied gravity.''

Harcourt predicted a net income of $23 million for 1988. Not everyone, however, is as confident that this is enough. It remains to be seen whether the company will indeed be able to generate the aggressive growth needed to meet the high interest payments on its more than $2 billion debt.

With news of the auction of its magazine unit, it seems Harcourt is also beginning to doubt that ability. With the company's having lost about $98.5 million so far this year - compared with a total profit of $70.5 million for 1986 - Harcourt's chairman, William Jovanovich, is beginning to feel the severe price his company paid for independence.

The company hopes that selling this unit of its publishing division will raise as much as $400 million. It also expects a buyer to come forward by Oct. 1. Sources say the company has contacted three potential buyers in Europe. But company spokesmen were unavailable to elaborate on the sale.

Despite its shortage of cash, Harcourt's future performance still seems stable, analysts say. ``With a reasonable economy over the next five years - no oil crunch or war - [Harcourt] will do all right,'' says J.Kendrick Noble, a media analyst at PaineWebber Inc.

``Financial struggle is really the core of it. They're accepting a tough life in the short run,'' Mr. Noble says.

That includes includes curtailing capital spending growth, reducing staff by 5 to 10 percent over the next year, and postponing wage and salary increases, when possible.

Filing for bankruptcy, while acknowledged by Harcourt as a possible last resort, is highly unlikely, according to many analysts. ``Bankruptcy's always been a possibility because of the amount of debt they've taken on,'' says Bert Boksen, an analyst at Raymond, James & Associates in St. Petersberg, Fla. ``But a lot of people who don't understand the nature of recapitalization are jumping to [morbid] conclusions.''

Harcourt executives believe they can pay off the $2 billion debt because of an increase in the operating income of its publishing arena, theme parks, and insurance businesses.

But the second half of 1987 will have to be very profitable if Harcourt expects to meet this year's target.

Last year, $67 million of its $70.5 million earnings came in the second half. Three-fourths of the company's total revenue in 1986 came from its publishing operations, a major part of which it is now selling.

Despite the enormous burden a company takes on when recapitalized - when a majority of a company's equity is substituted for debt - at least seven companies in the past few years have chosen to do it to avoid acquisition. Angry investors have challenged several of these plans in court, saying it puts both management and shareholders at risk in weaker economic times.

But recapitalization is a popular corporate tool not only because it tends to turn raiders away, but because it raises share prices as well. Because it's an inside buyout, the company itself buys all the outstanding shares, and it doesn't have to sell them to the highest bidder.

And so far, companies that have recapitalized have seen their stocks soar almost immediately. ``And what is the company other than its stockholders?'' queries a takeover lawyer at a prominent New York law firm.

Many analysts insist that Harcourt's shareholders are bette off leveraged.

``The company determined that $44 per share wasn't an adequate price for the shareholders to receive ... so instead, shareholders got around $50 per share in cash, plus the company's remaining shares,'' the takeover lawyer explains.

``You're just dealing with a very highly leveraged company, whose shareholders also got a lot of cash back,'' Mr. Boksen at Raymond, James & Associates says.

When the risks of recapitalization are spelled out, it always looks horrible, analysts admit. But they also point out that Harcourt has seen no turn for the worse since mid-July.

As long as operating earnings edge out projections, says one analyst, shareholders will be pleased. By the same principle, though, if these margins slip even a little below expectations, the stocks will fall.

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