National Golf deal is on track, but sale price could still drop. (Up Front).

The $1.1 billion acquisition of National Golf Properties Inc. and affiliated private companies by a Goldman Sachs-led group isn't showing any outward snags, but Wall Street traders are wary of betting that the deal will be completed as announced.

National Golf shareholders are slated to receive $12 in cash for each share held when the deal closes by the deadline of March 31, 2003. Recently, National Golf's shares were trading for $11.07, indicating an 8.4 percent return over four months or less for anyone who bought the stock last week -- a 25 percent annualized yield.

National Golf filed final shareholder voting materials with the Securities and Exchange Commission on Nov. 20, and set a Dec. 18 shareholder vote.

The vote needs a two-thirds majority to pass, but David and Dallas Price, the company's chairman and his ex-wife, have pledged to vote their 5.4 percent National Golf holding in favor of the deal. Much of the rest of the stock has shifted into the hands of risk arbitrage firms since the deal was announced on Sept. 16. Those shareholders would profit from the deal's completion.

Risk arbitrageurs hope to profit from the spread between the price of a target company in an announced merger, and the amount to be received when the merger is completed.

If there is a high confidence level that the deal will go through, a typical merger target's stock will trade at a spread of 8-10 percent, annualized. This would imply perhaps a 3.3 percent spread for the remaining months of the National Golf deal, or a stock price in the $11.60-$11.65 range.

"It should be going up a few pennies a day," said one investor. "The size of the spread indicates that the market believes that there's a likelihood that the deal closes (at a lower price)."

National Golf's stock traded as high as $11.69, just after the merger was announced, then began to fade. It fell as low as $10.40 on Nov. 18.

The biggest fear is that Goldman Sachs will try to renegotiate the deal at a lower price, or that it won't be able to obtain bank financing, several shareholders said.

National Golf's interim chief executive, Skip Paul, is said to have negotiated a merger agreement he considers to be "rock solid;' with little room to back out, sources said.

Paul wasn't available to comment, said an outside spokeswoman, Melissa Zukerman.

Generally, shareholders say Paul has obtained as high a price as possible given the financial crisis he stepped into as interim chief executive in December 2001.

Initial plan criticized

Shareholders pilloried an initial restructuring plan that would have merged National Golf, a real estate landlord, with its chief tenant, American Golf Corp., as favoring David Price, the founder and chairman of both companies.

Paul and the other outside directors, Cushman & Wakefield Chairman John Cushman and KB Home Chief Executive Bruce Karatz, persevered, taking control of both companies, negotiating a series of forbearance agreements with their lenders, and ultimately selling the company in a deal that severely limited any extra proceeds Price will receive.

As the deal is written, Price and his former wife, Dallas, will receive about $80.5 million for their National Golf common shares and equivalent operating partnership units in an affiliate.

Those equity interests were once worth more than $230 million.

The deal also envisions repayment of $64 million of American Golf debt, which the Prices had earlier guaranteed, and David Price will be paid $500,000 a year under a four-year consulting agreement that bars him from working for competitors.

But the Prices receive essentially nothing for their 71 percent share in American Golf, a golf course business David Price launched in the early 1960s.

The buyers will pay American Golf's owners $10,000, plus a 2 percent equity interest in the new National Golf, along with an option to acquire a 2 percent interest in the new American Golf after the merger. The buyers will likely be looking to profit on the deal by cutting costs at American Golf.

There are a number of contingencies that could provide an out for Goldman Sachs and its partner, Starwood Capital Group. For instance, the merger agreement requires National Golf's properties to be reviewed for environmental problems. A reluctant buyer could send an environmental crew around and use the findings to exert pressure for a lower deal cost.

But the incentives for Goldman Sachs to pall the plug are limited.

Because most of the $1.1 billion dollar deal value is assumption of existing National Golf and American Golf debt, the buyers would only save about $20.5 million for each dollar per share the purchase price was reduced. In a more typical debt-to-equity split, the stakes on any equity price reduction would be much higher.

Goldman Sachs officials declined to comment, referring questions to National Golf.

Ultimately, the deal will likely hinge on whether there's another potential buyer willing to keep Goldman Sachs honest by stepping in and completing the deal if necessary.

According to the deal documents, there was another bidder (rumored to be Westbrook Partners), that was preparing a bid for National Golf but when it wasn't issued by Aug. 21, National Golf's board entered into exclusive negotiations with the Goldman-Starwood group.

Westbrook officials weren't available for comment.

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