Turmoil for Mr. Turnaround?

By EDMUND SANDERS

July 16, 1999 12 AM PT

TIMES STAFF WRITER

Chasing deals earned William P. Foley II a fortune, and last year the Santa Barbara investor was at the top of his game.

Foley’s fast-growing Fidelity National Financial Inc.--which he built into one of the nation’s largest title insurers--hit record profits. The Wall Street Journal put Foley on its front page, profiling his burgeoning fast-food empire, which includes Carl’s Jr. and Hardee’s. Ever on the lookout for new deals, the hard-charging entrepreneur bought a stake in the Orange County investment banker, Cruttenden Roth Inc.

But as Foley is learning, the warmth of Wall Street’s approval can turn chilly fast.

In just one year, most of Foley’s best-known investments--ranging from title insurance to restaurants to information technology--have turned sour. Stock prices of seven Foley-run companies have lost, on average, half their value since July 1998. By comparison, the Standard & Poor’s 500 index has risen about 20% over the same period, while the Russell 2000 index of smaller stocks is up 0.5%.

Irvine-based Fidelity National is down 47%. Anaheim-based CKE Restaurants, parent of Carl’s Jr., lost 62%. Micro General Corp., a Tustin-based information technology firm controlled by Foley, fell from $6 a share last year to $3.25 as of Thursday.

Some Say Market, Not Foley, to Blame

Analysts say Foley shouldn’t take the declines personally, but the negative trends have nevertheless bruised his hard-earned reputation as a builder of companies and a corporate turnaround specialist.

“When your stocks go up, you’re a genius,” said Allan Hickok, an analyst at U.S. Bancorp Piper Jaffray in Minneapolis. “When they go down, you’re an idiot. I’d say the chorus from investors who are skeptical about Bill Foley’s collection of companies is definitely getting louder.”

Some question whether the energetic 54-year-old Foley is spreading himself too thin or chasing too many deals, causing investors to lose faith.

“Why can’t Foley just focus on one company,” asked one stock observer on a Yahoo message board this week.

There’s more than just Foley’s reputation at stake. The value of his personal stock holdings in several of those companies is down an estimated $88 million over the past year, primarily because of the declines in Fidelity National and CKE, according to company financial statements. Based on Thursday’s market close, Foley’s stake in the seven companies was worth more than $130 million, documents show.

Foley, who is traveling in Europe this week, did not make himself available for comment.

His supporters and colleagues say the stock drops are no reflection on Foley. Rather, they say, the declines represent an unfortunate convergence of unrelated market forces that have hurt his portfolio.

“Fundamentally, his companies are running strong,” said Andrew Puzder, Foley’s attorney and coinvestor in several of the stocks. “We just need the market to catch up and acknowledge that.”

Fidelity National, he said, is suffering from the same cyclical declines of other title insurance companies, caused primarily by rising interest rates and a concern among investors that the refinancing boom is over. Fidelity National stock fell from an all-time high of $39.14 a share last July, to $20.19 on Thursday. Fidelity National’s cross-town rival, Santa Ana-based First American Financial Inc., experienced a nearly identical 50% stock drop over the same period, Puzder noted.

Separately, investors in Foley’s CKE Restaurants have grown frustrated by the company’s slow progress in digesting its 1997 acquisition of Hardee’s, where sales continue to fall. After missing its first-quarter earnings expectations, the company watched its stock fall to $15.13 as of Thursday, down from $40 a share last July.

And the stock slumps at Foley’s other companies, including Santa Barbara Restaurant Group, Micro General, American National Financial Inc. and money-losing restaurant chains Checkers Drive-In and Rally’s Hamburgers, are largely attributable to the stock market’s current preference for large companies and Internet stocks, according to Byron Roth, chairman of Cruttenden Roth, the Irvine stock underwriting firm that is 18% owned by Foley’s Fidelity National. That has hurt the kind of small companies and value stocks that Foley tends to buy.

“Small company stocks are out of favor right now,” Roth said. “But it’s a marathon. Bill is making investments for the long run.”

Puzder also notes that despite the recent downturns, many of Foley’s companies have outperformed the market during the 1990s. An investor who bought $100 of Fidelity National stock on Jan. 1, 1990, would have nearly $1,050 today, or almost triple the gains of the S&P; 500. Even CKE stock is up 135% during the same period, despite the recent decline.

