Merger plan for National Golf fails to calm outside investors.

After months of negotiations, the independent directors of National Golf Properties Inc. have succeeded in bringing company Chairman David Price into the fold with a restructuring plan that absorbs his distressed, closely held companies.

In doing so, however, the board may have alienated the rest of National Golf's shareholders, whose approval they will need for the deal to go through.

From recent disclosures, it's become clear that American Golf Corp., the company Price founded three decades ago and substantially owns, is insolvent. The fate of American Golf-and maybe even Price personally-was thrown into the hands of National Golf's three independent directors in December, after American Golf said it couldn't pay rent to its publicly held sister company and landlord.

The independent directors, led by interim Chief Executive Charles Paul, had a number of options:

They could lower American Golf's rents to help the company regain its financial footing. They could declare American Golf in default, and find other operators for many of their golf courses--most certainly triggering an AGC bankruptcy filing.

To the horror of outside shareholders, the directors chose a third road. They said they would absorb American Golf and other Price-related entities, along with $126 million in debt owed to banks and other third parties, into National Golf, which has its own financial troubles.

Details released last week have deepened outside shareholders' opposition to the proposed deal. Those investors feel that the independent directors--Paul, along with John Cushman, chairman of real estate brokerage Cushman & Wakefield Inc., and Bruce Karatz, chairman and chief executive of home builder KB Home--are helping solve Price's problems at their expense.

"I do know John Cushman from a business standpoint, and I do know Bruce Karatz. I have the utmost respect for both gentlemen," said Carl Tash, National Golf's largest outside shareholder. But, he added, "in this matter I have confusion about where the term 'independent committee' comes from."

Benefits to be seen

Karatz declined comment. Cushman didn't return phone calls. Paul defended the deal. "Over time it will be revealed to the stakeholders that this was the best course, by a pretty clear margin," he said. "This is not a close call."

Last week, Paul announced terms of a final merger agreement between National Golf and American Golf, along with some AGC affiliates.

Among them, National Golf would shed its real estate investment trust status, and the combined company would seek an undisclosed amount of new equity. Price would retain his stake in National Golf, but it wouldn't increase with the contribution of American Golf. (Price can increase his holdings via a preferred stock issue if the companies prosper.)

Existing shareholders don't like the equity plan, as it will dilute the value of their holdings. But the key to their opposition is the $126 million in AGC debt that will slide over to the surviving company.

National Golf shareholders don't think they should have to absorb the debt, since it's money that's essentially owed by Price and his personal holdings.

"It's a terrible deal for National Golf shareholders," said Dan Boyle, principal in Schwerin Boyle Capital Management, another large outside shareholder. "It's just surprising in the post-Enron environment that such a lopsided deal would be proposed."

In the marketplace, investors reacted the same way, to both the deal and to updated financial information on both companies. National Golf Properties stock fell 3 percent the day the deal was announced, then 21 percent the next day, when wire services reported that the auditor of both companies, PricewaterhouseCoopers, questioned their ability to survive as a going concern. At the close April 4, the stock was trading at $5.83 a share, down $1.57 for the week.

Paul said he and the other independent directors studied all the options, including rent reductions and finding other operators. "We brought in Wachtel and Lazard, and frankly went over this place--both places--with a fine toothed comb' he said, referring to legal advisers Wachtell Lipton Rosen & Katz and investment bankers Lazard Freres & Co.

"The alternative that was most compelling to us and in the best interests of all these stakeholders was to combine the companies," he said.

Paul said the deal aligns the interests of Price with other shareholders, but he wouldn't go into specifics on why a merger was the best choice. He also disputed the idea that the deal benefits only Price. "I don't respond to unofficial critics," he said. "You can't just look at liabilities. You have to look at the assets and the revenues and the upside."

That upside presumably is wrapped up in deals American Golf has to operate golf courses that aren't among National Golf's 130 owned properties, and in details of the deal that haven't yet been released.

