White Knight In A Black Hat?

Great American Communications Co. wasn't exactly a trophy property when financier Carl H. Lindner acquired it in 1987. Its earnings were falling, and its revenue growth was slow. But where others saw a foundered hulk, the Cincinnati millionaire and quintessential bottom-fisher saw a sunken treasure. Known at the time as Taft Broadcasting Co., it owned five TV stations and 15 radio stations in some of the fastest-growing markets in the country, including Tampa and Phoenix.

Unfortunately for Lindner, Great American never quite lived up to his great expectations. Instead of reaping huge rewards, Lindner has spent the past six years scrambling to cushion his losses--often at the expense of Great American shareholders, say some investors and even brokers who used to sell Great American stock. Company filings with the Securities & Exchange Commission show that Lindner repeatedly tapped the cash-strapped Great American for management fees and huge dividends and shuffled the company's assets to other Lindner affiliates.

DILUTED STOCK. Shareholders' biggest complaints against the 74-year-old Lindner, though, stem from Great American's prepackaged bankruptcy, which was approved by the courts on Dec. 23. The reorganization wiped out the holdings of a majority of shareholders. That's not unusual in a bankruptcy, since holders of common stock are the last in line behind creditors. What's different in this case, shareholders allege, is that Lindner used Great American to acquire much of the company's bonds before the bankruptcy. That left Lindner and his closely held holding company, American Financial Corp., in firm control of Great American. "I didn't know I'd been had until after the prepackaged bankruptcy was announced," says James K. Arthur, an investor who lost over $100,000 on the stock.

Lindner and AFC decline to comment on the shareholder allegations. But a source close to AFC asserts Lindner did everything possible to turn around Great American and salvage shareholder value. Meanwhile, the painful odyssey of Great American is far from over. While the SEC won't comment, Lehman Brothers Inc. confirms that the SEC is investigating the sale of unregistered Great American stock handled by the securities firm in 1989. Lindner used the block to buy a chunk of Great American's bonds, but the stock issue diluted the value of existing shareholders' stakes. Representative John D. Dingell (D-Mich.) has twice written the SEC--mostly recently on Sept. 27--for a report on the transaction.

Lindner first became involved with Great American when he purchased 16% of Taft Broadcasting between 1986 and 1987 to help ward off a hostile takeover by a group led by Robert M. Bass, the Texas financier. Later in 1987, Lindner bought most of the company. With broadcasting ad revenues rising, he figured Taft would be a prize addition to his eclectic business empire, which ranged from Provident Bancorp to Chiquita Brands International, the banana giant.

The deal wasn't cheap, however. Lindner paid a staggering $1.5 billion, or 14 times cash flow, to acquire 70% of the company's common stock. Much of the amount came from $670 million in bank debt and $560 million in high-yield bonds underwritten by Drexel Burnham Lambert Inc. Lindner, who renamed the company Great American, became chairman and CEO.

FADING HOPE. The timing of the deal couldn't have been worse. After the purchase, an economic slowdown crippled advertising. "We knew it was in trouble almost immediately," says a former Drexel investment banker. A year after the acquisition, Great American posted operating income of just $44 million, almost $100 million short of what it needed to meet its interest payments. For a while, Lindner acted as if he could still pull off a turnaround. To support Great American's over-the-counter share price of roughly $10, he bought nearly 5 million shares from 1987 to early 1990.

But as the company's fortunes crumbled, Lindner's optimism seemed to fade. Unable to generate enough cash flow to meet Great American's debt obligations, he began selling assets--mostly to other Lindner-owned companies. Some shareholders complain that some of the asset purchases siphoned value from Great American. "This is another example of money going from one pocket to another," says Walter Giss, an investor who lost $80,000. During recent bankruptcy negotiations, creditors raised questions about the propriety of the asset sales, though they could find nothing illegal with the deals, says one.

The asset shuffling was extensive. Lindner's AFC and its affiliates, for instance, bought $80 million worth of old Taft real estate, including a hotel in New Orleans and Great American's headquarters building. In November, 1989, Great American sold its Mid-Continent Casualty Co. to AFC for $80 million. Great American booked a $9.4 million loss on the deal.

