Castle Gets Mortons, But On Whose Terms? –

Morton’s of Chicago steakhouses are famous for their silver platters, prime aged beef and tableside menu presentations. If only the restaurant chain’s ownership and potential buyers were as civilized.

Over the past three months, Morton’s Restaurant Group (NYSE:MDG) has been the staging ground of a private equity food fight between New York investment house Castle Harlan Inc. and billionaire financier Carl Icahn. And while recent shareholder acceptance of a $17 per share buyout bid from Castle Harlan would seem to have determined the winner, it is entirely possible that Icahn himself had the most to gain by losing.

“The whole thing was a plot by Carl Icahn to gouge Castle Harlan, and I can’t believe they played along,” says Scott Keller, president of “Icahn owns [6.1%] of Morton’s [common stock], so we know for sure that Icahn will make money off of this, but it remains to be seen if Castle Harlan can.”

Spoiling For A Fight

The saga began in earnest last summer, when Morton’s management recognized that it could best shield itself from the budding economic storm by selling out to a private investor. The upscale eatery operator saw no end in sight to its falling revenues, and enlisted Greenhill & Co. LLC to aid in determining buyout interest.

A number of private equity firms including Investcorp and DB Capital Partners expressed interest, but there was little doubt that the deal was Castle Harlan’s for the taking. Not only had the New York-based investment house led a pre-IPO buyout of Morton’s back in 1989 through an affiliate fund, but the firm also had a pair of senior managers in John Castle and David Pittaway already sitting on Morton’s board of directors.

While Morton’s insisted that the auction was fair and open, not everyone agreed. The most notable critic was Barry Florescue, head of Pompano, Fla.-based BFMA Holdings Corp., a 13.3% (as of February 2002) shareholder in Morton’s who had been brushed off by company management as non-credible when he offered to buy Morton’s in July for $28.85 per share.

“We are appalled by the actions of [Morton’s CEO Allen Bernstein] and the company’s board thus far,” Florescue wrote to Bernstein in a Nov. 2001 letter. “It is clear to us that the board has failed to provide independent and ethical oversight to this process. Unless the sale process recently announced by the company is demonstrated to be fair, open and equal to all parties, [Mr. Bernstein] can expect [BFMA] to continue to be a shareholder activist. We will not stand by idly and let [Mr. Bernstein], John Castle and [Morton’s CFO] Tom Baldwin steal value away from the public stockholders.”

Morton’s declined to publicly respond to the letter, except to lodge its “strenuous” objections to Florescue’s allegations.

Anything You Can Do…

As the auction carried on, Morton’s continued to suffer revenue declines. The company reported $237.1 million of revenue in 2001, down 4.5% from $248.4 million in 2000. Just before realizing that it had made 7.9% less in Q1 2002 than it had in the year-ago period, Morton’s on March 26 accepted a $52.8 million definitive merger agreement with Castle Harlan ($153.5 million including assumed debt). The deal worked out to $12.60 per share of common stock, or a 9.1% premium over the March 26 closing price and a 26.2% bump from the average closing share price over the previous 20 trading days.

Despite the premium, Florescue was livid. So too was Carl Icahn, whose divorce lawyer was Florescue’s brother and who had promised financial backing in the original $28.85 per share buyout bid. Icahn decided to take matters into his own hands by starting to buy up Morton’s common stock through his High River LP. From his first purchase of 8,500 shares at $14.02 each on April 2 through to his final land grab of 15,000 shares at $13.98 a share on May 3, Icahn spent over $3.96 million amassing 6.85% of Morton’s common stock at an average of $13.81 per share.

Sources say the original goal was to use Icahn and Florescue’s combined holdings to elect a dissident slate of directors, but then Icahn upped the ante by making his own buyout offer of $13.50 per share. Castle Harlan matched the offer and was approved again by the Morton’s board. Icahn returned fire by raising his bid to $15 per share, at which point it looked like the Morton’s board was ready to switch sides. But Castle Harlan once again matched and Icahn upped his bid to $16.

By the time Castle Harlan found its own way to $16 per share on July 9, it took Icahn just a few hours to offer $17 per share, which drove the deal’s value to 8.2 times Morton’s 2001 EBITDA. The only catch, however, was that Icahn now was also asking Morton’s to drop a “poison pill” provision designed to protect the company against hostile takeovers. By submitting to the request, Morton’s would have been allowing Icahn to bring in a third party – such as Florescue – into the mix.

The company believed that losing its poison pill provision would violate the original Castle Harlan offer and potentially cause the company to lose both bids. Morton’s told Icahn it would accept his offer if he dropped the request, but he refused.

In a letter to shareholders dated July 12, Morton’s wrote: “Ask yourself why Carl Icahn suddenly needed us to exempt him from the shareholders rights agreement… Why would this billionaire suddenly need us to join with others to secure $4.5 million in additional funding? We told Icahn then and tell him again now: If you have a real $17 offer to make, do it now.”

Following some additional verbal sparring between Icahn and Morton’s, Icahn on July 15 amended his poison pill request so that it would not violate the original Castle Harlan offer. By that point, however, it was too late as Castle Harlan immediately matched the $17 per share bid and Morton’s management decided to bring the new offer to a shareholders vote.

Following a recommendation by Institutional Shareholder Services that Morton’s stockholders approve the $17 per share Castle Harlan bid, shareholders approved the offer by a narrow 55.9% majority. According to published reports, the final bank syndicate for the deal included FleetBoston, Wachovia Bank, J.P. Morgan Chase, Comerica Bank and LaSalle Bank.

Just Desserts

The only question left at this point is whether or not Icahn was only bidding to drive up the price of his own holdings. Keller of thinks such a scenario is probable.

“Carl Icahn’s bids were illusory, but he ended up out-bluffing everyone,” Keller says. “Castle was kind of hamstrung in this case, but Icahn would have found a way to wiggle out of buying the company if he had actually won the auction.”

Time will tell if Castle Harlan was suckered into overpaying for the deal, but there is no doubt that Icahn made out like a bandit. The value of his stake has now risen to more than $4.87 million per the buyout agreement, which means he made a 23% profit, or $912,342, in less than three months.

At the end of trading last Monday, Morton’s was trading at $16.97 per share.

John Castle and David Pittaway of Castle Harlan were at an off-site meeting as Buyouts went to press, and therefore were unavailable for comment. Representatives from Morton’s did not return calls for comment. Icahn could not be reached.