FOOL ON THE HILL
An Investment Opinion
Saving the Rainforest Rick Aristotle Munarriz (TMF Edible)
January 25, 2000
Tribal bravado. The endangered is hunted. And still the rain pours. Scenes from deep within a tropical rainforest? Hardly. This is just another month in the life of the faux flora and fauna themed chain of Rainforest Cafe (Nasdaq: RAIN) restaurants.
It all started on December 22 when the company announced that it would be merging with Lakes Gaming (Nasdaq: LACO). The transaction, which would have called for a distribution of 0.55 new shares of Lakes Gaming for each outstanding share of Rainforest, was not well received by either camp. Both stocks lingered in response to the proposed coupling.
Why? Lakes was essentially a pair of Louisiana casino management contracts that were left behind when Grand Casinos merged with Hilton's gaming properties to form Park Place Entertainment (NYSE: PPE) back in 1998. Rainforest was struggling to find Wall Street believers in its 37-unit eatertainment concept after the Planet Hollywood (OTC: PLHYA) fiasco.
The companies had a few things in common. They both had asset-rich balance sheets. Rainforest brought cash to the table while Lakes tacked on cash, land, and investments. They were also both profitably unloved -- with each company trading at less than 10 times earnings. And, oh, right, they were also both run by Lyle Berman.
Why would Berman, a skilled cardsman at the poker table, opt for solitaire? Maybe scooping all of the cash chips onto one side of the table was the temptation? Rainforest, due to a persistent slump in unit sales, had scaled back expansion plans and will only open three domestic locations this year. Meanwhile, Lakes' lifestyle of attempting to maintain its existing gaming contracts while seeking out new ones is not exactly a capital-intensive venture.
But in the spring of 1999, Lakes had begun to invest part of its cash hoard in other upstart companies. It purchased a 27% stake in fantasy sport enthusiast site Fanball.com and bought a third of consumer product specialist Interactive Learning Group. Lakes already had inherited minority stakes in smaller Berman properties. Combined, the companies would have an arsenal of $94 million in cash with negligible debt.
If this love story between two hard-luck misfits sounded alluring, if this unlikely inbred union appeared ready to belt out the last laugh as a hot, new venture capital group with an online slant, if you thought disappointment would finally go on a sabbatical -- you missed. Last night the deal was called off. Over. I'll call off the caterer if you trip up the flower girl.
Why? Perception. Even if the deal made sense, which it did only if the big picture widened to span the horizon, investors had a right to be suspicious. Shareholders had been on the short end of Berman's tactics in the past. At Grand Casinos, and then again at Rainforest Cafe, when cratering share prices rendered stock options practically worthless, what did the executives do? They repriced the options lower -- an alternative clearly not available to the lay investor.
There was also the issue of bias. How subjective could the Rainforest board have been in considering the terms of the Lakes merger? Save for concept creator Steve Schussler, the Rainforest directors consist exclusively of Berman cronies from his Grand Casinos and Wilsons (Nasdaq: WLSN) days. Half of the boards overlap one another.
Then again, the incestuous dealings were forgotten when Rainforest received a higher unsolicited offer two weeks ago. The $125 million deal from an unidentified suitor, half in cash and half in stock, would value the company in the $5.20-a-share ballpark.
With Lakes' stock drifting lower, the outside offer represented an $0.80 premium when Lakes bowed out yesterday.
"Lakes is unwilling to participate in an auction for Rainforest and Lakes is not prepared to increase its offer," Berman announced.
Hmmm, was this a card game we were watching all along? This past month can be summed up in three words: bid, raise, fold. Berman, the master poker player that he is, might have just played the very hand he wanted to show all along.
Picture, if you will, this wild possibility. Imagine an award-winning, high-volume eatery concept going through a logistical meltdown. With three chief operating officers in as many years, it is pretty hard to find good help nowadays. Maybe it's the pressure of trying to run that rare profitable themed-restaurant chain. Maybe it's the ego-deflating challenge of trying to make a difference in a company full of Bermanesque executives. In the end, maybe Berman knew that salvation had to come from the outside -- as was the case with Hilton and Grand Casinos.
But how do you smoke out a savior? You cut the deck. You draw five cards and smile. You've got nothing, but you know how to bluff. So you throw in your ante chips with confidence. Then you wait. Who will see you? Who will raise you? Enter the other brave player. Do you chance a raise or do you bow out knowing the deed has been done.
In return, Lakes will receive a $2 million cancellation fee if Rainforest eventually hooks up elsewhere over the next six months. Rainforest might get something even better -- consistent restaurant savvy management. It's a game where everyone wins, but did the master dealer know it all along?
Sometimes, when you fold, you win.