Dallas Concern Raises Stake in First Executive : L.A. Insurer Known for Its ‘Junk Bond’ Investments Could Be Taken Private
A quiet Texas investor has upped the ante in a high-stakes poker game at First Executive Corp., where 1960s go-go fund operator Fred Carr has dealt the cards for nearly 15 years.
Carr is the innovative and controversial chairman of the Los Angeles-based life insurance concern, which is known for its single-premium deferred annuities and its investments in “junk bonds” promoted by Drexel Burnham Lambert Inc.
The Texas player is Rosewood Financial Partners, a private investment concern in Dallas that manages oil heiress Caroline Rose Hunt’s nearly $1-billion fortune. Her assets include the prestigious Bel-Air Hotel.
Publicly traded First Executive could end up a private company as a result of its affluent new investor. Last week, Rosewood bumped its stake in First Executive to 7.5% from the 6.2% stake initially reported Aug. 26.
No Reason Given
In the first 13D filing on its stake, Rosewood dropped the word that it might seek to take the Los Angeles-based insurance holding company private. At the same time, it made soothing sounds about not intending to do anything against the wishes of management.
The recently amended filing with the Securities and Exchange Commission offered no reason for the increased holding. Rosewood would need approval of state insurance regulators to top 10%.
Meanwhile, heavy trading in First Executive stock since late August indicates that some Wall Street institutions and other investors believe that something will come of Rosewood’s gambit.
The stock, which not long ago traded for around $11 a share, quickly moved up to $15 after Rosewood’s filing and has remained fairly steady at that level. (The stock closed Friday at $15.125, up 12.5 cents.)
The recent price increases, however, have been overshadowed by the trading volume. More than 5 million First Executive shares changed hands in over-the-counter trading in the first week after Rosewood passed the 5% threshold, three times the previous week’s volume. Another 3 million shares were traded the second week after Rosewood disclosed its stake. And Rosewood’s increased stake boosted the trading again last week, with more than 4 million shares changing hands.
A lot of money is riding on the question of how the Carr management will react to Rosewood’s ideas. Carr himself has declined to comment publicly on Rosewood’s filings.
Carr has been known as a shrewd operator of businesses since the late 1960s, when he steered Enterprise Fund to a pre-eminent position among the hot mutual funds of the day. He departed in 1968, in time to miss a big drop in its shares and an SEC complaint that it failed to keep its records up to date.
More recently, he has been applauded by some and criticized by others for trading the holdings of his insurance firm’s portfolio in the manner of a mutual fund operator.
Another cause of unfavorable publicity for Carr is his close association with junk bond king Michael Milken and Drexel Burnham Lambert. First Executive has made good profits with its investment portfolio loaded with the high-risk, high-yield bonds that Milken sells for corporate clients.
With Rosewood breathing down his neck, Carr might need assistance from the investment banking world if he undertakes some countermove of his own in the future. However, David E. Nelson, senior vice president and director of research for the Baltimore securities firm of Legg Mason Wood Walker, said last week that he has received a clear impression that Carr is amenable to listening to Rosewood’s proposals.
Also, a source close to the situation has told The Times that Rosewood representatives met with Carr at their request several weeks before the first 13D filing. Carr limited himself to showing the visitors public material on First Executive, the source said. The only subsequent contact was a “courtesy” telephone call on the afternoon before Rosewood filed a report with the SEC on its First Executive stake, according to the source. Rosewood said it has met with the Carr management but gave no details.
Since Rosewood’s filing, First Executive escaped even peripheral mention in the Securities and Exchange Commission’s recent insider trading suit against Drexel, Milken and others. Analyst Nelson said a beneficial result was to remove the uncertainty that hung over First Executive during the protracted Drexel investigation.
Meanwhile, Wall Street tea-leaf readers have been pondering Rosewood’s style and track record for clues to its intentions toward First Executive.
The 4-year-old investment firm has ponied up more than $67 million for its stake in First Executive stock, which many analysts claim is undervalued, and the Dallas firm has hinted strongly that it has its own ideas for boosting the value of the investment.
