Wendt's First Move at Conseco Leaves Many Scratching Their Heads
By Peter Eavis
Senior Writer
7/27/00 8:58 PM ET
Conseco (CNC:NYSE - news) recently got its Gorbachev, but he has yet to bring glasnost or perestroika to the ailing finance and insurance firm.
Gary Wendt joined Carmel, Ind.-based Conseco as CEO late last month to repair operations, deal with a life-threatening cash-flow squeeze and woo back investors that had fled the company's shares because of murky accounting.
But hopes that he would quickly take convincing steps to do these things were dashed Thursday evening, when Wendt presented a restructuring plan and second-quarter numbers that were so short on detail that their credibility was immediately doubted.
Short on Substance
"We wanted to give Wendt some time to give us details on what he's going to do, but today's call was very short on substance," says Colin Devine, insurance analyst at Salomon Smith Barney, which rates Conseco a hold and has done underwriting for the firm recently. Conseco is the center of a huge stock market battle between bulls, who think the firm's beaten-up stock could be a bargain, and bears, who think the firm is on its last legs, even with Wendt at the helm.
Conseco's announcement came after the close Thursday. Investors overlooked the vagueness of Wendt's presentation and bid up the stock: At 6:20 p.m. EDT, Conseco had advanced 1 9/16, or nearly 20%, to hit 9 7/16. The stock's now 70% off its 52-week high.
Reflecting $352 million in charges and special items, the company lost $404.7 million, or $1.25 per share, in the second quarter. That more than reverses first-quarter earnings of $77.4 million, or 22 cents per share. (Comparisons with 1999's second quarter are of limited usefulness, since in that period earnings at Conseco Finance, the firm's lending division, were calculated using a very different accounting method. For the record, though, Conseco made $213 million, or 64 cents a share, in 1999's second quarter.)
On a conference call Thursday, Wendt said he aims to return Conseco to its former health. He explained that he wants to transport the company "back to the future," and bring it back to its pre-1998 state. Many believe Conseco's problems began in 1998, when, under the leadership of Stephen Hilbert, who left the firm in April, Conseco acquired mobile-home lender Green Tree Financial at an exorbitant price.
Cash = King
Wendt's first priority has been to raise cash to pay off the $1.5 billion of debt that comes due in the rest of this year. To do this, the company said Thursday that it's going to sell off a raft of assets, though Wendt disputes that this constitutes a "fire sale." These assets include noncore investments like a riverboat and a stake in the wireless communications firm Tritel (TTEL:Nasdaq - news), as well as assets at Conseco Finance. Wendt said that "these items should be sufficient to manage all [loan] principal due this year and well into 2001." However, he stopped short of saying that the firm would be able to raise the cash quickly enough to pay back all the bank loans when they are meant to come due.
Costs are also going to be cut at Conseco Finance in moves that will shed some 2,000 jobs over the next few months.
The firm also announced that it had $460 million in cash at the end of June, and an executive said that it made cash flow from operations of $360 million in the second quarter, up from $315 million in the first. But Conseco's parent-company debt, a closely watched number due to cash-flow concerns, jumped to $3.63 billion in the second quarter from $2.87 billion in the first, indicating that creditors are still lending to the firm.
The $352 million of special items and charges included Wendt's signing-on bonus of $45 million, Hilbert's leaving bonus of $47 million, investment bank fees of $77 million, a $38 million charge from the sale of auto loans and a $34 million increase in the provision to cover loans made by the company to its senior execs to buy Conseco shares.
Male Bonding
Wendt also announced a complex plan to make a temporary boost to equity as a way of reversing a recent damaging rating downgrade by A.M. Best, an insurance rating company. Conseco also said it was taking $55 million of earnings-eroding reserves in its insurance business and said that bad loans were moderately rising at Conseco Finance, but didn't give numbers.
While Wendt appears to have administered some powerful medicine, observers were confused by parts of it. First, many key second-quarter numbers don't correspond with tables given to analysts and investors in previous quarters, which suggests the company is still obfuscating. The earnings release on Thursday said that the insurance operations made $154 million in the first quarter, but Conseco originally said that they made $259 million.
In addition, Devine is also questioning the company's $48 million mark-to-market loss on its Tritel investment in the second quarter. He estimates that the loss in the second quarter was as much as $200 million.
The company also didn't disclose bad-loan numbers and insurance-loss rates, as it did under Hilbert's leadership.
"A lot of people see Conseco as a great value investment, but you just don't have enough numbers to base an investment decision on," remarks Devine. |