The combined company would operate 246 properties with more than 300 courses. Some of its most lucrative outside deals are set to terminate, soon, however, including those for five municipal courses in New York. Extending the leases will require capital investments that reduce their profitability.

The independent board has extracted some concessions from Price. Although he gets a seat on the board of the combined company, he is not guaranteed to be running it. Price also had to cancel $6 million of net debt owed to him by American Golf and the affiliates being merged into National Golf. (The amount includes about $28 million owed by Price and his former wife, Dallas, to American Golf, offset by larger amounts owed to the Prices, according to sources close to the deal.)

American Golf must also pay lease-termination fees on the money-losing courses National Golf is now selling at a rapid clip; those fees totaled nearly $16 million for courses sold last year and to date in 2002.

Persons familiar with the independent board's thinking said any attempt to separate National Golf's problems from American Golf's would lead to "mutually assured destruction," with AGC pushed into bankruptcy and National Golf soon to follow. National Golf is in technical default on some of its loans, as they contain cross-default provisions with American Golf loans, It is also potentially vulnerable to upheaval in having to replace the operator of many of its courses.

Convincing shareholders

Tash, who favors keeping National Golf's REIT status, has proposed allowing American Golf to fend for itself. He doesn't believe National Golf's bankers would force it into bankruptcy, because it is paying its bills, has $63 million in cash, and has assets, in the form of golf courses owned, that more than offset the $484 million in debt on its books. (Paul wouldn't say whether National Golf's bankers have threatened to force a liquidation.) Finding new operators, by grouping National Golf's courses into regional groups, is also do-able, Tash said.

The Tash plan "is far superior to what the independent directors are trying to encourage," said Boyle, who said he hasn't discussed the plan with Tash.

Paul said he hopes to convince these shareholders that the deal on the table is a better one. "We're trying to do the right thing for Mr. Tash' he said. "I work for him."

More details will be included in a proxy statement, which is at least a month away, said sources close to the deal. Meanwhile, the golf course sales could cut both ways - smart sales will help National Golf limit the amount of capital it must raise from outside investors, but fire-sale bargains could undermine the company's asset base.

The integration of the companies is proceeding apace, even though it's unclear the board will muster the two-thirds majority vote for the deal required by Maryland law, where National Gold was incorporated.

Winning over vocal shareholders will be a test for Paul. "We are adamantly opposed to the integration of the companies," Tash said. "Look at the stock, every time the committee and Lazard have made an announcement the stock has gotten crushed. Anytime we and others out there have been asking good questions, people tend to get excited about it."

Tash and others are suspicious of a perceived lack of independence on the part of Paul and the other two independent directors.

They know that the independent board in 2000 released American Golf from maintaining a $13.6 million letter of credit that guaranteed its rent payments. The letter of credit would have come in handy in recent months.

Also, in 1996, Cushman Realty Corp., then run by John Cushman, took in $188,250 in fees representing the seller of the building in Santa Monica that Price purchased and leased to National Golf as its headquarters.

A one-time transaction such as that would be unlikely to endanger a director's independent status, said Stephen Bainbridge, a UCLA law professor. But, he noted, "as a prudential matter you might not want to do it."

Then there is the matter of Paul's statements. He was quoted in The Wall Street Journal defending the pending deal, saying there was "not a great deal of consideration" being paid for American Golf. That comment infuriated National Golf holders, who consider $126 million in assumed debt quite substantial.

Paul is also careful to defend the deal as being in "the best interests of all these stakeholders," which include lenders and shareholders. Asked whether these include the stakeholders of American Golf as well as National Golf, he seemed to change his mind mid-sentence. "Yes, certainly of National Golf Properties," Paul answered. Then he added: "I represent the stakeholders of National Golf Properties. I don't represent the other interests."

It will take some work to convince Tash. "At some point they have to single-mindedly worry about the stockholders and lenders of National Golf, and for Mr. Paul to make statements pertaining to American Golf, appears to me to be wrong."