Murdock Betting That Castle Shares Stage Comeback
If David Murdock gets what he wants--which he usually does--stock in his Castle & Cooke Inc. could quickly be worth a lot more than its current $29.75-a-share price.
But Wall Street is growing impatient with the 67-year-old Murdock and with his plans to sell Castle’s main unit, Dole Food. Although analysts say the true value of Castle is between $35 and $50 a share if Dole is sold, the waiting game has become too much for some traders to handle--especially in a bear market.
So Los Angeles-based Castle’s stock has drifted down from $38 in August, though it recently bounced back from a low of $26.25 on Oct. 12.
The decision to jettison Dole dates back to May, 1989, when Murdock announced that he was looking for a way to separate Dole from Castle’s other business, Castle & Cooke Properties, a major land owner and developer in Hawaii, California and Arizona. Murdock’s basis for splitting the firm was the classic 1980s argument: Separately, the two units would be better understood and thus more highly valued by investors. And besides, real estate is Murdock’s first love.
Initially, Murdock considered spinning off the Dole unit to shareholders. But by May of this year, Castle seemed doubtful of getting the Internal Revenue Service’s OK for a tax-free spinoff. Also, crumbling real estate values threatened to make it impossible for the realty unit to stand on its own without a cash infusion.
Realizing that, Murdock announced July 12 that rather than spin off Dole, he would try to sell it. The news sent Castle stock to $36 from $30 overnight. But here we are, three months later, and no sale. Carol Klein, spokeswoman for Castle, declined to rule out other conceivable turns in the Dole saga, but she said, “It’s safe to say that we’re focusing all of our attention on the possible sale.”
Everyone agrees that Dole is a great franchise, and that it should attract a host of potential bidders--Philip Morris, Chiquita Brands and any number of European or Japanese food giants. Since he took control of Castle in 1985, Murdock has built Dole into the world’s top distributor of fresh fruits and vegetables--from pineapples to bananas to pistachios. Sales last year topped $2.5 billion, or 92% of Castle’s total revenue.
Most important to any buyer, Dole ranks among the lowest-cost produce growers and distributors in the world, says Scott Greiper, managing analyst of the Spinoff Report research service in New York. That’s key to Dole’s future success in a world of falling trade barriers, he says.
What is Dole worth? Greiper figures a fair bid would be $2.8 billion. After taxes and repayment of Dole debt, he sees a net benefit of $24 per Castle share.
Meanwhile, he values the realty unit at about $14 a share. Larry Selwitz, analyst at Cruttenden & Co. in Newport Beach, is more conservative with the realty business, valuing it at about $11.
At rock bottom, $24 a share for Dole and $11 for the realty arm adds up to $35 a share in value in Castle, or 18% above the current $29.75 price.
There are two major risks, however. First, if no bidder surfaces despite Dole’s attractions, Castle stock will have to trade on its fundamentals. Selwitz estimates that Castle will earn $2.20 a share next year, bolstered by Dole’s growth. That puts the stock at 14 times 1991 earnings--a bit pricey.
Second, Murdock’s goal in selling Dole is to raise enough cash to finance the realty business. That unit needs $500 million to $600 million to refinance debt and to complete two huge luxury resorts on the Hawaii island of Lanai, where Castle owns 89,000 acres, Greiper says.
In the current banking crisis, even Murdock may have trouble getting real estate loans. Selling Dole would bring the cash he needs to do whatever he wants--for years to come--with Castle’s Hawaii land and its 20,000 acres in California and Arizona.
So as a Castle shareholder, after the Dole sale you would be solely in the real estate business with Murdock, like it or not. He owns 23% of Castle, so in theory his interests should be in sync with his shareholders’. Yet it’s unknown how much, if any, of the Dole windfall Murdock might pay out in cash to Castle shareholders. And should the global real estate slump deepen in 1991, it’s unknown how far down Wall Street might push Castle stock.
One other possibility here is particularly intriguing. Greiper believes that rather than sell Dole alone, Murdock might back a so-called Morris Trust transaction: Another company would buy Castle in its entirety for stock, then spin off the realty unit with Murdock at the helm.
The advantage to Castle is that a Morris Trust transaction would be tax-free. Murdock, meanwhile, would still end up with his plum: the realty business.
However this tale shakes out, it’s worth remembering that Murdock has been a highly regarded wheeler-dealer for 45 years. He usually comes out ahead. Unfortunately, one of the few times he stumbled was when he bet too heavily on real estate, as a builder in Phoenix in 1964. That market collapsed from overbuilding, and a Murdock-owned bank did likewise.
It may be ironic that Murdock wants to return to his real estate roots in a market as fraught with danger as this one. Castle shareholders can be forgiven if they start feeling a little deja vu .
FRESH FRUIT--TO GO
The stock of Castle & Cooke has slid as investors have grown impatient with the company’s delay in selling or spinning off its Dole Food subsidiary.
Castle & Cooke, weekly NYSE close, except latest Tuesday: 29.75