Caroline Hunt’s firm said it might seek to work with First Executive management to explore ways of achieving that goal, including “a going-private transaction or business combination consistent with the goals of both management and shareholders.”
At the same time, Rosewood stressed, it wasn’t “contemplating taking any actions which (the First Executive board) opposes.”
Such things are subject to change, as many corporate chiefs have learned.
No Active Role
As long ago as last March, Rosewood filed with federal regulators for clearance to increase its First Executive holdings above $15 million and up to 15% of the stock. However, it did not make its move above 5% for five months.
Rosewood was created by the Caroline Rose Hunt Estate Trust. Beneficiaries of the trust are Hunt and her family. She takes no active management role, a company spokesman said.
What stands out in Rosewood’s four-year history is an uncharacteristic takeover offer in July last year to publicly traded Phillips-Van Heusen. After gradually accumulating the stock for two years, Rosewood had accelerated its holding to 20% and made a $340-million bid for the rest of the company.
The shirt maker perceived the offer as both inadequate and unfriendly.
Within a month after the company countered with anti-takeover moves, however, Rosewood cashed in its chips, selling the stake for a handsome profit after a rise in the target’s stock price.
Rosewood’s current investments in public companies run largely to stakes in convertible preferred shares that pose no takeover threat to management.
But now, with its stepped-up campaign in First Executive stock, Rosewood’s strategy has apparently taken a new turn.
Mark W. Hobbs, Rosewood’s president, who is credited in large measure with formulating its investment strategy, consistently declines to be interviewed.
“First and foremost, (Rosewood’s managers) generate all their own investment ideas,” commented Bruce Benteman, an analyst for Wealth Monitors, a research firm in Kansas City, Mo., that studies the investment strategies of the very wealthy.
Noting that Hobbs is Rosewood’s main investment idea man, Benteman said the firm has shown it is not necessarily a passive investor and is “not afraid to put out a lot of money in a specific deal,” such as Phillips-Van Heusen and First Executive.
“They are very private,” Benteman said of Rosewood. “They just want to do their own thing.”
Institutions hold an estimated 50% of First Executive’s stock, including several money management firms with bigger holdings than Rosewood’s.
Most notably, Rosewood’s stake is far less than the 20% owned by ICH Corp., an ailing insurance holding company based in Louisville, Ky.
Carr has been considered friendly to ICH and its chief executive, Robert T. Shaw, and last June it did not oppose ICH’s $12-a-share tender offer for part of First Executive’s stock. ICH managed to double its prior stake in the company.
But friendliness has its limits, and ICH agreed not to purchase more than 25% until 1993. Meanwhile, ICH’s heavy debt and decimated stock price has led it to seek a merger with still another insurance firm.
Just two days before Rosewood disclosed its 6.2% First Executive stake, ICH agreed to be acquired by Conseco Inc., a fast-growing insurance firm based in Carmel, Ind. Conseco, which is one-tenth the size of ICH, also has piled up a huge debt from a binge of big acquisitions.
The Rosewood and ICH stakes in First Executive pose possibilities for either cooperation or cut-throat competition.
It’s not known whether Conseco would be willing to sell ICH’s massive chunk of First Executive stock to someone else interested in a First Executive buyout.
Some analysts say Conseco has too full a plate to be in any position itself to try to swallow First Executive, even if it should harbor that idea.
But Gloria Vogel, an analyst with Bear, Stearns & Co. in New York, says Conseco must be considered along with Rosewood, and she is waiting to see if Conseco will be friendly with First Executive.
And Michael J. Morrissey of Firemark Insurance Research described Conseco Chairman Stephen C. Hilbert as “an extremely bold and ambitious fellow who’s not going to stop (making acquisitions) until he is knocked down a peg.”
The major players are keeping their cards close to their vest, but some industry observers believe that Rosewood will engineer a First Executive buyout with the cooperation of Carr.