Is Tom Hicks Going Broke?

Five
minutes into my conversation with Tom Hicks, and Dallas’ best-known
investor is warning me. Sitting in his office, filled with marble and
tasteful bronze art, he is affable and friendly—certainly not
threatening in any way—but he wants to set me straight. Hicks, 56, is a
big man with easy grace, and he’s settled comfortably in his chair on
the other side of a huge conference table. He is clearly bemused by my
line of questioning. Is the recent poor performance by Hicks’ private
equity firm—Hicks, Muse, Tate & Furst—connected in any way to the
poor performance of his sports teams, the Dallas Stars and the Texas
Rangers?

“The mistake the
media and the analysts all make is trying to connect the dots,” Hicks
tells me. “The two have nothing to do with one another.”

“Except that you’re in charge of both of them,” I reply.

And so begins my
education. But while Hicks launches into his peroration, which has the
sound of something he’s had to say before, I can’t help but think that
this is a man who has made millions by connecting dots no one else
could see—and who is now losing millions. Having cast himself and his
firm so much in the public eye by becoming a team owner, he shouldn’t
be surprised to find himself under scrutiny.

On the face of it, of course, the leveraged buyout business has nothing in common with the sports business.

Nobody is suggesting
that the Stars’ failure to make the playoffs resulted from the collapse
of Hicks Muse’s telecom investments. Nor that the Rangers’ last-place
finishes in the AL West for the past two years are connected to the
failure of Hicks’ Latin American sports channel. The burst of the
Internet bubble, the recession, the meltdown of the Argentine
economy—there are distinct reasons for Hicks Muse’s problems in
different investment areas. As for the sports teams, perhaps it is
inevitable that winners eventually become losers. Except for the New
York Yankees, dynasties just don’t happen anymore.

Then again, there are
all of those dots. In the past 18 months, the general managers and
coaches of the Stars and the Rangers have been dismissed. Jim Lites,
the man supposedly running both teams, was forced out. Hicks Muse
partner Charles Tate retired in June. Partners Mike Levitt and Cesar
Baez, who were in charge, respectively, of telecom and Latin America,
left the firm earlier.

Another huge dot popped up when Hicks publicly threatened in March to pull out of the Victory project if the Palladium
proposal to use $43 million in tax increment district funds was not
approved (the deal would win approval in May). Because his only role in
the project would have been to sell his partnership portion to
Palladium, some observers saw the threat—planted in the Morning News—as
little more than a head-fake aimed at the City Council, which Hicks
himself later acknowledged in the New York Times. The episode made
Hicks look more like a petulant child than the astute and seasoned
investor he is. That impression was magnified when he called up KTCK-AM
1310 (The Ticket) to complain on the air about the station’s take on
the Victory project, rambling on about tax increment financing. At that
point, something began to sound less like petulance and more like
desperation.

In Hicks’ office, I
keep trying to connect the dots, and he keeps setting me straight. The
performances of the Stars and Rangers have nothing to do with
front-office turnover, Hicks says. The failure to develop property
around The Ballpark in Arlington and the controversy over Victory
spring from the bad real estate market and nothing else. The botched
investments by Hicks Muse are the result of bad timing. The turnover of
key personnel at Hicks Muse and the sports teams is unrelated to any
turmoil in those businesses.

But eventually the
dots line up so neatly that you don’t even need to connect them to see
where they’re headed. The line Hicks doesn’t want drawn leads right
across the conference table. And he seems to be struggling to avoid the
central question before him: is Tom Hicks’ world crumbling around him?
Or, put another way: just how many millions can a millionaire afford to
lose?

Missing the Bar

Before we get to
Hicks’ sports interests, let’s have a look at his cash-generating
machine, Hicks Muse. The fact is that the machine isn’t running well.
Its problems predate the Internet meltdown and the 9/11 market crash,
but those certainly didn’t help. The ship is righted now, Hicks says.
What he won’t acknowledge is that he still has a lot of wreckage to
deal with.