In SEC filings, AFC says that all the transactions were reviewed by investment bankers for fairness. Gregory C. Thomas, Great American's chief financial officer, also says all the transactions were done to benefit Great American and that the company received fair-market value for each of the assets.

STOCK WOES. But asset sales weren't the only sore point with shareholders. Despite Great American's cash shortage, Lindner collected between $20 million and $30 million a year in dividends on his preferred stock, according to filings with the SEC. He also sold back to the company a chunk of preferred stock for $30 million in 1988. What's more, Great American paid AFC $2 million to $3 million a year in various fees for everything from casualty insurance to portfolio management, according to Great American proxy statements. Some investors believed Lindner was harvesting what cash he could before the company went under. "It was like running into a burning house and saving your TV set," says one creditor. Thomas argues that Lindner and AFC were entitled to the amounts collected.

Despite the efforts to pay down debt with asset sales, Great American continued to spill red ink. And before long, Wall Street turned bearish. Great American's stock tumbled more than 75% in 1990, to less than $2 a share, and its bonds were following suit.

With much of the company's nonbroadcasting assets sold, Lindner decided to reduce his company's debt by buying up its bonds. And to finance the strategy, Great American engineered debt-for-equity swaps. The first occurred in October, 1989. Lindner repurchased $50 million worth of Great American bonds from Lehman. To pay for them, Great American gave Lehman a block of 3.65 million unregistered shares worth $44 million. Much of the stock was sold to individual investors on Oct. 11. Some brokers say Lehman paid an unusually generous commission of $1 a share.

In a lawsuit filed against Great American and Lehman in U.S. District Court in Chicago in September, 1992, some shareholders--including ones who bought part of the Oct. 11 issue--say they were never informed ahead of time of this debt-for-equity transaction, which ended up diluting their holdings. Some brokers also claim that they were led to believe that Lehman was pushing the stock because Great American was an undervalued company. "We were deliberately misled," fumes Paul Warehall, a former Lehman broker whose clients bought about a million shares of Great American stock.

Indeed, the shareholder suit also claimed that Great American purposely issued unregistered stock because it didn't want to "risk highlighting the company's financial problems through public disclosure" in a prospectus. Great American and Lehman insist the offering was legal and that the stock didn't have to be registered because it was a debt-for-equity swap and therefore exempted. A Lehman spokesman denies that the firm misled clients, saying that Lehman felt Great American shares were a good buy.

In December, a Chicago federal appeals court upheld a lower court's decision to dismiss the case because it wasn't filed within the one-year federal statute of limitations. Neither court ruled on the merits of the allegations. Terrence Buehler, the attorney for the shareholders, says he plans to file an appeal with the Supreme Court. If that fails, Buehler says he will refile the complaint in Illinois state court, which has a longer statute of limitations.

Meanwhile, the October, 1989, stock sale has drawn the attention of the SEC. Warehall says he gave sworn testimony to the agency in mid-1992. At the time, he says, an SEC official also told him that they were "trying to link that with a broader conspiracy to defraud" investors. A source close to AFC says the company was also questioned by the SEC last year, but the company hasn't been contacted by the agency since then. Lehman, too, says that it has been questioned by the SEC and that it's cooperating fully with the agency.

If the SEC believes Lindner violated securities laws, the consequences could be unusually serious. Without admitting or denying the charges, Lindner has already signed two consent decrees with the agency on previous dealings involving AFC, and he could face contempt charges for violating the orders. The latest decree was signed in 1979 following sweeping SEC allegations, including charges that he and AFC failed to disclose to shareholders several sweetheart loans to insiders at AFC.

Whatever legal uncertainties swirl around the stock offering, what happened to Great American afterward is no secret. Short-sellers began raiding the ailing company's stock. The short position in Great American rocketed to 2.6 million shares by mid-February, 1990, from 22,000 in September. That was roughly 25% of the shares not held by Lindner interests. As if that weren't bad enough, the 1992 shareholder lawsuit contended that many of the short-sellers borrowed the shares they were selling from Lehman. That left shareholders wondering how Lehman could promote the stock to investors while simultaneously lending it to short-sellers who were betting that the share price would plunge. The securities firm declines to comment on the episode.

