A `Grave Dancer' Tries To Pick Himself Up

Famed bottom-fisher Samuel Zell has landed a couple of whoppers lately. Paying 47 on the dollar, the Chicago real estate tycoon scooped up 80% of the debt of bankrupt Carter Hawley Hale Stores Inc. last October. He hopes to convert the debt into 90% equity ownership during the retailer's reorganization. In February, Zell cut a similar deal with Revco Inc.'s debtholders. Zell/Chilmark, his $1 billion "vulture fund," should wind up with about 18% of the drugstore chain.

In both cases, Zell's image as a corporate savior helped him succeed. But now, as he steps back into the spotlight, the self-proclaimed "grave dancer" is not exactly doing a jig. The reason: Zell's highest-profile turnaround, the makeover of former computer lessor Itel Corp., is turning out to be a bust.

After furiously unloading assets to cut Itel's 1990 debt of $3.2 billion, often at money-losing prices, about all that's left is its Anixter Bros. Inc. wiring business and a few short-line railroads. With Itel's size and prospects much diminished, Zell has hurt his stature as a master dealmaker--and done nothing for his bank balance. Shares in Itel, at nearly 30 three years ago, now trade at around 18. Zell, Itel's chairman and its largest shareholder with 31%, would not comment.

ABOUT-FACE. At the least, Zell's humbling experience at Itel may have taught him some tough lessons he can put to use at Carter Hawley Hale and Revco. Chief among them: the need to stay flexible. Rather than cling to his dreams of building a transportation empire, Zell wisely started selling assets before it was too late. His about-face proved critical for investors. "To his credit, he was able to get out from the situation without equity- or bondholders having to take a hit," says Brian Carrico, portfolio manager of Pilgrim Group's High Yield Trust, which owns $500,000 in Itel notes.

Zell took control of Itel in 1985, after getting a board seat and forcing out previous management. He borrowed heavily to expand Itel into a $2.1 billion operator of a half-dozen businesses, including railcar and container leasing, marine dredging, and cable wiring systems. Then everything began to come unglued. Not only was Zell caught flat-footed when leveraged balance sheets fell out of favor, but his much-vaunted ability to spot bargains seemed to have failed him.

The trouble began in 1988, when Zell agreed to pay $1.2 billion in cash and stock for Henley Group Inc.'s leasing operations and its 17% stake in railroad giant Santa Fe Pacific Corp. Itel also acquired Signal Capital Corp., a $300 million investment portfolio. Around the same time, Zell began accumulating a 20% stake in shipper American President Cos. From the day he took the helm, Itel's holdings in American President and Santa Fe lost money. And since Signal's investments are made up mainly of subordinated junk debt in small companies, Zell has been unable to unload most of those holdings.

WRONG TIME. His biggest blunder, however, came in mid-1990. That's when he agreed to buy back Henley's 38.5% stake in Itel over 12 months at prices ranging from $18 to $22 a share. Zell may have been trying to prop up the stock price, but it backfired. Coupled with big interest and principal payments due, that deal sent the stock down to 7 5/8 in late 1990. "The stock buyback was a big drain on cash at exactly the wrong time," notes Carrico.

Zell bought Itel some breathing room in early 1991 when he sold its container-leasing business for $825 milllion, a pretax gain of $250 million. Still, crimped by the recession and the need to dump more assets, Zell had to settle for small losses or at best breaking even on other divestitures. He plans to do still more whittling. "I'm basically turning Itel into Anixter," he told BUSINESS WEEK early this year.

Now, Zell is moving on to Revco and Carter Hawley Hale. He and partner David M. Schulte will sit on both boards, says Schulte, a former Salomon Brothers investment banker. Executives from both retailers insist that they're not concerned about Zell breaking up their companies or piling on debt. "Sam has a genuine long-term interest in this company," says CHH Chairman Phil Hawley. Adds Schulte: "Sam doesn't tend to sell things." Unless, as at Itel, he leaves himself no alternative.

      MARCH, 1991 Itel sells 3.8 million shares in American President Cos., losing 
      $22 million. Later, it persuades an outside group to buy 6.9% of Itel at $12.63 
      a share, a loss for Itel of $12.1 million
      JUNE, 1991 Itel sells Itel Distribution Systems, a warehouse company, for $32 
      million. Itel breaks even on this unit, pieced together over three years
      OCTOBER, 1991 Itel unloads its 15% stake in Santa Fe Pacific for $240 million, 
      a loss of about $30 million. It sells Great Lakes Dredge & Dock for $165 
      million in cash, losing some $20 million
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