So What If He Can't Dance? Herb Siegel Knows How To Make Money for Holders
July 17, 1989
NO MATTER what the ultimate outcome of the great Time-Warner-Paramount shoot-out, Herb Siegel will do very well. And so will shareholders of his company, Chris-Craft Industries. But that's not exactly hot news. For Herb Siegel has been doing very well for some years now and so have Chris-Craft shareholders: In less than two decades, the value of their holdings has increased by a mere 30,000%.
As things stand, when the dust clears and the lawyers stop bickering, Chris-Craft could wind up, thanks to the bunch of Warner stock it has accumulated, over $2 billion richer. Even these days, that's nothing to sneeze at. And while it took odd and unforeseeable turns of events-Time's proposed merger with Warner, which prompted Paramount's hostile bid for Time and then Time's offer for Warner for Chris-Craft to cash in on its gain, it was no accident that the company was in the right place at the right time. For Siegel has made an art of spotting values before they are generally recognized and then cleverly exploiting them.
In doing so, Siegel often attracts no little rancor and lots of ill will. That certainly has been true of his relations with Warner, which, ironically, he first got involved in back in 1984 as a putative white knight to fend off the advances of press lord and all-around ogre Rupert Murdoch. The cordiality between Siegel and Steve Ross, Warner's chairman, barely survived Murdoch's retreat from the scene. By 1987, things had reached the spitting stage between the two moguls, and Chris-Craft, which owns 17% of Warner, was weighing a proxy fight for control.
The jostling between Ross and Siegel was grade-B Hollywood. Faced with the loss of his company, in which he characteristically had very little personal investment, but from which he drew an incredibly lucrative compensation package. Ross called up the reserves. A celluloid contingent, led by Steven Spielberg, Clint Eastwood and Barbra Streisand, took up the cudgels for Ross. In one famous salvo, Streisand threatened to leave Warner forever if Ross were deposed and contemptuously asked, "Who is this guy Herb Siegel? Doesn't he run a boat company?" As it happens, Siegel was in showbiz when Steve Ross was still in funeral parlors
Moreover, despite the retention of the famous powerboat name, since 1980 Chris-Craft has been strictly a corporate landlubber, whose principal claim to fortune is billions of dollars worth of entertainment assets. Warner is by no means the first movie-plus company to catch Siegel's eye. Earlier, he had made passes at Paramount and 20th Century-Fox. In each instance, his interest translated into capital gains for Chris-Craft's stockholders.
As intimated, Siegel's forays have not earned him unstinting admiration from entrenched managements whose pursuit of happiness was suddenly placed in jeopardy by his attention. During the spat over Warner, for example, he was portrayed by the incumbents-his admirers say unfairly-as a penny-pinching nitpicker, who lacked whatever it took to run a giant entertainment conglomerate. To which Mario Gabelli, who, after Siegel, is Chris-Craft's largest shareholder, sniffs: "Warren Buffett can't run a company, either, and he's made $4 billion. Herb's in that category."
Besides their anomalous and enjoyable role as guests at the Time-Warner-Paramount takeover feast, Siegel and his company are worthy of investors' note, as is Chris Craft's majority-controlled United Television. While Chris-Craft shares have risen smartly in reflection of the potential gains from its Warner holdings, United Television shares remain, by some measures, undervalued by investors. And, for that matter, there are wrinkles in the Warner picture that promise to redound to Chris-Craft's favor that seem to have escaped Wall Street's notice.
Siegel is, to allay any doubts, human and his performance as a corporate investor has not been an unbroken string of triumphs. The most conspicuous of his failures was his acquisition of a large stake in Piper Aircraft in 1969 and the subsequent years of frustration spent trying fruitlessly to take over that company. He wound up a loser in the battle for control and less than a winner on the investment front. However, more recently, he has displayed a sure touch. Not the least of his shrewd moves was Chris-Craft's buying in over half its own stock between 1978 and 1983, at, needless to say, a mere fraction of what the shares fetch today.
Although Siegel had first gained prominence in Hollywood with a profitable thrust at Paramount, he made his initial big killing in moviedom via a sally into 20th Century-Fox, around the end of the 'Seventies. Gradually, Chris-Craft built up a 22% interest in 20th Century, causing enough discomfort to draw a $45-a-share greenmail offer, which it turned down. Eventually Siegel sold out to Marvin Davis for $60 a share, walking away with $75 million, and more important, perhaps, 22% of United Television (enough for control), which Fox had spun off to shareholders.
