By Scott Kauffman
Two and a half years after ClubCorp Inc. and American Golf Corp. absorbed 50 courses in the biggest multicourse acquisition ever – the $386 million, Cobblestone Golf Group deal – golf’s two largest and usually profitable operators are losing money.
Beset, too, by the softening national economy and static golf industry, the two private companies have undertaken measures to improve results.
Santa Monica, Calif.-based American Golf, which manages more than 300 courses, has reduced its operating regions from nine to four, and it trimmed another 65 positions, part of a recent downsizing that has eliminated as much as one-fourth of the corporate staff that once totaled about 400, according to sources familiar with the company.
The company’s moves were made to help offset a net loss of $8.7 million for the six months ending June 30; its net income was $6 million for the year-earlier period, according to Securities and Exchange Commission filings by National Golf Properties (NYSE: TEE) which owns 142 of the courses AGC leases.
AGC’s weak performance has resulted in provision violations of its long-term debt agreements involving $34 million. Because of a “cross-default” provision, NGP, too, was considered to have violated terms of its debt of $157 million.
That’s one reason NGP’s stock is trading at below $20 after a 52-week high of near $30 in May. NGP owns 146 courses in 23 states.
“It’s clear the fundamentals have deteriorated,” said Morgan Stanley real estate investment trust analyst Matt Ostrower, referring to NGP’s relationship with AGC. “We’re very concerned. If there’s big problems at American Golf, there’s a big problem at NGP.”
American Golf officials declined to discuss their state of affairs, but NGP – which acquired and then leased about half of the Cobblestone properties – attributed losses to adverse weather, increased competition and a downturn in business entertainment.
Lehman Brothers analyst Paul Penney believes there are other factors, particularly the Cobblestone deal and management issues: “American Golf has had problems for a while, and it’s kind of a byproduct of growing too quick. In my opinion, they weren’t ready for that amount of growth.
“The good news,” said Penney, “is they still have some large clusters. They own the Phoenix market and have a strong presence in California.”
Meanwhile, Dallas-based ClubCorp – with a net loss of nearly $11 million for the first half of this year – has made an abrupt shift in its strategic focus.
First, it sold its interests in England-based PGA European Tour Courses; three weeks later, it divested most of its stake in Canada’s largest operator, ClubLink Corp.
The two transactions, conducted between Aug. 17 and Sept. 4, generated nearly $39 million.
According to ClubCorp chief operating officer Jim Hinckley, the proceeds from these “nonstrategic assets” were used to pay down debt, which increased from $274.5 million in December 1998 to $512.1 million in December 1999, after the Cobblestone deal. (At the end of 2000, debt had increased to $692 million.)
“The issue for American Golf is there is so much competition in the daily-fee or public sector,” said Hinckley, who rejects any notion that the Cobblestone deal has hurt ClubCorp earnings. “We feel like we’ve got a hedge because we’re so heavily invested in country clubs.
“We’ve been selling courses and tightening up our portfolio in terms of markets and types of clubs. Financially we’re a very strong company.”
Hinckley said income before expenses such as interest and depreciation remain healthy at ClubCorp, which operates more than 190 courses around the world.
Penney said companies can blame weather and other factors, but the “biggest culprit” is the industry.
“That 26 million golfers number hasn’t grown,” Penney said. “Supply has grown way too aggressively.
“This supposed Tiger Woods-factor . . . all it means is it’s just fattening his pockets and TV ratings. You need to get more creative these days.”