Hicks made his name
in the leveraged buyout business in the mid-1980s, when he and partner
Bobby Haas bought Dr Pepper and Seven-Up in two separate deals totaling
$646 million (the combined companies were later sold for $2.53
billion). He went on to form Hicks Muse, where he followed a
buy-and-build strategy that wasn’t universally embraced at the time.
When LBO firms first came into vogue in the 1970s and ’80s, many made
their money by breaking up companies and selling the parts. Hicks
instead bought companies that were undervalued—first in the food and
manufacturing sectors, later in media as well—and built value through
investment and sound management.

Private equity firms
like Hicks Muse (the term “leveraged buyout business” is synonymous but
lost favor in the 1990s because hostile takeovers gave it a bad
connotation) are fairly simple businesses, at their core. They
generally raise money for a fund from institutional investors to buy
stakes in companies where they see upside potential. The private equity
firm typically draws down on its commitments from investors for a
five-year period, buying and investing as it goes. Generally, the goal
is to cash out after 10 years. The private equity firm gets annual
management fees of 1 to 2 percent, usually weighted more heavily in the
first five years to “keep the lights on” while the firm hunts for
target companies. The investors get a preferential rate of return, and,
at the end of the fund’s life, they get their money back plus the
lion’s share of the profits, with the equity firm getting 20 to 30
percent. If all goes well, partners like Tom Hicks make a lot of money
on their expertise, and the investors get a higher rate of return than
with other, more conservative investments. Being successful requires
buying right and not overpaying for target companies.

The success or
failure rate of these funds is difficult to gauge, because the firms
themselves do not make return rates public and the long-term nature of
the funds allows for turnarounds after bad starts. Nobody doubts,
however, that Hicks Muse had a golden touch during the early and
mid-1990s. It certainly had a golden touch in attracting investors,
quickly becoming one of the largest private equity funds in the nation.

Its first two funds
performed well, with the right combination of food, manufacturing, and
media plays. The third fund, started in 1996, has also done fairly
well. By the late 1990s, though, the investment climate began to heat
up. Investors leaped like lemmings into high-tech, and anyone who
wanted some of their money had to jump ahead of them and pretend to be
in the lead.

With its fourth
fund, in 1998, Hicks Muse changed strategies. Out of a $4.1 billion
pool, the firm placed $1.2 billion in telecom, buying minority stakes
in public companies in a bid to become a major player.

Meanwhile, the New
Economy siren song grew more and more enticing. Venture capital firms
posted gigantic returns, and the pressure was on to match them. Hicks
Muse jumped in by borrowing $200 million and investing in several
Internet companies, with the thought of folding them into its next
general fund. At the same time, it launched a $964 million Latin
American fund with the idea of exporting U.S. media expertise to the
South American market.

As the Hicks Muse
partners went out to peddle their fifth general fund, the New Economy
turned ugly. The first to go down were the telecom investments.
Four—Teligent, ICG Communications, Viatel, and Rhythm
NetConnections—would file for bankruptcy. ICG collapsed only six months
after receiving a Hicks Muse infusion of $230 million. Analysts think
the telecom plays will be nearly a total loss for the firm.

Then came last year’s
meltdown of the Argentine economy, which hit three Hicks Muse
investments—two of which are in default, the other in bankruptcy. On
top of that, its $500 million investment (from its third fund) in Regal
Cinema hit the wall when the company declared bankruptcy (it has since
emerged).

For its fifth fund,
Hicks Muse announced it would raise $4.5 billion. It bears mention that
when a firm makes an announcement like that, the bar is always set low,
with the firm expecting to clear it with lots of room to spare (thereby
providing an opportunity to crow about the achievement). The fifth fund
closed in January at $1.6 billion. And Hicks Muse’s Latin American II
fund similarly missed the bar, promising to raise $1.5 billion but only
mustering $150 million.

Amid this poor
performance, with his reputation in the investment world taking a real
bruising, Hicks did something almost unprecedented. He and his partners
made headlines when they guaranteed investors a 20 percent return on
Hicks Muse’s original Internet investments or they would make up the
difference out of their own pockets. Some analysts believe these
investments are now worth 30 cents on the dollar.

