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Tuesday, October 6, 1998

Zapata Corp.
Phone: 713-940-6100
Website: http://www.zap.com
Price (10/5/98): $8 5/16


This portal smells like a porthole. Sounds fishy? Zapata's shares have had a colorful oil-based past. Forty-five years ago the company was co-founded by former President George Bush. From crude oil origins, complete with a bit of notoriety, the company evolved to become a top producer of fish oil.

Over the last four years the company has been run by Florida's Glazer family, the real estate and broadcasting tycoons who also happen to own the Tampa Bay Buccaneers football team. The Glazers sought to unlock some of the value in the company by taking its fish oil subsidiary public. Flush with cash after the successful Omega Protein (NYSE: OME) debut earlier this year, the company then set its sights on what any logical crude and fish oil producer would target -- the Internet.

The Internet??? Fish oil! Bucs! Ahoy there mateys, time to walk the plank. In pursuit of the Internet portal riches that past swashbucklers like one-eyed Yahoo! (Nasdaq: YHOO) and peg-leg Lycos (Nasdaq: LCOS) had found, Zapata figured that the treasure map would be easy to follow.

After a laughable bid to buy out Excite (Nasdaq: XCIT) for five times the market cap of Zapata in company stock, a stunt so outlandish that most have relegated the move to nothing more than a clever publicity stunt, the Glazers rolled up their sleeves and began to acquire established websites. Investors became believers and bid up the stock to the mid-twenties. Then mutiny!

Facing a jaded market, which viewed Zapata as a latecomer to the portal party, and a futures trading company claiming first dibs on the Zap moniker the company was basing its website on, the company, like Tampa Bay's promising second-year halfback, was Dunn.


"We Will Buy Your Web Site" proclaimed Zapata advertisements, an offer also echoed at the company's www.zap.com online guide to what is now a launching pad to more than 30 recently purchased content-rich websites.

Along with the online pursuits, the company also owns 40%, or 5.9 million shares, of food packaging specialist Viskase (Nasdaq: VCIC), and has retained 60%, or 14.5 million shares, of Omega Protein.

And in case your curiosity swells, how do you squeeze a fish to produce oil? You don't, but the typically inedible menhaden fish oil is used in margarine, shortening, and even animal feed.


Income Statement
12-month sales: $129.0 million
12-month income: $21.0 million*
12-month EPS: $0.60*
Profit Margin: 16.2%
Market Cap: $201.2 million
(*from continuing operations, excluding one-time gain)

Balance Sheet
Cash: $158.9 million
Current Assets: $219.7 million
Current Liabilities: $41.9 million
Long-term Debt: $11.6 million

Price-to-earnings: 13.9
Price-to-sales: 1.6


Just a few months ago, Zapata was being valued at a significant discount to its assets. Rational or not, the market price on Zapata was lower than it is today -- while Omega and Viskase (which was then known as Envirodyne Industries) were substantially higher than they are today. Clearly, the popularity that drove shares of Zapata to its early July peaks was all based on an Internet portal that had yet to cultivate a following.

With every assorted purchase, be it a shareware, online chat, or financial domain, the stock built momentum with no one really questioning the synergy of placing Latinolink side-by-side with game haven Happy Puppy. Zap was simply on a second-tier shopping spree, and it was only a matter of time before investors saw the company for what it really was -- a company trying to make up for lost time by buying up established sites rather than develop unique content internally.


There is more value in Zapata than cynics are giving the company credit for. Even at recent lows, Zapata's 14.5 million shares of Omega is worth about $4 for each share outstanding. The company's stake in Viskase, a troubled company that is possibly poised for a rebound after selling off some assets, is still valued at more than a buck a Zapata share. Since both companies are publicly traded, buying Zapata gives an investor more than $5 a share liquidity in the combined companies. Naturally Zapata would be taxed if it were to sell its stakes -- but that would not be the case if they were spun off tax-free to shareholders, a route that Zapata is considering. The company has hired Salomon Smith Barney as a financial adviser in that matter.

Then we have the $122 million debt-free war chest, which adds up to a little better than $5 a share. Before considering zap.com, these assets add up to a sizable $10 a share stake. That's quite a bounty, so why the mutiny? Well, the purchased Web domains tend to be obscure, often niche specific, destinations where one would expect the ransom to be paltry. Further, Zapata has been buying the content sites with shares, not cash, so while the shares outstanding are inching higher, those assets are being diluted. And this from the company that had enough market savvy to buy back a whopping 6.7 million shares last year when the stock was just shy of the $5 mark.

In theory, with shares of Zapata below that $10 threshold, an investor is buying the upstart portal for less than Zapata is dishing out in new shares. That is a comforting thought in a frothy Internet sector.

The decent quarterly dividend of $0.07 a share is also a unique industry feature, giving the stock the glitz of an Internet go-go stock with a yield of close to 3%.

The value is there. Even ZAP Futures, the trading company that is suing Zapata because it feels users will confuse Zapata's website with the company's www.zapfutures.com brokerage site, knows that there is value in the upstart portal. It appears as if ZAP Futures is willing to compromise. Whether it will come in the form of a cash payment, or the more likely scenario of Zapata doling out substantial banner promotion for ZAP Futures, this Zap vs. ZAP battle looks as if it will have a peaceful win-win conclusion.

For now, the critics are many. It seems the only thing that scouring for fish oil and running online content have in common is that they both are ultimately looking to hook and reel in meal tickets. On the surface, the transition makes even less sense than Seagram (NYSE: VO) and its diversification from beverages to music and film entertainment. But don't sell short the Glazers. The father and son team have excelled in real estate and broadcasting, and, gee, isn't that what the Internet is all about?

-Rick Aristotle Munarriz

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