Is Zapata The Glazers' Toy?

A lawsuit alleges they raised cash to fund the Buccaneers football team with deals that hurt shareholders

Facing a bank of microphones and cameras on Jan. 16, 1995, Malcolm I. Glazer beamed. The little-known financier had captured a long-sought prize--ownership of a professional sports team. With a bid of $192 million, the highest price ever paid for a sports franchise, Glazer won control of the Tampa Bay Buccaneers football team. "I gulped many times," he says of the price.

So have some minority shareholders of Zapata Corp. Glazer owns 35.2% of Houston-based Zapata, and since early 1995, he has overseen an unusual series of transactions between Zapata and other companies in which he also holds big stakes. The latest: Zapata, the oil-and-gas company founded by George Bush, agreed in June to pay $80 million to acquire Houlihan's Restaurant Group Inc., a lackluster chain 73%-owned by Glazer.

But disgruntled investors are crying foul. One shareholder unhappy with the merger sued to block it, and on Sept. 24, a Delaware court ruled in his favor. Given Glazer's stake in both companies, the court ruled that the deal must win approval from 80% of Zapata shareholders, rather than just 50%. And that's not all: Two other shareholder suits--since combined--allege that Glazer is using Zapata to buy out his other interests to help finance his purchase of the Bucs.

Glazer, who is Zapata's chairman, and his eldest son, Avram A., Zapata's president and CEO, deny the allegations. They insist there is no tie between the deals and the Bucs--and that the Houlihan's merger is good for Zapata. Dismissing the ruling as a "very narrow, technical interpretation," Zapata general counsel Joseph L. von Rosenberg III says the company is now weighing its next move. The Glazers say the deals are part of a strategic shift: Since early 1995, they have transformed the oil-and-gas outfit into a food services company. "We thought there were better opportunities to make money for stockholders," says Avram Glazer.

SAVVY. But public documents and interviews with former Zapata executives raise numerous questions. For starters, the only companies Zapata appears seriously interested in are controlled by Glazer. And Zapata's shift--which, if the Houlihan's deal goes through, will have allowed Glazer to cash out of investments in two thinly traded public companies--appears to have begun soon after the Bucs deal. "The suit alleges this redirection resulted in part because of Glazer's need for cash for the Tampa Bay Buccaneers," says Gregory E. Keller, a lawyer for shareholders in one suit.

A savvy financier who splits his time between Rochester, N.Y., and Palm Beach, Fla., Glazer built a fortune in the 1970s and 1980s buying real estate and TV stations. In 1991, he paid roughly $30 million for bonds of a troubled restaurant operator, later renamed Houlihan's. In late 1992, when it came out of reorganization, Glazer had control.

Around the same time, Glazer also paid roughly $40 million for 41% of Zapata. Executives at the heavily indebted company were then selling off volatile oil-related units to shift into natural-gas services. Glazer at first backed the change but was soon at odds with management over a proposed $111 million financing from Norex America Inc., an affiliate of a British holding company. In exchange for the funds, which would allow Zapata to reduce debt and expand in natural gas, Norex would receive 3 million Zapata shares. Norex Chairman Kristian Siem would become a director.

Glazer threatened a proxy battle, complaining that the Norex shares would dilute his stake. But given board seats for himself and Avram, he dropped his fight. In May, 1993, the deal went through, and Siem was later named COO. Zapata soon paid $90 million for natural-gas compression specialist Energy Industries Inc. Its owner, Peter M. Holt, joined Zapata's board.

OLD PALS. Since then, however, critics say Glazer has methodically gained control of Zapata's board. When two long-time directors resigned in November, 1994, Siem says he and Holt suggested outside nominees with experience on Wall Street and in energy. But with the board down to five, Director Ronald C. Lassiter, Zapata's former CEO, cast the swing vote. Two longtime Rochester associates of Glazer, attorney Luther W. Miller and banker Myrl S. Gelb, became directors in December, 1994.

No sooner were the two confirmed than Glazer phoned Siem and asked him to resign as COO. Von Rosenberg says the board lost confidence in Siem. He left the board in April, 1995. "We didn't see where we had power to protect minority interests," Siem says. Later events "suggest that Glazer wanted me out to implement his own strategy," he adds.

