National Golf Shareholders Wary of Restructuring Plan

Corporate Focus
by Anthony Palazzo

Things have only gotten worse for National Golf Properties Inc. (NYSE: TEE), the Santa Monica-based golf REIT, since it halted its dividend and announced a vague plan to merge with its flagging affiliate and tenant, American Golf Corp., on Feb. 13.

"There're more questions today than we had two weeks ago," said Steve Sakwa, a Merrill Lynch analyst. Sakwa placed a "reduce" rating on the stock last fall. "The level of uncertainty just keeps growing."

American Golf is controlled by National Golf's chairman, David Price, and operates nearly all the 136 golf courses that National Golf owns. In November, National Golf said American Golf couldn't pay its rent.

National Golf has said little since then, as it hired outside advisers and appointed independent director Charles Paul to guide it through restructuring options. The Feb. 13 announcement of a letter of intent for the merger provided investors with a framework for the restructuring, but few details.

What is known is that Price and minority owners of American Golf will get a class of non-dividend yielding preferred stock in National Golf, though that transaction is conditioned on an infusion of equity. Meanwhile, American Golf's rent payments have been deferred through March 14.

Skeptical investors outside

Wall Street's reception to this sketchy story has been wholesale flight. Since Feb. 11, when the dividend was eliminated, National Golf's shares have fallen nearly 40 percent, to $5.05 recently from $8.05. As recently as August 2001, it was trading in the mid-$20 range.

Part of the reason for shareholder flight has been a change in the company's investor profile, as National Golf is expected to shed its status as a real estate investment trust. Turnaround stories call for a more risk-tolerant breed of investor. But in the post-Enron era, the risk-oriented investors just won't bite with so many pieces of the puzzle missing.

Among Sakwa's questions: How much is National Golf paying if anything, since American Golf is essentially insolvent and what are the terms of the equity infusion?

"The last piece is, they haven't reported fourth quarter earnings yet so I don't know what the business is doing," he said.

The lack of detail has also raised concerns about how the Paul-led committee of independent directors addressed conflicts of interest involving Price, who would be chairman of the merged company.

A fuller plan is at least two weeks away, according to knowledgeable sources.

National Golf officials declined to discuss specifics. "The company is keeping their eye on the ball and operating in the best interests of shareholders," said Melissa Zukerman, an outside spokeswoman.

Outside view

Institutional holder, Dan Boyle of Schwerin Boyle Capital Management Inc.

Boyle believes National Golf will absorb American Golf's debt, which he estimates to be $100 million. The preferred shares give American Golf owners mainly Price and his wife, Dallas an option to cash in if National Golf's stock ever recovers to above $15 a share. If it doesn't, they apparently don't receive anything.

Boyle is concerned about other aspects of the terms released to date. Assuming his estimate of His estimates put combined debt at about $658 million. He also calculates more than $100 million in annual cash flow more than enough to service and pay down debt. So why raise more equity now, when the stock is at its lowest price ever? "That's just harmful to shareholders, it seems unnecessary."

Boyle is also puzzled by Paul's quote in the Feb. 13 press release, saying that the combination "should enable us to capitalize on the consolidation opportunities" in the overbuilt, recession-hit industry.

"The notion that they're going to be consolidating this industry seems like the old strategy," Boyle said. "It seems like they should repair themselves for years, retain cash flows for years, before even considering it."

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at

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