In 1984, Siegel made his debut at Warner. In a friendly deal to thwart Murdoch, he swapped a minority interest in Chris-Craft's broadcasting operations for 19% of Warner and subsequently enlarged that position by buying shares in the open market. That was the origin of Chris-Craft's golden holdings of Warner.
What has Siegel wrought? Primarily, a rich and growing portfolio of interest in entertainment enterprises. An industrial division posts yearly revenues of around $20 million and operating income of $2 million or so, but Chris-Craft's true value rests in its 57.5% owned BHC subsidiary (the rest is owned by Warner). In turn, BHC is a blend of television operating units and equity interests in other concerns, notably Warner and United Television.
More specifically, BHC operates TV stations in Los Angeles and Portland, Ore. It also boasts securities convertible into 33,112,974 shares of Warner, roughly 15.4% of the total outstanding. Finally, BHC lays claim to 50.2% of United Television (of which, for the record, I own some shares). United Television, for its part, has five TV stations and owns 3,479,769 shares of Warner (that's about 1.6% of the latter's equity). One way or another, Chris-Craft thus controls 36,592,743 Warner shares. Based on the bid by Time of $70 a share, Chris-Craft's stake in Warner is worth a cool $2.56 billion. No wonder, then, that Chris-Craft, without taking sides, last week asked permission from the Delaware Chancery Court to intervene in the legal battle over Warner.
Chris-Craft is particularly worried about the fate of the 15.2 million preferred shares that make up a big chunk of its Warner stake. It's filed a suit in a New York state court asking that Time be forced to amend terms of its bid, which is for only about half of Warner's common shares. This means that Chris-Craft probably would get the $70 payment for only half of the shares it tenders. The rest of its shares-including the preferred-would be returned, but only as common. This, the company contends, would violate its rights as a shareholder.
While that case is still pending, the Delaware Chancery Court Friday rejected Paramount's challenge to Time's takeover of Warner. However, Paramount plans to appeal to the Delaware Supreme Court.
Evaluating United Television and BHC takes more than a little work. United Television's four profitable stations have cash flows of about $35 million a year. Salvatore Muoio at Gabelli & Co. estimates their private market value at around $550 million and reckons the fifth station, which was started from scratch in 1983, would bring $30 million. United Television's Warner stock is worth another $244 million (at $70 a share). All together, that adds up to $70.36 a share. Subtracting $63 million for capital gains taxes on the Warner stock leaves $64.63 a share. So, at $35 a share, United Television is thus selling for only 54% of what it might bring from a private buyer. Once the Time-Warner deal is completed, it wouldn't be surprising to see Chris-Craft or United Television buying in the latter's shares.
BHC's 50.2% interest in United Television, using the above assumptions, commands a value of $357 million. Its two TV stations are worth about $450 million, and the 33 million Warner shares another $2.32 billion. Subtracting debt of $140 million brings the grand total to $2.987 billion. Capital gains taxes on the Warner stock reduce that to $2.33 billion. So Chris-Craft's 57.5% of BHC is worth about $1.34 billion. Add in $30 million for the industrial division, subtract $20 million for debt, divide by 30 million shares and each Chris-Craft share is worth $43.90. The market has been catching on to this. Since the Time-Warner-Paramount story first began making headlines, Chris-Craft shares have moved up from the mid-30s to around $40.
In its eagerness to merge with Time, Warner made a key concession to Chris-Craft-BHC can now sell its Warner stock without offering it back to Warner. Furthermore, Warner must unload its BHC stock. In a nutshell, Steve Ross and friends can either sell it to Chris-Craft or a third party, or spin it off to shareholders. A spinoff seems unlikely since a highly leveraged Time-Warner could probably use the cash. Warner will owe $50 million -- $125 million in taxes on the divestiture either way, so a sale would at least bring in money to pay the IRS. For example, buying BHC at a $300 million discount, not unreasonable considering the company's size, would add $10 a share to Chris-Craft's value. Because Warner is under the gun, it's in a rather weak negotiating position.
And Herb Siegel just loves to negotiate when the other side is under pressure to sell.
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