Buy This Firm; They’ll Throw In an Island
For sale: The Hawaiian island of Lanai and assorted real estate on Oahu and the U.S. mainland.
Price: About $316 million in cash, and the assumption of $273 million in loans.
Sales pitch: If you buy the real estate holdings at market price, you may be able to sell off all the real estate except the island of Lanai to finance the transaction, winding up with a Hawaiian island for free.
The catch: You have to get past wily Los Angeles businessman David Murdock, who has staked out this deal for himself.
Murdock has an agreement to purchase Los Angeles-based real estate development firm Castle & Cooke Inc., which owns Lanai, in a deal valued at nearly $600 million.
Murdock, 77, one of the nation’s richest individuals, who likes to brag about how he doesn’t have an MBA degree or even a high school diploma, also happens to be chairman and chief executive of Castle & Cooke.
A committee of Castle & Cooke outside directors--individuals who are not company executives--has agreed to the deal, provided someone else doesn’t come up with a better offer by July 6.
But some shareholders suspect the deal is simply a financial plot by Murdock to gain undisputed control of 98% of Lanai at a bargain price. And they are hoping another bidder comes along--soon. Murdock has said that his plan, which would make the publicly traded Castle & Cooke a private company, would ease development of the company’s real estate holdings, including Lanai, freeing the company from the pressures of meeting quarterly profit targets set by Wall Street.
Castle & Cooke shareholders look at the beauty and romance of Lanai--it’s where Microsoft Corp. billionaire Bill Gates got married in 1994--and say they fail to understand how it could be worth as little as $60 million--the value of Castle & Cooke’s Lanai holdings as assessed by Wall Street investment bank Bear Stearns & Co., hired by the company to review Murdock’s offer
“Clearly this island has tremendous value,” said Bob Marks, former attorney general of Hawaii and one of several parties challenging the deal in court.
There’s ample evidence that the company’s assets--Lanai and varied residential and commercial real estate in Oahu and the Southwestern U.S.--are worth far more than what Murdock has offered. Indeed, Castle & Cooke faces eight separate lawsuits over Murdock’s plan.
“I feel we are paying a pretty good price,” Murdock said in an interview.
Murdock said people look at Castle & Cooke’s holdings in Hawaii--mostly abandoned pineapple fields--and assume they are worth a fortune. But in reality, he said, “tens of thousands of those acres could never be developed. The state wouldn’t allow it. People don’t realize that you can walk on that land but that is the extent of what you can do with it.”
Others disagree.
“The question is not whether or not people see value in this deal, it is whether or not they can do anything about it,” said Craig Silvers, an analyst with securities firm Sutro & Co. in Los Angeles. “I think it is a case of plenty of people with money to do this deal but don’t want to, and plenty of people without the money but who want to.”
The reason, Silvers said, is a virtual line Murdock has drawn in the sand of Lanai’s beaches. He owns 27% of Castle & Cooke’s shares and has said in regulatory filings that he won’t sell his holdings. Moreover, Murdock said he will fight efforts by anyone who tries to purchase Castle & Cooke.
“He’s trying to scare away other bidders,” Silvers said. “If you want to buy something for the lowest price, that is a smart strategy.”
How to value Lanai is key to the deal. In its report, Bear Stearns notes that one appraisal, from The Hallstrom Group Inc., said the island was worth $160 million. On its balance sheet, Castle & Cooke has assigned a $230-million value to the island. But based on what Murdock is offering to pay, the price tag for the Lanai portion of the company pencils out close to the $60-million estimate.
That’s not that much more than the combined value of Murdock’s 15-bedroom and 17-bathroom Bel-Air mansion and his 12-room apartment in New York City, including furnishings.
Once the world’s largest producer of pineapple, Lanai is 141 square miles, making it the sixth largest of the Hawaiian Islands, according to the Hawaii Visitors & Convention Bureau.
A Neighbor to Maui
It was formed by an extinct volcano and is 50 miles southeast of Honolulu and just nine miles from the popular tourist island of Maui.
The island’s 47 miles of coastline are typically sunny, but mist forms up the slope of the island’s 3,400-foot peak. Temperatures average in the 70s.
Lanai’s reliance on pineapple has steadily declined, with the last major fields closing in 1993 to make way for other crops, ranching and resort development. About 100 acres of planted pineapple fields remain on what was once called the Pineapple Island, primarily for the benefit of tourists.
