From the WSJ (Heard on the Street column) -
interactive.wsj.com
Some of Black's Picks Show
Even His Timing Can Be Off
By ROBERT MCGOUGH
Staff Reporter of THE WALL STREET JOURNAL
Leon Black of Apollo Advisors made a lot of money this decade snapping up distressed companies on the cheap. But lately, his timing is off: Some of these companies have run into financial problems after he bought them.
Take Mariner Post-Acute Network, an Atlanta nursing-home chain that was supposed to be the linchpin of a nursing-home empire for Apollo and Mr. Black. Turns out it is Mariner that needs some acute care: Its stock price has shriveled to what stock traders call "drill-bit range" -- just 1/2 a share in New York Stock Exchange trading Tuesday. Last year, Mariner traded for more than 20.
Mr. Black paid $186 million for a stake in Mariner in late 1997. The current value of his roughly 19% stake? About $7 million.
While Mariner is the biggest loser for Mr. Black and the investors in Apollo's limited partnerships, several other investments also are struggling -- including Converse, Atlantic Gulf Communities and Foamex International.
Apollo maintains that it hasn't lost any of its magic. Through a spokesman, the New York firm acknowledges that the investments have been a problem. But with the exception of Mariner, they are only minor annoyances, Apollo says. Apollo manages $10 billion, and has returned an additional $6 billion in realized profit to investors. And investors in its partnerships have still gotten terrific returns, the firm says.
Apollo's 65% stake in Converse, the North Reading, Mass., maker of not-so-in-demand basketball shoes, has been a victim of a slump in the entire athletic-shoe business. Converse, the No. 5 sneaker maker, has suffered more than most. The company lost money in each of the past four years, including a loss of $23.5 million, on revenue of $308 million, in 1998 -- and it isn't even an Internet stock. The stock price, which has fallen to 3 5/8 on the Big Board, traded over 25 briefly in early 1997.
Two years ago, an Apollo real-estate partnership bought preferred stock and warrants in Atlantic Gulf Communities for $25 million. The stake, according to Carson Group, which tracks institutional shareholdings, was convertible into 9.91 million shares of Atlantic, a residential real-estate developer in Miami, with 19 properties in the Southeast. Atlantic Gulf, which emerged in 1992 from the reorganization of General Development, failed to meet net-worth requirements last year and was delisted from the Nasdaq Stock Market. If Apollo converted its holdings into Atlantic Gulf stock today, those shares would be valued at $6.2 million.
Finally, Apollo long has been a shareholder in Foamex International, the Linwood, Pa., maker of polyurethane foam. Foamex is controlled by financier Marshall Cogan, an old Drexel Burnham Lambert client. As previously reported, some Foamex subsidiaries aren't in compliance with some financial covenants on their debts, which raises "substantial doubt about the Company's [Foamex's] ability to continue as a going concern," according to a Foamex filing with the U.S. Securities and Exchange Commission. The company has been seeking amendments to those covenants.
Mr. Black has a lot more experience buying into troubled companies than having his investments go bad on him. He learned of profiting from financially strapped companies when he worked at Drexel Burnham Lambert. There, Mr. Black, co-head of investment banking, engineered mergers that were financed by Michael Milken's junk-bond machine. Both Mr. Milken and Drexel paid hundreds of millions of dollars in fines to the SEC for securities-law violations. Drexel eventually collapsed and the junk market crashed.
But Mr. Black, who wasn't charged with wrongdoing, has thrived. He set up Apollo initially as a vulture investment firm, and made a killing buying back, at fire-sale prices, many of the same junk bonds that Drexel had originally underwritten. Since then, Mr. Black and Apollo also have gotten into the buyout game, and also sometimes buy large stakes in companies, often alongside management.
Apollo, in its defense, says the partnerships that invested in Converse and Foamex have gained more than 40% annually. And despite the hit from Mariner, the partnership that holds it has had annualized returns of more than 30%, Apollo says. Those returns are before the often-considerable fees and expenses that investors pay. Apollo wouldn't provide the net return to limited partners.
Converse, Apollo says, was a spin-off from a larger investment, Interco, on which Apollo doubled its money. Converse says it was hit hard by the shift in fashion away from basketball shoes, its specialty, but it sees hopeful signs that the trend has bottomed.
A spokesman for Foamex says, "Our 1999 results show we're achieving continuous improvement and increased sales, and we fully expect Foamex to be a profit-generating and growing entity for the long term." Foamex earned $6 million, or 24 cents a share, in the first three months of 1999, after a loss of $96.2 million, or $3.84 a share, in the final three months of 1998.
As for Atlantic Gulf, Apollo says it is a $25 million initial investment in a $2.5 billion real-estate partnership, and the firm expects Atlantic Gulf to rebound and eventually give it a 20% return on its investment. Atlantic says that $5.6 million of its $9.4 million loss last year (or 77 cents a share) was due to accrual of preferred-stock dividends -- Apollo is a holder of preferred -- and the company is exploring strategic alternatives with investment bankers.
Mariner is a problem, Apollo acknowledges. In the first three months of this year, Mariner has a loss of $79 million on revenue of $615 million. Earlier this month, its chairman and chief executive officer left for another health firm, and the company hired Bear Stearns to explore "restructuring alternatives." Then, last week, the chief financial officer left for another job.
Apollo says Mariner was the victim of drastic cutbacks in reimbursement rates by federal agencies to nursing homes, and that most companies in the industry are also suffering.
Mariner referred questions to Apollo.
Apollo isn't one to quickly trade in and out of stocks. As it did with Mariner, Apollo often takes large stakes in companies, often with privately placed securities. Just Tuesday, Apollo increased its stake in United Rentals, an equipment-rental company, by buying $100 million in "perpetual convertible preferred stock," which doesn't pay a dividend but which is exchangeable for 3.3 million shares at $30 a share. United Rental stock closed Tuesday at a price of 29 3/16 on the New York Stock Exchange. When Apollo obtains private stock, it often has to register the stock in order to sell it, a time-consuming process, a spokesman says.
But sometimes it is really handy to have a quick exit available. Jeffrey Vinik, the former skipper of Magellan Fund, was also intrigued by Converse. His investment firm bought Converse stock early in 1997, according to Carson Group, but sold the stock a few months later after it had made some big gains. Mr. Vinik, who once was a block trader, is known for a rapid-fire trading style.
An investor in Mariner who got out was Ron Baron, of Baron Asset Management. "We lost a quick 30% on our money," Mr. Baron says candidly. He bought in because he thought Mariner was "trying to provide more care than had previously been provided" to Medicare and Medicaid patients. "I had faith in" the chief executive who has since departed.
But cutbacks in Medicare and Medicaid reimbursement rates for nursing homes struck particularly hard at companies, like Mariner, that had taken on debt. Mariner was left with "Herculean tasks, given the amount of leverage and the change in reimbursements. So we sold."
Apollo is probably wishing it had done the same thing.
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