ESOP at Farmer Bros. May Foil Hopes of Speculators.

HERE'S a wakeup message delivered recently to speculators in Farmer Bros. Co.: Don't start counting your beans yet.

The ongoing saga of 77-year-old Torrance-based Farmer Bros. continues, with the coffee purveyor announcing recently that it will start an employee stock ownership plan effective New Year's Day.

The ESOP will almost certainly strengthen the near-iron grip that the Farmer clan has maintained on the publicly traded stock in the post-WWII era.

Roy F. Farmer, 83, is chairman and CEO of the $221 million (annual revenues) Farmer Bros., and his son Roy E. Farmer is president. The senior Farmer has been on the board since 1951, chairman since 1968. All together, the Farmer family controls about 45 percent of Farmer Bros.' stock, either directly or through trusts.

Some investors bad bet in 1999 that due to inheritance taxes, the Farmer family would be forced to liquidate at least a portion of their hoard, in the event the senior Farmer died.

That might even mean a merger -- and while the long-somnolent Farmer Bros. stock trades at a meager 10 times last year's earnings, an outfit like Starbucks Corp. trades at 48 times next year's earnings. For minority Farmer shareholders, a merger with a high-flyer could mean an overnight doubling (or more) of share value.

But the Farmer family doesn't want to sell, as borne out by the new ESOP, which when fully funded would control another 300,000 shares, or 15 percent of shares outstanding. And remember, ESOP shares are voted by management. That means the Farmers will retain control.

"I think you hit on the reason for the ESOP," said Steve Crowe, shareholder and son of board member Catherine Crowe, 81, last week. "They don't want a change in control."

Altogether, the Crowe family controls about 23 percent of the stock -- and way back in 1981 staged a boardroom battle, winning two seats on Farmer's five-seat board.

Speculation surfaced in early 1999 that the Farmer's might be losing their long grip -- and that speculation drove the stock to $222, a 52week high.

But the run-up was short-lived. As of last week the stock was trading in the $158 range, not that far from the $140 it hit in 1993. The company has pretty much gone sideways since 1995, in revenues and earnings.

There has even been talk that the Farmers are trying to limit shareholder value, as inheritance taxes would be greater if the stock price were to increase. "There are obvious conflicts of interest in having the majority shareholders act as managers, in this case," Crowe said.

To say that Wall Street is not impressed with Farmer Bros. would be an understatement. The company has nearly $100 of cash in the bank for each share, and no long-term debt. If you subtract out the $100, that means the company is trading for about $58, or about 4 to 5 times earnings per share. The S&P 500 index is trading at about 30 times earnings, by way of comparison.

In keeping with longstanding policy, Farmer Bros. declined to comment last week.

Crowe said the company is well-enough managed, showing good profits relative to the industry -- indeed, enough to sock that $100 a share, or $170 million, into the bank, free and clear. Still, he said, "You don't learn much about the company, even at shareholder meetings. They say they don't want competitors to learn about the details of their operation."

Right now, Wall Street isn't very interested anyway. No analysts cover the stock.

Down Shingle, Up Harness

Taking down the shingle after two years last week and putting on the harness for a new employer is Neil Dabney, founder and chairman of Dabney Flanigan LLC, the Westwood-based brokerage that specialized in high-yield bonds.

"I am establishing a branch in Los Angeles for Ladenburg, Thalman, which has been in business since 1876," said Dabney, 47.

He will be a managing director of the New York-based brokerage. Dabney Flanigan closed its doors last week.

Running a whole brokerage -- including a corporate finance department -- proved a daunting task, and always there was the question of having enough capital to execute trades. Taking a big position in certain bonds tied up capital -- something a fledging firm doesn't have in abundance, said Dabney.

Too, managing the often-mercurial personalities attracted to Wall Street proved a challenge, said Dabney. "It is always difficult to manage people, especially so given the complicated nature of securities markets," he said. "When people ask me if they should start up a brokerage, I tell them it will be harder than they imagine. Way harder."

Dabney knows of what he speaks. He also started up the old Dabney Resnick brokerage, since absorbed by Imperial Capital LLC, which is part of Torrance-based Imperial Credit Industries Inc.

Twice is enough, said Dabney. "I'll probably never do it again," he said.

Perils of Being a Softie 

Recently, critics have wondered why powerful money managers seem to be spending proportionally more in commissions to trade stock than even individual investors, who are choosing to execute trades online. Some worry about fuzzy arrangements between brokerages and money managers.

But there are good reasons to use certain trading arrangements, even if they are slightly more expensive than online trading in terms of direct charges, said Bob Nichols, founder of Westside-based Windward Capital Management. "Execution. if you pay less for a trade, but pay a higher price for the stock, then you don't save any money, do you?" he asked.

In today's bewildering array of markets -- Nasdaq, the so-called ECNs (electronic communications networks), the NYSE, the Instinet (where institutions trade with each other), and others -- there are multiple prices floating around on any stock, and spreads between the "bid" and "ask" prices vary. Nichols would rather pay to get good execution -- an intelligent, hard-nosed search for a good price -- than go to the lowest-cost service.

Still, money managers would be well advised to keep even good brokerage buddies at arm's length.

Gerald Boltz, a lawyer with Bryan Cave in Santa Monica and former SEC chief in Los Angeles, warned money managers and brokerages alike to steer clear of any arrangements which benefit money managers. "A brokerage shouldn't even give a gift to a money manager," said Boltz. "if there are benefits to be had by agreeing to execute trades through a brokerage, those benefits should accrue to the clients."

Contributing Columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [e-mail].