Back to Basics—and the Ballpark

All of this is old
news to Tom Hicks, who says his company is back to basics. The rest of
Fund V is being invested in good old-fashioned companies like Swanson
Food, Vlasic Food, and Yell, the British yellow pages company (which
the firm plans to take public soon). In late May, Hicks Muse, along
with another group, bought ConAgra Meats for about $1.4 billion. But
the past—and the running interest on the mistakes of the past—won’t be
easy for Hicks to forget.

Take that famous
guarantee, for example, made late in 2000. “Covering that money
wouldn’t have been a big issue for them in the past,” says Josh Kosman,
a senior writer at the Daily Deal, a financial news publication. “Today
it is a big issue.”

The Hicks Muse
partners made the guarantee by promising a portion of their future
profits from past funds to cover it. Recently they hired an investment
bank to help them find the most efficient way of covering the
guarantees while reducing the carrying costs. According to Kosman, the
partners have already paid down $50 million on the $200 million
principal. With compounded interest, the guarantee on the remaining
$150 million will be worth $180 million next year and $373 million
after four years.

“The problem
for a buyout shop like Hicks Muse is that they have all of these
telecom and Internet companies that have no breakup value,” says Jesse
Reyes, vice president of Venture Economics, a New York-based
venture-capital research firm. “The market has dried up.”

William Quinn, an
investment advisor for AMR’s pension fund, has put $55 million into the
latest fund. “The pressure to get into telecom and Internet investment
really hurt them,” Quinn says. “Clearly they have made some missteps.
But these funds have a long way to go, and you have to take the long
view. They are back into what they do best, and they have done well
with these type of companies in the past.”

Not everyone is so
sure. The Daily Deal’s Kosman thinks the situation is more serious for
Hicks Muse than the firm is letting on. “They are a house of cards
ready to fall apart,” he says. “Ten years ago they were a top 10 buyout
firm. Today they are about 60th, and the problem is, there are just too
many firms chasing too few deals.”

Jay Fewel of the
Oregon Public Employees Retirement Fund, which has invested with Hicks
Muse in the past but passed on Fund V, doesn’t go that far, but he does
sound a cautionary note: “If they don’t do well with this current fund,
it will be difficult to raise money for a Fund VI.”

Not
all the problems are New Economy-related. Eyebrows were raised on Wall
Street by Regal Cinema—the $500 million movie theater bomb—and
Viasystems, an electronics manufacturer into which Hicks Muse has
pumped $700 million and whose stock over the last 12 months has dropped
from $4.25 to 7 cents. “These call into question the method, manner,
and care with which Hicks Muse is selecting its investment
opportunities,” says one fund manager.

“You can see
a change in Tom,” says a friend. “Before he owned the Stars and the
Rangers, he was content to sit in the background and make money. Owning
the sports teams has increased his profile, and despite how he protests
about all the publicity, he really likes it. It’s made him a little
more reckless.”

The Man Couldn’t Help Himself

While Tom Hicks
clams up when it comes to talking about Hicks Muse, he can get
positively loquacious about his sports franchises.

Before he bought
the Stars in 1995 for $84 million, Hicks claims he originally had an
endgame in mind—at least that’s what he says now (more on this later).
Hicks says his plan was to invest in the Stars, make them a playoff
team, and get them moved into the American Airlines Center. The
increased revenue would double or triple the value of the team, and
Hicks would walk off with a big wad of cash. (Which is exactly what
fellow arena investor H. Ross Perot Jr. would do with the Mavericks.)
But after he bought the team, Hicks says he looked across town at what
Jerry Jones was doing with the Cowboys and he began to develop a
different perspective. “I used to think sports didn’t make economic
sense,” he told Fortune last year. “But seeing what Jerry did opened up
my eyes to what a well-managed organization could do.”

In his office last
month, Hicks elaborated. “Two things happened to make me look at sports
long-term,” Hicks says. “I fell in love with hockey. Then I started
seeing what the sports business is all about, and I started doing the
buy-and-build thing because I couldn’t help myself. Having the two
teams [he bought the Rangers for $250 million in 1998] changed the
whole dynamic. We had leverage over Fox because we could create our own
network or let Fox pay what it was really worth.” What it was worth to
Fox was $550 million over 15 years, one of the most lucrative media
deals in sports. It was a deal that also placed the Stars and Rangers
among the top revenue producers in their leagues.

