Southland Investor to Fund Zany Brainy
Kenneth J. Abdalla thinks he knows an undervalued asset when he sees one.
The Southland financier bought O.J. Simpson’s Brentwood home in 1997, then razed it in 1998 to build his own home on the site. This year, he took a large stake in struggling retailer Kmart Corp.
Now, Abdalla has agreed to provide $115 million in financing to specialty toy retailer Zany Brainy Inc. as it emerges from bankruptcy. The deal was announced Wednesday.
A former money manager at investment bank Salomon Bros., Abdalla, 37, formed Waterton Management in Los Angeles five years ago to take stakes in other businesses.
“Our specialty is finding undervalued assets and trying to grow the company. That’s the fun part for me,” Abdalla said Wednesday.
Although the Kmart deal and now the Zany Brainy investment have given him a much higher profile this year, Abdalla is intensely private about his firm and its investments.
He declined to disclose Waterton’s holdings, though he said that the firm has invested in more than 20 companies, and that about 75% of its capital has come from high-net-worth individuals. The balance has come from institutional investors, he said.
A native of the Bay Area and a graduate of the University of the Pacific, Abdalla is a close confidant of local billionaire and former supermarket magnate Ronald W. Burkle. Burkle co-founded Waterton with Abdalla, and the two men have known each other for 15 years.
“Never give up, that’s Ken,” said Burkle, 48. “He’s very persistent, very diligent, very smart, and I trust him.”
Burkle said the two men met when Abdalla was a young trader at brokerage Bear Stearns in San Francisco who repeatedly cold-called him with an investment idea.
Burkle, impressed that Abdalla was able to get through his switchboard, took him up on the idea. He said that Abdalla now manages personal money and some trust funds for him and that Burkle in turn invests in about 50% of Abdalla’s deals.
In January, the two men together disclosed they had purchased a 6% stake in Kmart, worth more than $200 million. They said they might buy as much as a 15% stake. Abdalla took a 2.5% position in the retailer. And Burkle, who owned the Ralphs and Food4Less supermarket chains before engineering their sale to Kroger Co. in 1999, took a 3.5% stake.
Kmart shares have jumped from $5.44 at the beginning of January to $10.48 now on the New York Stock Exchange.
Abdalla said he believes he has found another undervalued company in Zany Brainy. The King of Prussia, Pa.-based retailer, with 187 stores nationwide, filed for bankruptcy protection in May.
But Abdalla said he is impressed with the company’s brand, store locations and management. “In a market that is riddled by consolidation and liquidation, one brand consistently stands out in terms of providing the merchandise and shopping experience that kids love and parents trust. That brand is Zany Brainy,” he said.
With the Waterton investment Zany Brainy said it doesn’t plan any store closings or layoffs and will keep its current headquarters, according to Thomas G. Vellios, Zany Brainy’s chief executive.
Zany Brainy’s financial woes stem from a liquidity crisis brought on by an overly aggressive expansion effort begun in 2000. The firm, which sells educational toys and multimedia products, lost about $9 million last year on a failed Internet venture called ZanyBrainy.com. It also struggled after opening nearly 30 stores and buying New York-based competitor Noodle Kidoodle. Waterton’s $115-million infusion will go to pay off creditors and loans.
“We have been in discussions with Ken and his team for quite a few months,” Vellios said. “We felt with the financial resources and with the belief they have in Zany Brainy this was an outstanding match.”
Abdalla “is a strategic thinker, very thorough, very private,” said Alexander Cappello, chief executive of Santa Monica-based Cappello Group Inc., a financial advisor to Waterton. “He likes to invest for the long term and is one of the most quality deal guys in town,” he said.
Some who know Abdalla said his business strategy can best be summed up by his purchase of O.J. Simpson’s house.
“He felt it would be a bargain, that no one would bid on it,” said one investment banker who did not want to be named. “The land in Brentwood was so valuable, he would just tear down the house.”