The first sign of Zapata's new shift to food services came soon. In February, 1995, Glazer had agreed to sell his 31% stake in Envirodyne Industries Inc., a maker of sausage casings, to Lazard Freres & Co. for $21 million. Two days later, Lazard backed out. Glazer soon found another buyer: Zapata. But at a May, 5, 1995, board meeting, Glazer became angered when his two associates, Miller and Gelb, questioned the deal. The two quit on May 30. Von Rosenberg says their resignations weren't tied to the dispute. Miller and Gelb say they were simply too busy to be directors.

Their replacements: W. George Loar, a 72-year-old former general manager of a Glazer-owned TV station, and Robert V. Leffler Jr., whose sports marketing firm has worked for the Glazers. And on June 16, 1995, Zapata agreed to buy the Envirodyne stake for $18.8 million. That money was pledged to pay down a $22 million loan Glazer took out two weeks later, part of the $90 million he says he borrowed to pay for the Bucs.

Malcolm Glazer says he didn't need the money for the Bucs. Asked why he didn't keep the stock in the family trust after the Lazard deal fell through, Glazer replies: "What's the difference?" Adds Avram Glazer: "If we have a sale and we have some loans, we pay off our loans. But they're not tied together."

Meanwhile, Holt--upset with Zapata's pending plans to sell the natural gas unit to fund its food buys--quit the board in November, 1995. He sued, alleging the Glazers misled him when they bought Energy Industries. They deny that, saying Holt is angry because his bid to buy back his old company failed.

Houlihan's, too, was drawn into Glazer's deal for the sports team. On Glazer's suggestion, Houlihan's CEO, Frederick R. Hipp, agreed in October, 1995, to pay $10 million to one of Glazer's privately held firms for the right to put its name on the Tampa Stadium for a decade. Yet Houlihan's has just two outlets in Florida and none around Tampa. "I can think of better places they could have called Houlihan's," says Robert Martorelli, manager of Merrill Lynch & Co.'s Phoenix Fund, which holds 11.5% of Houlihan's. The Glazers say the deal is comparable to those at other stadiums. Hipp says he and his staff examined 32 such deals. "We have felt no pressure to do things to benefit the Glazers solely," Hipp says.

Now, Zapata's proposed buyout of Houlihan's lackluster operations has some minority Zapata shareholders upset. In June, Zapata agreed to pay $8 a share in cash and stock for Houlihan's--more than a 30% premium over the pre-deal price. With 73% of Houlihan's, Glazer stands to make $58.6 million; roughly $22 million is likely to be paid in cash. "In our view, Glazer is using Zapata to enrich himself," says Daniel F. Wake, a lawyer for the shareholder suit that won the Sept. 24 ruling requiring 80% approval. If it stands, the deal will be tough to pull off.

The Glazers give no explanation of why Zapata's abrupt shift in strategy occurred just as Glazer was buying the Bucs. "It just did," Avram says. Lassiter says it was his idea, not Glazer's, that Zapata sell its energy divisions and buy Glazer's food interests. And both Lassiter and Leffler say that the deals between Zapata and Glazer's other companies have been negotiated by the outside directors; they also hold a proxy to vote Glazer's stake in the same proportion as independent shareholders.

MORE DEALS? The Glazers say their motives are misunderstood. With prices rising in the natural-gas business, they claim, they decided to be a seller instead of a buyer. And they simply decided to reinvest the cash in an industry and in companies they know best.

That may continue. According to Zapata's SEC filings, it may next buy Glazer's 45% stake in Specialty Equipment Cos., a supplier of milkshake and other machines to McDonald's Corp. For now, the Glazers say they have no plan to sell Specialty. And as the largest shareholders in the companies Zapata is buying, the Glazers say their interests coincide with minority investors'.

And certainly not all investors have been scared off. Attracted by Zapata's cash hoard, mutual-fund company Pioneering Management Corp. owns 7.05% of Zapata. "If he's stealing out of my pocket to some degree, he's also stealing out of his own," says Pioneering's Vice-President Todd E. Grady. For now, however, Zapata's stock is trading at 3 5/8, 34% below its May, 1994, high. As with the Bucs, Glazer has a ways to go before this one turns up a winner.

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