About 3,000 people live on the island, most near Lanai City, the only town.
The landscape ranges from rolling fields to steep, eroded lava gorges. Mesquite brush grows in thickets near some of the beaches, giving way to tall Cook pines on the mountain heights. Manele Bay and Hulopo’e Bay offer prime snorkeling and diving spots. Axis deer, imported as game a century ago, graze in the highlands.
Some have speculated that the island might represent paradise for a billionaire seeking a private vacation refuge.
Murdock gained control of Lanai when he purchased a major stake in Castle & Cooke, which owned Dole Food Co., and became its chairman in 1985. Dole owned 88,000 acres, or 98%, of the island. The remaining 2% is owned by homeowners and the county and state governments. Following a variety of corporate gyrations, ownership of the island remained with Castle & Cooke after it spun off from Dole as a separate company in 1995.
His vision was to transform Lanai into a tourist resort, and he has built two exclusive hotels, the Lodge at Koele and the Manele Bay Hotel.
But first Murdock had to oversee a transformation of the island, which had suffered from years of Dole’s benign neglect.
Murdock persuaded the few thousand residents of Lanai City to launch a community housecleaning, removing abandoned cars, painting homes and planting flowers. He even had the company provide residents with plastic trash cans.
Then Murdock invested in the island’s infrastructure, improving the power grid, sewage-treatment system and water supply.
All that spending hurt Dole’s balance sheet, forcing the company to write off $168 million for its Lanai investment in 1995.
Since abandoning pineapple, Dole and Castle & Cooke have never made much money on Lanai, said Riki Hokama, an island native and member of the Maui County Council, which also has jurisdiction over neighboring Maui and Molokai.
“Whoever owns the property in the end still has obligations to the community and the government,” Hokama said. “Everything from the parks to bypass roads to affordable housing to creating job opportunities.”
Development is difficult on Lanai. Fresh water is tightly regulated. The airport can’t handle large commercial jets. Its remoteness, seen by many as an asset, also adds to the cost of improvements.
For that reason, Bear Stearns noted that Lanai’s highest value to a buyer might be as a tax deduction, where the owner would give it to a government or a charitable organization such as a nature conservancy.
Nonetheless, shareholders represented in the lawsuits, and other large holders contacted by The Times, would like to see Castle & Cooke’s board more aggressively shop the company.
“This is a beautiful island that would be nice for someone to have in their real estate portfolio,” Marks said.
Analysts watching the sale of Castle & Cooke say they’re not surprised the deal looks good to Murdock, whose practices in the buyout game have long been controversial.
Murdock acquired textile manufacturer Cannon Mills of Kannapolis, N.C., in a $413-million leveraged buyout in 1982. He used $50 million of Cannon’s own cash to finance the deal.
After convincing the work force to abandon its union, he sold the company to Fieldcrest Mills for $250 million in cash and assumed debt in 1985, keeping real estate valued at $150 million and a division of the company. Analysts said the deal resulted in a tidy profit for the Los Angeles financier.
Later, The Times reported that Murdock had used assets from the mill hands’ pension fund to finance a bid to take over Occidental Petroleum Corp. When Occidental bought its stock back from him at a $60-million premium, Murdock kept the profits. Meanwhile, he had terminated the pension fund and bought annuities to finance future obligations to retirees. The California firm handling the annuities later collapsed.
Murdock Settles Suit
The Amalgamated Clothing & Textile Workers Union filed suit on behalf of retirees. Murdock, while denying any wrongdoing, eventually settled for an undisclosed sum.
Analysts and even major shareholders who would like to see a bidding war break out say that in the end, Murdock is likely to wind up with Castle & Cooke because of his proven track record in playing corporate hardball.
Moreover, Silvers said, “there’s an impression on Wall Street that the board is going to favor Murdock” over other bidders.
For his part, Murdock discounted notions that he is getting a bargain and said he wonders why no one else attempted a buyout when shares were trading in the $12 range in the weeks before he made his offer. His price of $18.50 a share is more than a 50% premium.
Perhaps the best possibility of a well-financed challenge would come from the billionaire Tisch family, which has about 10% of Castle & Cooke’s shares. In a Securities and Exchange Commission filing, the family said it might make an offer.
Meanwhile, back on Lanai, some residents are surprised that Murdock even wants to maintain control of the island. “People expected that he would have got his money back and left already,” said Letty Castillio, who has lived on Lanai for the last 35 years.