Hicks likes to
emphasize that the sports teams are completely separate from Hicks
Muse. And they are somewhat minor investments, considering his entire
portfolio. Before the Stars moved into the new arena last year, they
were costing Hicks about $10 million or more a year; now they make a
small profit. The Rangers are in worse shape. Last year, Hicks
announced a loss of $31.2 million; this year it will likely surpass $40
million. We’ll try to understand what those numbers mean to Hicks—and
just how minor the investment is—in a minute.

Putting money
aside, Hicks’ biggest problem has been the melding of the two
organizations under the Southwest Sports Group umbrella. The Stars and
Rangers now share marketing, ticket sales, media negotiation, and real
estate ventures. “You don’t need two of everything,” Hicks says. “The
Stars play in the winter and the Rangers in the summer. The crunch time
to sell tickets is at two entirely different times. You can use a lot
of the same people to do two jobs.”

Sounds logical, but
the results haven’t been pretty. In 1999, before the SWSG merger, the
Stars won the Stanley Cup and the Rangers won the AL West. Now the
Stars can’t make the playoffs and the Rangers are in last place. The
front office has been a mess, too. Hicks inherited team presidents Tom
Schieffer of the Rangers and Jim Lites of the Stars from the previous
owners. Schieffer was gone fairly quickly. Lites was named president of
SWSG because Hicks knew little about hockey and because Stars general
manager Bob Gainey wasn’t comfortable discussing personnel issues with
him.

To look after the
money, Hicks installed his own man, attorney Mike Cramer, as chief
operating officer. Cramer had once managed the Bumblebee brand for
Hicks, which led some SWSG colleagues to refer to him derisively as
“Mr. Tuna.” Later, he and Lites sparred over personnel and financial
issues, and Lites was gone. Hicks helped Lites get a job with the
Phoenix Coyotes.

“The clash
was between Lites and Cramer, and that was the only clash,” Hicks says.
“Mike Cramer is clearly in charge of the business side, and he and his
team are doing a better job than anyone has ever done.”

The other changes
in the organization are easily explained, Hicks says. Rangers manager
Johnny Oates and Stars coach Ken Hitchcock had lost their teams. “A
manager can only be effective in the pros for a finite period of time.”
Rangers GM Doug Melvin couldn’t “get us to where we wanted to go.”
Gainey, who had told Hicks he would step down two years ago, had become
a lame duck.

But even as he ticks
off the changes and the reasons for them, Hicks has to know that so
much turnover can’t be good. Three levels of management have been
changed in a business where stability usually translates into
championships. Meanwhile, both the Stars and Rangers finished poorly
last year, with an aging nucleus of key players. With both labor
contracts in both leagues coming due in the next two years, the prudent
thing to do, some sports columnists have argued, would be to tear down
the teams and trade veterans for younger players.

Hicks has taken a
different approach. He pushed the payroll of the Rangers up to $105
million this year, with free-agent signings of veterans Juan Gonzalez
and Chan Ho Park, among others. Hicks told me the spending strategy is
crucial, as this is a “crunch year” for the Rangers, meaning that
revenue issues will get better the further the team gets into the Fox
TV contract. Oddly enough, when the team was swept days later by the
lowly Detroit Tigers, Hicks vented frustration over his team’s inflated
payroll, telling the beat reporters, “I’m not doing it anymore. This is
my last year of doing it. We’re going to play within our means from now
on. At least break even.” And he admits that he needs to get butts in
the seats: the Rangers are 160,000 fans behind last year’s pace. To
compound matters, 25 percent of the Rangers 2.8 million attendance last
year were no-shows. That translates into almost $1 million in lost
parking revenues alone, not to mention the profits on overpriced beer
and hot dogs.

