Ugly Duckling Chairman Still Interested In
Buyout
By ANNE BRADY
Of DOW JONES NEWSWIRES
PHOENIX -- While institutional investors are disappointed that Ugly
Duckling Corp.'s (UGLY) board was unable to clinch a deal to sell all
outstanding shares to chairman Ernie Garcia at a premium, they may be happy
to learn that he remains interested in buying out the company sometime down
the road.
"I certainly wouldn't rule it out," Garcia told Dow Jones Newswires. "I see
long-term value there, and I will remain interested in buying the company or
continuing to increase my stake."
Garcia on Monday withdrew an offer that had been before Ugly Duckling's
board since April to purchase all the shares he doesn't own for $2 per share
in cash and $5 in subordinated debentures. That $7 offer was at a 71%
premium to the company's stock price in April. Garcia already holds a 56%
stake in the company he founded in 1992, a used car dealership chain which
targets low-income customers and those with credit problems.
In withdrawing the offer, Garcia cited the events of Sept. 11 and the related
uncertainty in the economy. He told Dow Jones Newswires that in addition to
the hammering Ugly Duckling's stock took following the terrorist attacks, it
could be more difficult to borrow money in this economic environment. And
that would be exacerbated if he took the company private, reducing liquidity.
"It's one of those things where we sit back and ask, 'What if the Duck's ability
to borrow is impaired?' " Garcia explained. "The better the balance sheet, the
better the liquidity, the easier it is to borrow. The liquidity would have been
less (after a buyout)."
Institutional investor Orin Kramer, of Kramer Spellman LP, said he
understands Garcia's decision. "From his perspective, he behaved reasonably
(in withdrawing the offer)," said Kramer. "From my perspective, as a major
shareholder ... it is not understandable why the board sat on the offer so long.
That was not in the interest of shareholders.
"Obviously, shareholders would have been well served if the board had
accepted Garcia's offer in a timely fashion."
Garcia said the board committee examining the deal had to take extra care
"making sure it was fair," in part because of shareholder lawsuits claiming the
offer was inadequate. That extra care included hiring U.S. Bancorp Piper
Jaffray to evaluate the offer. Garcia disclosed that he and the board "literally
were within days of signing a definite agreement.
"Right around Sept. 11, we were very close to reaching an agreement," he
said.
Institutional investor Jim Benson with Harris Associates LP said he, too, is
"disappointed that something didn't transpire."
However, he is optimistic about the company's long-term prospects, given its
dominance of its niche.
CEO's Strategy To Improve Earnings
Chief executive Greg Sullivan said his strategy for improving earnings includes
broadening his dealerships' inventory mix and improving marketing and
advertising campaigns to spur sales. He said the company also will continue to
tighten its credit criteria, while still serving its niche market.
"Everything is relative. We may require a higher down payment or loan less
money to the people with bad credit," Sullivan said. "We're making it harder
for people to buy cars."
In the second quarter, Ugly Duckling reported a 69% decline in profit,
compared with the year-ago quarter. The company said that its provision for
loan losses charged against earnings rose to 31% of originations from 27% in
the second quarter of 2000. Ugly Duckling also sold fewer cars in the quarter,
which Sullivan said partly had to do with a business environment in which
people are reluctant to go into debt.
The Phoenix company's stock, which had been trading for about $4 most of
this year, dropped to a 52-week low of $2.52 on Monday. It rose Tuesday,
the day after Garcia announced he was withdrawing his offer, to close at
$2.92. It traded recently down 2 cents at $2.90.
"I was surprised it went down so much Monday on very low volume. It was
probably somebody just looking to get out," proposed Garcia.
Garcia made an offer last fall to buy back the company for $8.50 per share in
cash and indebtedness. He withdraw that offer rather quickly, stating that he
didn't believe his offer would be accepted. A stock analyst said at the time
that investors didn't like the deal because too much ($6 a share) was in the
form of subordinated debt. At that time, Garcia held a 36.5% stake in the
company.
After withdrawing his offer last year, Garcia filed documents with the
Securities and Exchange Commission stating that he may consider a new
proposal to acquire shares in the future. He indicated in interviews then that he
was merely keeping his options open.
Under both of Garcia's offers, Sullivan would have had an option to buy a
20% interest in the company.
-By Anne Brady, Dow Jones Newswires; 602-258-2003;
anne.brady@dowjones.com |
