Monday, June 15, 1998
Zapata Corp.
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Phone: 713-940-6100
Website: http://www.zap.com
Price (6/12/98): $9 7/8
HOW DID IT DOUBLE?
Viva Zapata! Or is it Zap? From crude oil to fish oil to e-commerce, this company's business has been a little too slippery to keep up with. Co-founded as an oil company by former President George Bush back in 1953 (he sold out in 1966), Zapata's storied history features as many bizarre turns as The X-Files.
Think I'm kidding? Consider the Barron's cover story that ran weeks before Bush won the presidency. Reporter Jonathan Kwitny revealed that during his tenure at Zapata, CEO Bush had failed to disclose material regarding suspect business ventures. At the heart of the controversy was a related private company started by Bush, other major Zapata shareowners, and a well-connected Mexican official with ambitions of claiming that country's presidency.
That guy actually ended up a convicted felon. Kwitny also discovered that six years of crucial Zapata filings, which may have revealed what was really happening at the company in Bush's latter years as CEO, were "accidentally" destroyed by the SEC shortly after Bush became VP. The truth is, ZAP was out there.
But hey, that's ancient history. Zapata's main operation of late has been its fish oil business known as Omega Protein <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OME)") else Response.Write("(NYSE: OME)") end if %>. Zapata's shares nearly doubled in late January following word that it would offer part of Omega to the public. The offering went off in early April at the high end of its per share range, pushing Zapata stock as high as $15 3/8 for a one-year gain of 270%.
The latest news is that Zapata will soon change its name to Zap, refashioning itself as an acquirer and consolidator of Internet and "e-mail commerce" businesses. The first step in that process involved paying a pittance to acquire the nearly defunct operations of online magazines Word and Charged from Icon CMT. The next step was running classified ads in newspapers across the country reading "We Will Buy Your Web Site."
Yet, the real stunner -- widely seen as a mere publicity stunt -- was the May 21 offer to acquire Internet search engine company Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> for $72 a share in Zapata stock. At the time, Excite had a market cap of $1.4 billion compared to Zapata's $260 million. The highflying Excite immediately laughed off the offer, citing the "complete lack of synergy." But since we're writing about them, the stunt must have worked! (The Fool, by the way, is not in talks with Zapata.)
BUSINESS DESCRIPTION
Since 1994, Zapata has been controlled by Florida real estate and broadcasting magnate Malcolm I. Glazer and his son, CEO Avram Glazer. Among other things, the Glazers own the Tampa Bay Buccaneers football team.
In the last couple of years, Zapata has sold off its oil and gas businesses. In the process it paid $26 million for a minority stake in papa Glazer's Envirodyne Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EDYN)") else Response.Write("(Nasdaq: EDYN)") end if %>, a maker of food packaging products. Plans to bid for the restaurant chain Houlihan's and hamburger grill maker Specialty Equipment (companies in which the Glazers held major stakes) were apparently thwarted by shareholder lawsuits.
In the last year or so, Zapata acquired businesses to complement Omega Protein (formerly Marine Genetics Corp.), which makes products from menhaden fish, including meal for animal feed and oils used in margarine and shortening.
Zapata's major assets today include a 40.4% stake in Envirodyne (6 million shares) and a 59.7% stake in Omega (14.5 million shares). Malcolm Glazer reportedly owns 45% of the stock.
FINANCIAL FACTS
Income Statement*
12-month sales: $128.5 million
12-month income: $13.8 million
12-month EPS: $0.57
Profit Margin: 10.7%
Market Cap: $238.8 million
(*As reported. Does not accurately reflect future operating results.)
Balance Sheet*
Cash: $32.8 million
Current Assets: $80.9 million
Current Liabilities: $16.8 million
Long-term Debt: $10.9 million
(*As of March 31. Does not include about $86.7 million net from the sale of Omega Protein shares and Omega's repayment of a loan.)
Ratios
Price-to-earnings: 17.3
Price-to-sales: 1.9
HOW COULD YOU HAVE FOUND THIS DOUBLE?
The decision in May of '97 to buy back 6.7 million of Zapata's then 29.5 million outstanding shares meant the Glazers thought the stock was cheap at around $4.52 per share. Also, the late January spin-out announcement worked as expected in waking up the market to a potentially undervalued asset. Even before that, though, Omega Protein was reporting strong revenue growth and even stronger profits thanks to rising prices.
WHERE TO FROM HERE?
Though an investment banker would sweat the details more thoroughly, a simple approach to determining Zapata's value is just to add up the pieces.
Envirodyne is a money-losing business with a debt-to-equity ratio of 6.2. So Zapata's stake in the firm is worth just $43 million despite Envirodyne's roughly $587 million in trailing 12-month sales.
Omega Protein is a nicely profitable business. Pro forma results for FY97 showed $86 million in sales with 12.5% net profit margins. Results for the first half of FY98 showed sales up 23% to about $60 million, with net margins at 20%. Though the second half of the fiscal year is busier but less profitable, cash from the recent offering should help Omega cut its interest expenses and continue its expansion. Zapata's equity stake in Omega is worth $232 million.
Omega's results are consolidated in Zapata's income statement while its minority interest in Envirodyne appears as income (loss) from unconsolidated affiliates. Of course, the minority interest of Omega's public stockholders will henceforth be backed out of Zapata's income.
So Zapata owns $275 million worth of stock while holding a war chest of around $109 million net of debt. To arrive at something closer to a liquidation value, though, you would at least need to account for the capital gains taxes on any additional equity sales. That's one reason Zapata appears to trade at a discount to its obvious assets.
If we assume Omega and Envirodyne are fairly valued, then the main question becomes: What can the Glazers do with a wad of cash and vast ambition? Avram Glazer maintains that the bid for Excite was serious and that Zapata could have proved a strong financial partner for the money-losing search engine company.
Glazer has said that he believes online content and commerce will be dominated by a handful of players, and Zapata intends to be one of them. Still, it's unlikely that classified ads and splashy buyout bids offer a legitimate way to build an Internet empire. Until the future ZAP proves that wrong, investors are rightfully dubious.
-- Louis Corrigan
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