Intermark Specialty Is Complexity
With last week’s announcement that its Pier 1 holdings might be sold, La Jolla-based Intermark faces the unusual prospect of selling what company executives call their crown jewel, the retail chain that generated 25% of Intermark’s estimated $1 billion in 1988 revenue.
But the possible sale is even more unusual because it and a string of other proposed and recently completed sales would reduce Intermark’s annual revenue by a total of $650 million.
The sale of Pier 1 and Los Angeles-based Continental Graphics, when combined with the completed sale of Simplicity Patterns, would leave as Intermark’s largest operating company National Airmotive, an Oakland-based turbine-engine repair company with $90 million in 1987 revenue.
A Complex Firm
To outside observers, the flurry of divestitures is in keeping with the La Jolla-based mini-conglomerate’s unusual and sometimes unfathomable blend of unrelated businesses.
Because of the firm’s complexity, only one industry analyst regularly follows Intermark.
“The majority opinion among analysts is that we’re just too damn complex,” Vice President Mitchell Woodbury acknowledged Friday. Because of Wall Street’s disinterest, Intermark executives think their stock is undervalued.
But there is a growing awareness at Intermark’s corporate headquarters building in La Jolla that the company needs to spend more time wooing the investment community.
‘You Have to Hustle’
Intermark’s 24 executives have “been on the move” with acquisitions and divestitures, Woodbury said. “But we’re also aware that, over the past 10 years, we haven’t actively hustled the industry analysts. It’s clear to our board that, if you’re going to play in the big leagues . . . you have to hustle and court those people.”
Intermark recently hired a New York-based investor relations firm to help it attract investors. Charles R. (Red) Scott, president and chief executive, will spend more of his time “presenting dog and pony shows,” Woodbury said.
That could be a tough task because Intermark’s eclectic blend of businesses “makes it difficult for analysts to get their arms around the company,” according to Irving Katz, director of research for Thomas Green/San Diego Securities. “As a result, you’ve got to take their word for what’s going to happen in a lot of their businesses.”
Diverse Holdings
Besides printing, specialty retailing and sewing-pattern design companies, Intermark in recent years has owned all or part of real estate companies, a sporting goods chain, a metal fabrication business, the turbine repair company and garden and nursery chains.
The confusion is exacerbated by the fact that, unlike traditional holding companies that have wholly owned subsidiaries, Intermark typically owns controlling interests in other publicly traded companies.
For example, Intermark, which is traded on the American Stock Exchange, owns only 50% of Pier 1, which is traded on the New York Stock Exchange. Intermark owns as little as 41% and as much as 100% of its nine partner companies.
Deals With Partners
Some of Intermark’s businesses--including Simplicity Patterns, which recently was sold for $117.5 million--are held through Intermark’s 41%-owned Triton Group subsidiary, which is itself a publicly traded company.
Intermark also has created confusion through fairly complex deals negotiated with its partners: Intermark once sold its Nurseryland garden centers to Pier 1 for more stock in the retail company. Intermark also traded several of its printing operations to Triton, itself a holding company, in exchange for Triton stock.
Analysts also are leery of Intermark’s erratic annual earnings, which swing from a net loss to a net profit, depending on whether the company has sold assets during the previous year.
‘Can Be Disconcerting’
Intermark has, for example, reported $26.1 million in net profits in three of the past five years--but reported $5.6 million in net losses in the other two years.
“That can be disconcerting to a lot of people,” acknowledged Lawrence Klamon, Fuqua Industries president and a member of the boards of Trident Group and Pier 1, Intermark’s two most successful companies.
But Intermark executives expect some of that confusion to end when its gets its hands on the cash from the sale of Pier 1 and Continental Graphics.
With those two sales, and already-completed deals, Intermark “is looking at the possibility of accumulating a vast amount of cash,” according to Vice President Woodbury. That cash would be used to buy more businesses that could propel the company “into the big leagues,” according to Woodbury.
Closer to the Cash
Intermark took a step closer to that pile of cash in February when Triton sold Simplicity for a $40-million gain.
The continuing flurry of activity at Intermark is just part of the acquisitions and divestitures that have occurred at the company since 1970, when Scott became president and chief executive. Since then, Intermark has bought and sold holdings in more than 30 companies, according to Woodbury.
Intriguingly, Intermark, whose stock closed unchanged Monday at $10.875, did not initiate the proposed sales of its Simplicity, Pier 1 and Continental Graphics holdings. In each case, Intermark was approached by an interested buyer.
“If you had asked me a week ago if Pier 1 was for sale, I’d have said definitely not,” Klamon said last Thursday. “But we’re in business to make money for the stockholders, and when people start knocking on your door with prices that look to be really good, you have to listen.”
Style Developed in ‘60s
Intermark developed its unusual style in the late 1960s after evolving out of Southwestern Capital Corp., a San Diego-based company that made loans under a federal license from the Small Business Investment Corp.
Scott gained control of Southwestern and changed its name to Intermark in the late 1960s, when his Roberts, Scott & Co. stock brokerage made a $2.9-million investment in Southwestern.
But Scott ran into regulatory problems when he requested Securities & Exchange Commission approval to turn Southwestern into an operating company instead of a lender. Intermark eventually cleared the regulatory hurdles, but its troubled operating companies, one of which entered Chapter 11 bankruptcy proceedings, remained burdened with a staggering debt load.
By 1975, Intermark had solved its financial problems. Scott then began the company’s complex series of acquisitions and divestitures.
Paid Off in Long Run
Intermark turned out to be a good investment for shareholders who were willing to stick with Scott for the long run. Even with the Oct. 19 market crash, a $10,000 investment made in 1975 would have grown in value to $1.7 million by the end of 1987.
Intermark’s 1988 net income will be relatively low, but with the possible sale of its Triton and Pier 1 holdings, “there’s the potential for 1989 earnings to be absolutely huge,” said Klamon, who remained on the boards of Pier 1 and Triton after Atlanta-based Fuqua sold its interests in the two companies to Intermark.
U. S. industry analysts might not feel comfortable with Intermark’s business strategy, but New Zealand investor Ronald Brierley--whose Industrial Equity (Pacific) Ltd. recently initiated a hostile takeover bid for CalMat, a large Los Angeles-based construction material company, now owns 6.6% of Intermark.
Unlike CalMat, which has sold assets to fend off Brierley’s attack, Intermark’s Woodbury described relations with Brierley as friendly.
“We’ve had several constructive talks with his people in Mr. Brierley’s La Jolla office,” Woodbury said. “They’ve made it clear to us that they like our situation and philosophy, that they’re long-term investors.”
‘We’re Bulletproof’
That friendly atmosphere is dictated by the fact that Intermark insiders and directors own 45% of the company’s stock. “We’re bulletproof,” according to Woodbury.
Of course, not all of Intermark’s “partner companies” have been successful. Triton recently sold its interest in Kentucky Electric Steel, a financially troubled operation that “cost shareholders many millions of dollars,” according to Intermark’s annual report.
In 1969, Intermark acquired Topaz Inc. for Intermark stock. Intermark spun off 36% of the company in 1979, realizing an after-tax gain of $2.2 million. Intermark sold its remaining interest in 1983 for $15.6 million in cash and 581,000 shares of Square D common stock. That stock was subsequently sold for a $2.4-million gain.
Intermark reported a $7.6-million gain on the sale of Anthem Electronics, which it acquired in 1971.
Intermark’s latest wave of restructuring began in late February, when the company hired Drexel Burnham Lambert to analyze several unsolicited inquiries about Continental Graphics.
