Banking & Finance and Sports Business

Texas group roaring for Indians stock: Lion Fund dangles 40-percent premium for ballclub's shares

October 3, 2005

A San Antonio-based hedge fund's public solicitation of Indianapolis Indians stock is akin to a hostile takeover attempt, industry observers said.

It also brings into question the succession plan of the Indians' 72-year-old chairman, Max Schumacher, who owns 39 percent of the company's stock.

While officials for The Lion Fund LP said they aren't looking to take majority control of the city's AAA baseball franchise, they're willing to pay a substantial premium over the Indians' last buyback offer of $9,200 per share, and even more for large blocks of stock.

"I can see us paying at least a 40-percent premium," said Sardar Biglari, the 27-year-old principal of The Lion Fund who has been making a splash in San Antonio since starting the fund five years ago. "The more shares someone has to sell, the more attractive it will be."

While Biglari declined to divulge how much in assets The Lion Fund manages, San Antonio investment and banking sources said Biglari's fund is well-capitalized by wealthy individuals.

Biglari said he became aware of the Indians through investment colleagues and has been following the franchise's financial perform- ance for years. An ad placed several years ago in The Wall Street Journal by an Indians stockholder looking to sell could also be responsible for heightened interest in the franchise.

The Indians listing in Walker's Manual, a well-known national information clearinghouse of unlisted and other rare, illiquid stocks was also likely a source of information.

An advertisement placed by The Lion Fund in the Sept. 26 Indianapolis Business Journal started turning heads locally.

"I find it curious the Lion Fund, out of San Antonio, is doing the tender offer," said Matthew Will, University of Indianapolis professor of finance and director of the school's graduate business program. "I give them credit; they're doing some good research. I'm surprised someone locally hasn't already done this."

The Indians board of directors enacted poison pill language in the company's articles of incorporation in 1990, and strengthened that language in 2002 to make it more difficult for an out-of-town interest not in tune with the board's vision to take control of the team.

One fear is that an out-of-town investor could take control of the franchise and move it out of state. While that's possible, said Mark Rosentraub, an economist and author of "Major League Losers," a book about professional sports operations, he added that part of the Indians' value is due to the support of its home market and the revenuegenerating amenities of the team's home venue, Victory Field.

Lauded as one of the best baseball parks built in the last 20 years, Victory Field has been recognized as the "Best Minor League Ballpark in America" by such publications as Baseball America and Sports Illustrated.

Schumacher said at the conclusion of this season he has no intention of retiring or selling his stock. "I'm in good health and I feel good, and as long as I think I can make a contribution to this organization, I'll do so," Schumacher said.

Financial experts said The Lion Fund has likely taken notice of Schumacher's age and shareholder stake, and the Indians board should be making succession plans.

"The team at some point will transition its ownership," Will said. "The only question is, will that be done under [Schumacher's] control or after he's gone? With the stock value going up, the estate tax issue becomes very critical."

Will pointed out that after Miami Dolphins owner Joe Robbie died, his heirs could not afford to pay capital gains taxes and were forced to sell the team.

"If that becomes the case with the Indians, that could make a large chunk of stock available," Will said.

Biglari admits Schumacher's shares are attractive.

"Should Max decide to sell any or all of his stock, we'd be happy to talk to him," Biglari said. "But that wasn't the reason for the advertisement. I think it's a tremendous franchise, and we seek to be long-term shareholders."

A stock accumulation before Schumacher's departure could put an investor in position to take control of the team, Will added.

"When [an entity like the Lion Fund] accumulates enough shares, they have a fair bit of leverage," said Bob Shortle, a principal with Periculum Capital Partners in Indianapolis. "They wouldn't do this without seeing a big opportunity or they know someone who wants to control this thing. Obviously, something is going on."

Milton Thompson, an attorney and longtime Indians board member, acknowledged that Schumacher's exit strategy has been considered, but it hasn't officially been discussed "at the board level."

"Has the subject matter come up? Yes," said Thompson, also president of Grand Slam Cos., a locally based sports marketing consultancy. "All good boards of directors look at future planning, and we do that."

But Thompson said, in the end, part of the planning must be done by Schumacher personally. "Max has some estate planning to deal with," Thompson said.

The Lion Fund has traditionally been a passive investor, Biglari said. But if a large block of Indians stock was acquired, Lion Fund officials could "become more active," he said.

Will thinks The Lion Fund has opened the door on a new day for Indians stock.

"No one makes a tender offer without competition," Will said. "[The Indians organization] is clearly undervalued. There's tremendous opportunity here for profit. The Lion Fund has opened the gates to a bidding war. This story is only going to get bigger."

While hedge funds-which are expected to bring higher-than-average returns for their investors-are often apt to invest in more complex properties such as derivatives, futures and options, Shortle isn't surprised The Lion Fund targeted the Indians.

"Hedge funds are noted for trying to find undervalued opportunities," Shortle said. "A lot of times they look for somewhat illiquid or more unusual transactions rather than trying to track the stock market."

With 800 shares outstanding and only a few trades made annually, the Indians certainly qualify as illiquid. Until a 2003 sale of 56 shares was made public-28 shares for $13,000 each and 28 shares for $13,100 each-the main option for selling stock was the franchise-led buyback program.

In 1956, 6,672 people ponied up $10 per share and bought 24,488 shares of stock in the city's struggling minor-league baseball team. The move was designed to take the money-losing team off the hands of its owner, the Cleveland Indians, and keep it in Indianapolis. A franchise-led 5-to-1 reverse stock split in 1985 was designed to clean up the team's ownership status.

In 1997, Indians Inc. was offering to buy back shares for $5,000 each. Those shares were retired, making existing shares more valuable. In 2002, Indians officials increased their offer to $9,200.

Indians stock trades this year have been made as high as $21,000 per share in the Pink Sheets, but Biglari said that's not a reliable indicator of value.

"I do not view the Pink Sheets as a fluid market," Biglari said. "There's no depth in that kind of arena, and I won't be guided by that."

Even at $21,000, the Indians still have a price-to-earnings ratio of 16.8 to 1, which is still more than two points below stocks listed on the Standard & Poor's 500 index.

One thing Biglari will be guided by is profitability, Will said. The Indians have made money each of the last 30 years, with profits in recent years around $1 million annually.

"The people behind [The Lion Fund]," Will said, "might think they see a way to make it more profitable."
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