BRAVE FACE. Even though Great American's stock was falling, Lindner remained bullish--at least in public. During the first two weeks of 1990, Lindner made what seemed to be a last-ditch effort to support the stock price with open-market purchases of 1.4 million shares for about $12 million. In his chairman's message in the 1990 annual report, Lindner hailed strategies the company was using "to improve profitability and build shareholder value." The stock, however, continued to dive.

If shareholders were counting on Lindner to persevere on their behalf, they were badly disappointed. By July, 1992, Great American and its creditors, including Continental Bank, Kemper, and Allstate Insurance, were discussing a possible prepackaged bankruptcy. "Prepacks" have become popular recently because creditors must agree to restructuring terms before a company receives Chapter 11 protection. Moreover, prepacks call for a two-thirds majority of bondholders to agree on a reorganization plan. In a conventional bankruptcy, at least 80% of bondholders have to agree. That saves a lot of time and attorney fees: Companies that have sought prepacks remain in Chapter 11 for three to four months, compared with 2 1/2 years in a conventional bankruptcy.

Of course, any bankruptcy still posed a risk to Lindner. Even after diluting his own stake in Great American with new stock offerings, he owned 40% of the company's common. Still, Lindner was in a strong position to negotiate a favorable deal. Lindner now owned nearly all the preferred stock as well as big pieces of two bond issues. And by repurchasing so much debt, Great American had sharply reduced the number of creditors who could lay claim to company assets. Lindner "wanted to come out of the reorganization with control," says Matthew C. Doherty, co-head of mergers and acquisitions at Barington Capital Group LP, who advised a group of Great American bondholders.

PYRRHIC DEFEAT? Lindner still had to make concessions. Creditors forced him to agree to a generous settlement, Doherty says, by threatening to hold up the bankruptcy by challenging the previous asset sales to AFC affiliates. Indeed, creditors received at least 90 for each dollar owed them.

Lindner and Great American's creditors finally cobbled together a reorganization plan and filed it with the U.S. Bankruptcy Court in Cincinnati last November. Creditors were happy with the final deal. But many individual shareholders were furious. True, Lindner suffered, having invested over $300 million in Great American over the years. But he secured voting control over as much as 44% of the new common stock in the restructured Great American. By contrast, the other shareholders, who had owned 60% of the old company, came away with a measly 1% of the new Great American. Adding up Lindner's current stake, the preferred dividends, the asset sales, and fees, Lindner "didn't lose that much," says Phelps B. Hoyt, a bond analyst at Duff & Phelps.

Some shareholders suggest that Lindner may actually end up doing fairly well. Great American's debt has been whittled down to $433 million, with annual interest payments now at a more manageable $42 million. Great American just might turn a profit by 1996, according to the company's reorganization plan. Even the market is starting to believe that the long-awaited turnaround may soon be on the horizon. Great American started trading again on Jan. 4, and within days the company's stock rocketed up 50%, to 18 a share. That makes Lindner's 3.8 million shares worth $70 million. Lindner, the bottom-fisher, may someday get his treasure after all.


1987 Lindner acquires Taft Broadcasting for $1.5 billion. Renames TV and radio station owner Great American Communications.

1988 Faced with stiff debt payments, Lindner begins selling Great American assets to his affiliates. Great American starts paying $2 million to $3 million a year in management and insurance fees to American Financial.

1989 Lindner starts buying back Great American bonds to ease debt load further. Lehman exchanges a block of company debt for $44 million of Great American stock. Lehman then sells the unres, using proceeds sells the unregistered shares to the public. A shareholder lawsuit later alleges that the stock was unregistered to avoid public disclosure of Great American's problems.

1990 Short-sellers start driving down Great American's stock. Share price is hurt further by additional offerings of new equity in exchange for debt. Stock price falls 80%, to under 2.

1991 Downturn in broadcasting industry has analysts wondering whether Great American can survive. Company repurchases an additional $380 million in bonds.

1992 Stock price plummets to 16 a share. In July, Lindner discusses possible prepackaged bankruptcy with major creditors. By then, he's in a strong bargaining position, with much of the company's debt and its stock.

1993 Court approves prepackaged Chapter 11 on Dec. 23. Lindner maintains voting control of almost half of Great American's new stock.

1994 Great American shares start trading again on Jan. 4. Stock jumps 50% to 18 within days.


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