‘The Grave Dancer’ : Sam Zell Looks for Bargain Buys


Sure they’re best known as “bottom-fishing investors,” “vulture capitalists” or any one of a number of bargain-hunting descriptions that usually accompany mentions of Sam Zell and the Zell/Chilmark investment fund that he shares with partner David Schulte.

Even the irreverent and zany Zell likes to refer to himself as a “grave dancer,” a description that conjures up images of the short, bearded 49-year-old financier merrily jigging over the remains of some over-leveraged, imploded corporation.

But Schulte, the more sober and corporately correct of the two Chicago-based partners, prefers to view their mission without the hype, the hyperbole--and all those adjectives.


“We’re just businessmen whose philosophy is that in today’s environment, cash is what matters,” explains the 44-year-old investment banker who has spent the bulk of his career resculpting cracked, crumbling and bankrupt operations. “If you have cash, and we do, then you can make deals. We’re making deals now, and there will be more.”

Within the last week, the $1-billion Zell/Chilmark fund made its mark on the Los Angeles deal-making scene. First, last Tuesday night, the fund apparently iced its $280-million offer for Carter Hawley Hale, the bankrupt parent of the Broadway department stores.

Two days later, the fund joined other investors in announcing intentions to bid for Executive Life Insurance Co., the troubled insurer whose investments include a huge portfolio of junk bonds for a raft of similarly teetering American businesses.

Before settling on Carter Hawley and Executive Life, Zell and Schulte spent the last year and a half scrounging among the wreckage of the excesses of the 1980s, looking for the corporate victims of the doctrine that debt is great and junk bonds are only the offerings of “fallen angels.”

Their goal is to find once-strong companies whose basic business remains solid but which are hampered by excessive debt. Their strategy is to buy out the debt holders for pennies on the dollar, convert their debt holdings into a significant controlling ownership stake and return the company to its former glory.

“The long-term objective is to reposition Broadway as the pre-eminent department store in Southern California,” Zell said in an interview last week.


“If they do it right, and in sufficient quantity, they could be the Kohlberg Kravis Roberts of the 1990s,” says Paul Debban, co-manager of the reorganized securities group at the Los Angeles brokerage Seidler Amdec, referring to the pre-eminent buyout specialists of the 1980s.

Buying cheap and selling dear has always been Sam Zell’s stock and trade. Even as a youngster living outside Chicago, this only child of immigrant Polish parents turned a profit from his mandatory attendance at Hebrew school in Chicago. Zell discovered that a racy new magazine, much prized by his pals, was available near the railroad station in Chicago. He bought Playboy for 50 cents an issue in the city and resold it for $1.50 in the suburban school yard.

While attending the University of Michigan School of Law, Zell managed apartment buildings and built up contacts in the real estate business. Although he fully intended a career in law, Zell discovered after one week at his first job that he preferred deal making to drafting contracts.

Zell’s first partner was University of Michigan fraternity brother Robert Lurie. Together the two ventured into real estate, amassing a huge portfolio of commercial, apartment and industrial properties across the country. The inflation of the 1970s increased the value of the property many fold, and by the 1980s Zell and Lurie were diversifying into industrial concerns.

Through the years, the two bought stakes in Consolidated Fibers, a fiber processor, and Commodore Corp., a mobile home maker. But Zell is perhaps best known for taking over Itel Corp.

Once a highflying computer leasing firm in San Francisco, Itel fell into Chapter 11 bankruptcy protection in 1980. It emerged two years later, a shell of its former self but with one important asset: $400 million in tax credits on its books. After acquiring a 10% stake in the company and taking over as chairman in 1985, Zell methodically purchased companies for Itel to operate and share its tax credits with. Today Itel has annual revenue of about $2 billion and Zell remains its chairman.


“Sam is influenced primarily by the Pritzker family,” says longtime friend and Chicago industrialist Marshall Bennett. “All of them buy to invest and to hold. They buy only as friends. Sam only acquires when people want to sell. He likes motivated sellers.”

Schulte made his mark in the financial world by fashioning some of the most dramatic and most publicized bailouts of the past 15 years: Chrysler Corp., Castle & Cook and International Harvester. A Yale Law School graduate and former Salomon Bros. senior vice president, Schulte calls his domain “the land of broken dreams.”

Schulte formed Chilmark Partners in Chicago--its name comes from the Martha’s Vineyard town where Schulte has a summer home--nearly 10 years ago to offer financial fix-it advice. He met Zell in 1985 when Zell needed help restructuring Itel. The two worked together on and off through the years and became investment partners in the $1-billion fund in 1990 after Lurie’s death from cancer.

The partnership’s first deal is for Carter Hawley Hale. And just as Zell likes it, Philip Hawley, chairman of Carter Hawley Hale Stores, approached the partners. He was a motivated seller.

Hawley, who has known Zell for two decades, approached his friend earlier this year with a plea for a loan to get through the year. Zell turned him down. But after Carter Hawley filed for Chapter 11 protection, the Zell/Chilmark Fund offered to buy out the company’s creditors and take control of the ailing retailer.

Last week, a key creditors committee agreed to an offer of 47 cents on the dollar, and the $280-million bid will probably get the required 70% support from the remaining creditors and bondholders. Zell/Chilmark could get as much as a 90% stake in Carter Hawley once the company is reorganized and taken out of bankruptcy.


Zell/Chilmark’s bid for Carter Hawley represents a sharp departure for Zell, who has traditionally shied away from retailing as unpredictable.

But Schulte said in an interview Monday that the pair have no intentions of stripping Carter Hawley’s real estate assets. “We want to be retailers,” he said. “Carter Hawley is an under-performing retailer with some spectacular locations that are badly in need of refurbishing. We think the stores still have a terrific consumer franchise.”

The fund has pledged $50 million toward a modernization program, and Zell said the fund could grow to more than $100 million during the next few years.

Details of the bid for Executive Life are closely guarded, and Schulte won’t comment on the partnership’s offer other than to say policyholders “will come away pretty well off.”

However, Schulte says the insurance company is just the kind of “busted company” that the partners believe can be a “winner if done right.” The lure is the company’s junk bond holdings, stakes in nearly 500 companies, many of which are in danger of bankruptcy and falling into the control of the bondholders.

The winning bidder for Executive Life--there are four bids on the table--would get immediate access to a smorgasbord of distressed companies--just the type of feast fit for vulture capitalists.


Zell/Chilmark at a Glance The Zell/Chilmark Fund has no holdings, but partner Sam Zell has been an active investor for more than two decades.

Zell/Chilmark Proposed Acquisitions

Carter Hawley Hale Stores.

Executive Life Insurance Co.

Sam Zell’s Holdings

Controls 31% of Itel.

Itel holds close to 20% of Santa Fe Pacific Corp.

Controls 74% of Great American Management Investments through partnerships.

Has interests in apartment buildings and commercial and industrial real estate.