Still, some say Foley’s self-described “addiction” to deal-making may play a role in his stock troubles. A West Point graduate who has applied his military training to running companies, Foley may be making deals faster and more aggressively than investors like to see.

‘Labyrinth of Corporate Entities’

Foley’s restaurant operations are a case in point: In his efforts to cobble together the nation’s fourth-largest fast-food chain, Foley has bought, sold, merged and renamed so many small restaurant companies in recent years that it’s difficult for investors to keep track of the ever-changing strategy.

For example, Foley tried to merge Checkers and Rally’s in 1997, then scraped the idea, then revived it again last fall.

In 1996, CKE moved into buffet-style restaurants, then abruptly spun off the operation two years later.

When Foley bought Hardee’s, he planned to convert the stores into Carl’s Jr., but then he dropped the idea in favor of reviving the Hardee’s brand.

In addition, Foley has forged numerous joint ventures among his restaurant chains and several of his companies own stock in one another, blurring the lines of where one company stops and the other begins.

A recent example: In January, Santa Barbara Restaurant Group gave about 2.5 million shares of its stock to Fidelity National in exchange for 2.2 million shares of Rally’s stock and 274,000 shares of CKE stock. At the same time, CKE holds an 8.4% stake in Santa Barbara Restaurant and a 37% stake in Rally’s, according to recent financial statements.

Confused?

“It’s sort of a Byzantine labyrinth of corporate entities,” Hickok said. “It confuses investors. . . . But Foley is a deal guy. Some deals work out and others he spins off. He’s like a bridge player. He gets some cards that don’t work out, so he shuffles them off to the left or the right.”

Moves at Fidelity Called Into Question

Foley’s deal-making strategies at Fidelity National also have been controversial. In an effort to diversify Fidelity away from interest-rate sensitive businesses, Foley has said he wants to branch out into new directions. But some of the diversification has come in the form of stock investments into other Foley-run companies, making Fidelity National look more like an investment firm than a real estate information company.

In addition to the 18% stake in Cruttenden Roth, Fidelity National owns 78% of Micro General, 29% of American National Financial and almost 37% of Santa Barbara Restaurant. Fidelity also holds stakes or warrants for stock in CKE Restaurants, Rally’s and Checkers.

“That’s not really diversification--that’s running an investment portfolio,” said Todd Pitsinger, analyst at Friedman, Billings, Ramsey in Arlington, Va. “Investors don’t want to pay Bill Foley to run their investment portfolio. They can do that themselves. They want him to run his business. They like clean [investment] stories.”

Still, Pitsinger said he doesn’t believe that Fidelity National’s equity investments have grown large enough to hurt--or help--Fidelity’s stock price, which be believes has dropped because of rising interest rates.

Mark Stewart, chairman of Irvine-based ocstocks.com, which tracks Orange County companies, said the recent stock declines in Foley’s companies may be a friendly reminder from shareholders that he should finish implementing his existing deals before embarking on new ones.

“Sometimes deal-makers get ahead of themselves,” Stewart said. “It may be a good idea to digest what he’s done.”

Stewart said Foley also may be a victim of his own success. Foley’s track record for building Fidelity National from scratch and turning around the once-troubled Carl’s Jr. may have led investors to hold unrealistic expectations of what he can do and how quickly he can do it.

“Sometimes stocks and investors get ahead of themselves too, and that may be what has happened,” Stewart said.

Foley, however, shows no signs of slowing. Chairman of six of his companies and chief executive of the two largest, Foley recently told a colleague that he views the recent stock declines as an “opportunity” for more deals.

“He doesn’t have the personality to move slow,” Roth said. “I don’t think he has two speeds.”

Times staff writer Edmund Sanders can be reached at edmund.sanders@latimes.com.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Losing His Touch?

Some of William Foley’s biggest investment bets--ranging from title insurance to hamburgers to technology--came up short over the past year. Stock prices at seven Foley-run companies have lost, on average, half their value.

Company: American National Financial

Position: Chairman

Foley’s stake: 5.0%

Value as of 7/15/99: $1,634,559

Stock performance 7/16/98 thru 7/15/99: -24%*

Company: Checkers Drive-In

Position: Chairman

Foley’s stake: 1.9%

Value as of 7/15/99: $476,051

Stock performance 7/16/98 thru 7/15/99: -71%

Company: CKE Restaurants

Position: Chairman/CEO