A New Empire Rises North Of The Border

The past couple of years haven't exactly been kind to Canada's empire-builders. In 1992, the Reichmanns' highly leveraged Olympia & York Developments Ltd. crashed into bankruptcy. Then last year, Peter F. and Edward M. Bronfman, who dabbled in everything from brewing to mining, stumbled as their markets also slumped.

Yet such traumas show little sign of curbing the ambitions of Peter Munk, chief executive of Horsham Corp. Canada's newest empire-creator has been expanding his Toronto-based holding company into a diversified giant. Building on a 20% stake in gold-mining company American Barrick Resources Corp., Munk has extended Horsham's reach into oil refining and German real estate. Along the way, Horsham has gained a measure of corporate prestige. Both former Canadian Prime Minister Brian Mulroney and former Bundesbank chief Karl-Otto Puhl are Horsham directors.

Now, Munk hopes to transform Horsham into one of North America's biggest real estate players. On July 5-6, investors in Trizec Corp. will vote on a $732 million bid from a Horsham-led investor group to acquire 68.5% of the bankrupt real estate giant. The Calgary-based company--once controlled, ironically, by the Bronfmans and Reichmanns--owns and manages 85 office buildings and shopping centers from San Francisco to Montreal, worth about $4 billion. "If we combine our financial credibility and global vision with Trizec's real estate expertise, I think we can do great things," says Munk.

That's high-flown, of course. But Munk, now 66, has a knack for squeezing out value from unlikely places. He built Southern Pacific Hotel Corp. into a huge chain in the South Pacific in the 1970s. Then he founded American Barrick in 1983 at a time when gold prices had slumped. Using strict cost controls and modern mining technology, Munk transformed the company into one of North America's most profitable gold miners. In 1987, he founded Horsham. The aim: to use the wealth created by gold to venture into other potential turnaround situations.

TRIZEC'S TROPHIES. Problem is, Horsham's other interests haven't duplicated American Barrick's success so far. Horsham acquired 60% of the bankrupt Clark Refining & Marketing Inc. in 1988. It bought the rest in 1992. But Clark's earnings are down because of smaller refining margins. In 1990, he launched Horsham Properties to develop commercial properties in Germany. But the downturn in the German economy slowed new office demand. Horsham's only project: a 600-acre office and industrial complex near Berlin.

Still, Horsham's chief argues that he paid rock-bottom prices for his investments and it may just take a while before business picks up. Having seen the problems of the Reichmanns and the Bronfmans, Munk says he knows the perils of debt. That doesn't mean Horsham's balance sheet

isn't leveraged. Horsham has $1.1 billion in debt. And its long-term debt as a percent of capital is 66%; 55% is typical for many companies. But $600 million of the debt came from low-interest debentures issued in December in anticipation of new acquisitions. By giving bondholders the right to exchange their debt for shares in American Barrick, Horsham wrangled an annual interest of just 3.25%, less than half the current prime rate of 7.25%.

For now, Horsham's shareholders seem willing to wait. After climbing 65% last year to just above 15, Horsham's stock has been flat this year, at about 14. But analyst Marc Cohen of Kidder, Peabody & Co. estimates that Horsham's earnings could double this year, to $79.5 million, thanks to productivity gains at Clark. And he reckons Horsham's assets are worth $20 a share. "The parts of Horsham add up to a great deal more than the whole," says William Spears, chairman of Spears, Benzak, Salomon & Farrell, a New York money management firm that owns 6% of Horsham's stock. As Horsham's companies gain momentum, its stock will start climbing, Spears figures. Munk hopes so, too. He owns 9% of Horsham's common stock and controls 81% of its voting shares.

Trizec could be key to Horsham's growth. Once the biggest publicly traded real estate company in North America, Trizec's fortunes have sagged along with the real estate market. It was forced to write off its more than $500 million investment in bankrupt Canadian developer Bramalea Ltd. And by 1993, with its leasing income depressed, it was unable to service its debt. Trizec entered a court-supervised debt renegotiation in Alberta last August.

Munk is convinced that Trizec's luster can be restored. Its portfolio is chock full of trophy properties, such as the sprawling Cullen Center office complex in Houston. And Trizec's buildings have low vacancy rates: 11% of its office space is empty, compared with a North American average of over 15%.

FORCING THE DEAL. Under the proposed deal, Horsham and its U.S. partners--J.P. Morgan & Co. and O'Connor Group, a real estate investment firm--would pump $732 million into Trizec. Investors would then swap $1.4 billion in debt for cash and equity. That would still leave Trizec with $2.4 billion in debt. But the deal would reduce its annual interest expense by about a third, to some $150 million. The result: a positive cash flow of $100 million in its first year. Horsham is contributing about $475 million to the deal for a controlling 44.5% stake in Trizec. Trizec's biggest creditors tentatively accepted Munk's offer in June. But some of the company's smaller, unsecured debtholders are balking at the deal. Still, it's likely that Horsham will prevail.

Tom Sperry, a managing director at Union Bank of Switzerland and chairman of the senior creditors' steering committee, says the big debtholders could seize Trizec and cut a deal with Horsham if the current plan is voted down.

Even if the deal goes through, Munk doesn't see quick riches. It may still take another five to seven years before the real estate market fully recovers. In the meantime, he is trying to build his other businesses. Clark is negotiating with Chevron to buy its Port Arthur (Tex.) refinery--a deal that could double its refining capacity. The way Horsham's chief sees it, the key to modern empire-building is constant growth--and lots of patience.


With a 20% stake, Horsham has controlling interest in successful Toronto-based gold miner.

1993 earnings: $213.4 million (+22%)

Revenue: $680.6 million (+23%)


St. Louis-based refiner, with 850 gas stations in the Midwest, is struggling because of slumping margins.

1993 earnings: $2.8 million (NM)

Revenue: $2.3 billion (unchanged)


Founded in 1990, German company wants to develop commercial properties. Its first project: a 600-acre office and

industrial park in Berlin.

1993 results: NA


Horsham has tentative deal to acquire 44.5% of bankrupt Calgary-based real estate company, one of the biggest in North America, with $4 billion in assets.

1993* loss: $225 million (NM)

Revenue: $749 million (+14%)

*Fiscal year ended Oct. 31 NM: Not Meaningful NA: Not Available


Before it's here, it's on the Bloomberg Terminal.