Mid-Size Firms May Find It Easier to Raise Capital
When a company needs capital, the options often aren’t very extensive. A firm can borrow from a bank, find venture investors or, for the relative few, make a public offering of debt securities or stock.
On Thursday, the Securities and Exchange Commission is expected to approve a rule change that may make it easier for many companies--including medium-size operations--to raise money longer term. The shift will be slow, but the expected SEC change may ultimately go a long way toward linking capital-needy firms with big investors. And that could be extremely important in Southern California, home of an astounding number of mid-size firms.
The change involves so-called private placements. Until now, the SEC has limited the ability of many firms to place large bond or stock offerings privately--with limited paper work--in the hands of big institutions such as pension funds. The SEC wanted companies to maintain a high level of financial disclosure, and it wanted to discourage institutions from high-risk investments.
The private placement market has grown in spite of those restrictions, largely because many of the players that could meet the SEC’s qualifying rules found the private placement market to be a lucrative one. Now, the SEC is expected to remove many of the restrictions on such placements.
The advantage of private placements: A company can negotiate a debt or stock deal directly with one or a handful of big investors, thereby saving on many of the costs of public securities offerings--including SEC registration fees, some lawyers’ fees and underwriting fees.
The potential disadvantage: Big investors are likely to demand a high return on the securities. Even so, by removing its restrictions, the SEC will at least give more companies the option of figuring where they can get the best capital deal.
Lloyd Greif, Sutro & Co.’s investment banking chief in Los Angeles, believes that the private placement rule change may mean that “a lot fewer companies will be going public because they have a viable alternative in private placements.”
But Tom Weinberger, managing director of Oppenheimer & Co. in Los Angeles, said many established private firms may still find that they’re more comfortable selling securities to the public than dealing with a few big investors. Given the size of the stake involved, a big investor in a private placement becomes “the elephant perched on the shoulder” of the company owner, he notes--and some owners can’t stomach that.
Recluse Investing: James J. Cotter, one of the Southland’s most respected investment pros, spends as little time as possible in the public eye. His admirers say he’s too busy making money.
Now, Cotter is inviting the public to join the next phase of his plans for Los Angeles-based Craig Corp., the investment shell that he runs. Craig plans to offer 1.6 million new Class A shares of stock. The cash raised apparently will put Cotter in position to launch fresh investment forays.
Craig already has about 4.58 million shares outstanding on the NYSE. But in reality, Craig hardly trades. Tuesday, all of 1,000 shares changed hands, and the stock closed at $16.25, off 12.5 cents.
That thin “float” partly is a result of Cotter’s near-legendary status: Many of the 1,200 shareholders who own Craig don’t want to sell. And Cotter himself controls 38% of the stock.
The 52-year-old whiz has made his mark running the fortune of the reclusive Michael Forman. The Forman empire, estimated at $500 million by Forbes magazine, was built on California real estate and movie theaters (Pacific Theatres Corp.). Cotter, an ex-IRS trial attorney, has multiplied Forman’s wealth and his own.
As always, Cotter declined to be interviewed. But he has no shortage of fans. “The man is incredibly bright,” says Robert Blake, general partner of ESA Associates, a Newport Beach investment firm. Blake goes so far as to put Cotter in “the William Simon category,” referring to one of the most astute investors of the 1980s.
Cotter took control of Craig Corp. in 1985, when the company was a struggling consumer electronics operation. What Cotter has done since is reduce Craig to a shell investment company--his vehicle for taking large stakes in other companies.
In the fiscal year ended Sept. 30, Craig’s revenue totaled just $9.7 million, including fee income and proceeds from asset sales. But thanks to the share of earnings Craig realizes from its investments in other companies, net income for the year totaled $9.1 million, or $2.07 a share. In 1986, earnings were just 18 cents a share. What Craig Corp. owns:
* A 50% stake in the 100-store Stater Bros. supermarket chain, which dominates fast-growing Riverside and San Bernardino counties.
* A 34% stake (recently raised from 20%) in Reading Co., which owns some Philadelphia real estate, energy operations and other assets.
* A 9% stake in Citadel Holding Corp., parent of Fidelity Federal Savings of Glendale.
What makes this package attractive is the value of the assets, variously estimated to be worth $20 to $25 or more per Craig share. So why does the stock trade for just $16.25? Mainly because no one is sure when any of the asset values might be realized. Cotter has made millions wheeling and dealing but he can be a patient man.
The Citadel stake, for example, was acquired by Craig at an average price of $55.33 a share in the late-’80s. The stock now trades at $42.25.
Meanwhile, in his personal portfolio (outside of Craig) Cotter has made what to date looks like a losing investment in developer Del Webb Corp. Cotter is waging a proxy fight to shake up Webb.
Yet it’s tough to knock Cotter’s record with Craig. At $16.25, the stock is down from a peak of $26 last year but is double the $8 of late-’88.
So now comes Cotter with his plan to sell 1.6 million new shares via Paine Webber Inc. Craig says the proceeds would be used to pay off debt.
Howard Rosencrans, an analyst at H. D. Brous & Co. in Great Neck, N.Y., believes Cotter is up to one thing only: “He’s building a war chest.” Cotter loves to ferret out undervalued assets. Where he’ll strike is anyone’s guess. And that’s a big part of the risk if you invest in Craig: Given Cotter’s stake, the firm is, for all practical purposes, his baby alone. What’s more, the new Class A shares will have 1/30th the voting power of the current stock--so Cotter won’t be giving up any control.
Even so, for investors who’ve always wanted to ride with a genius, the Craig offering may prove tough to resist. And with 38% of the company, Cotter needs little extra incentive to keep his investing record intact. “He’s an empire builder,” said Rosencrans. “The way he’s going to get richer is through the stock.”
Briefly: Neutrogena Corp. stock is likely to get smashed today: The firm said late Tuesday that earnings in the quarter that will end April 30 will be about 50% below year-ago levels because of soft sales. . . . Teledyne’s spinoff of its Unitrin insurance unit will happen Friday. The new stock will begin trading over the counter on Monday.
THE PRIVATE PLACEMENT BOOM
Debt issues (non-convertible)
Number of Dollar amount Year issues (billions) 1985 1,485 $54.3 1986 1,851 99.1 1987 2,104 111.5 1988 2,291 144.3 1989 2,009 137.2
Common stock
Number of Dollar amount Year issues (billions) 1985 435 $9.46 1986 296 9.71 1987 325 12.83 1988 308 13.19 1989 314 23.07
Source: IDD Information Services
