Sam Zell: "Amateur Night"
Matthew Swibel, Forbes Magazine, 10.29.01
In real estate, Sam Zell always turned steel into gold. Then he decided to get into the restaurant business.
Most everyone thought Samuel Zell was nuts to invest $19.5 million for 29% of an ailing restaurant chain in 1997. Chart House Enterprises blew budgets, violated loan agreements and lost $31 million on revenues of $151 million that year. The company lost $10 million in 2000, after restructuring charges related to restaurant closings and construction delays. Zell originally paid the equivalent of $5.75 a share. Now the stock trades at 87 cents.
The billionaire realty tycoon is losing money there but making some of it back on the side. In late 1999, when Chart House had less than $500,000 in the bank and $23 million in debt after acquiring New York's Angelo & Maxie's Steakhouse, Zell agreed to bail it out. He bought subordinated notes totaling $13 million on terms that were extremely generous--to himself. Zell receives 18.6% (Libor plus 16%) annual interest on $5 million in loans and, until June 2001, got 12% on $8 million of unused credit. That month he made another save--and another killing. Few investors bit when Chart House, hungry to pay for expansion but starved for capital, offered $9 million in convertible preferred stock. Zell purchased two-thirds of the offering at $2.25 a share, collected a $400,000 fee for his generosity and raised his stake to 38%. "I thought I was a shareholder," says Zell, "not the ultimate source of capital."
Who's he kidding? Without his purse, Chart House would have shriveled long ago. To finish construction on a new restaurant 30 miles northwest of Chicago, the public company took the unusual step of trying to raise $2.7 million through a private placement last month. The promised return: up to 18%, plus a profit-sharing kicker.
Profitability looks about as likely as a 2001 World Series in Chicago. The company's hands are tied by an agreement with FleetBoston, ING and BNP Paribas, which prohibits Chart House from funding any new restaurants. (The company has already spent $200,000 or more on the one north of Chicago, but says it's not violating this rule.) The lid on expansion comes at a particularly bad time. Andrew Barish, a restaurant analyst at Banc of America Securities, expects same-store sales to decline 5% to 10% this year at restaurants relying on business expense accounts, an important revenue source for establishments such as Angelo &Maxie's and Morton's. Chart House's revenues, on a same-store comparison, were down 3.6% in the second quarter.
Zell might ride this one all the way to the bottom. But he could probably sell the chain now, says Barish, at up to six times operating income (net before depreciation, interest, taxes and non-recurring items)--$54 million. After paying the banks, Zell's share would be $18.5 million, a $12.4 million loss on his total investment. An expensive lesson for anyone but Zell, and worse for other investors, who'd get about $1.35 a share. |