But the Stars are
about to undergo a similar spending spree. Not making the playoffs cost
Hicks about $10 million in lost revenue, he says, but he plans to sign
key free agents this summer. “Based on the revenues, we have the
flexibility to be aggressive and we will,” he says. “We are the gorilla
in hockey. We can afford to have a competitive payroll and still make
money. We will be very aggressive.”

The Bottom Line

The financial drain
on Hicks doesn’t end with his investment firm and his sports
franchises. As it turns out, Hicks is also losing money at home. Four
years ago, he purchased the old Crespi estate and later bought
adjoining properties on Walnut Hill, near the Dallas North Tollway.
Last year, he began construction on a new residence. The property is
valued on the tax books at $26 million. Sources close to Hicks say the
house and other improvements were originally budgeted at $30 million
but could now exceed $50 million.

On the surface,
Hicks has every reason to indulge himself. Hicks Muse has an estimated
$12 billion under management (though it’s tough to gauge because so
many of their investments have shed value). Without making another deal
or raising money for another fund, Hicks Muse could comfortably coast
until at least 2007. Its management-fee income is north of $80 million
annually, which, after operating expenses, earns the partners perhaps
$60 million, probably netting Hicks himself $15 million a year, after
taxes.

Tom Hicks’ net worth,
as calculated by Forbes, is around $700 million. But that’s a deceiving
figure. When you have a lot, you spend a lot. Net worth is one thing;
liquidity is something else entirely. Hicks’ money is tied up, some in
outside investments, some in Hicks Muse funds. Ready cash is a scarce
commodity, no matter how many zeroes you have on your balance sheet.

So when you try to
see where the cash is going to come from to keep the Rangers afloat,
the clouds start to roll in. Hicks is being hit from a number of
different areas. He and his partners have to pay off that Internet
investment, and the interest clock is ticking at $30 million a year.
The Rangers are hemorrhaging money at the rate of $40 million a year
(and the impending work stoppage in major league baseball doesn’t bode
well for owners). The first four Hicks Muse funds are maturing, which
means the management fees will be leveling off. Meanwhile, the firm’s
anticipated share of profits is being eaten by flawed investments such
as telecom, Regal, and Viasystems.

Now, much of this
is informed conjecture, and nobody knows Tom Hicks’ personal financial
situation except Hicks, his wife, a couple of the original partners,
and maybe a banker or two. But put in perspective, the prospect of
writing $40 million checks for the Rangers doesn’t seem as minor as
Hicks makes it out to be when he’s chatting with a reporter. It makes
one wonder if Hicks blew up at the Dallas City Council over the Victory
project because he doesn’t like the way the city operates—or because he
flat-out needed the cash. It also makes one wonder why he might now
claim that, before he bought the Stars, he planned to sell the team all
along. Could this be a rich, though cash-strapped, man laying the
foundation to cover his posterior when he does sell? This line of
questioning might illuminate the recent release of the $6 million Ed
Belfour in favor of the $850,000 Marty Turco. Decreasing payroll to
improve cash flow outlook is sometimes termed “dressing up Grandma” in
deal circles.

Certainly the
vultures are hovering. The Daily Deal’s Kosman sounds a common theme:
“If we looked at Tom Hicks in January 2001, he was ranked in the top 10
of all private equity firms, he was on the top of the sports world, his
personal friend had become president, and there was talk of his being
named Treasury Secretary. All the stars were lining up for this guy.
Now his firm’s in some trouble, his sports teams are terrible, and he
was passed over for a cabinet post. It’s amazing how quickly all of
this has caught up with him.”

It’s also amazing
how quickly it could turn around. A solid performance with Swanson
frozen dinners and Vlasic pickles, a smashing IPO for the British
yellow pages, development of new offices and apartments around The
Ballpark in Arlington, a pennant for the Rangers, and another run at
the Stanley Cup for the Stars—all that would scatter the clouds and
bring sunshine once again to the world of Tom Hicks.

Then again, I
shouldn’t make such assumptions. None of these occurrences would affect
any of the others. None of the dots are connected. That much Mr. Hicks
has told me.

Fort Worth-based
freelance writer Dan McGraw is a former senior editor for U.S. News
& World Report. He is currently working on a biography of football
great Johnny Unitas.

Photo by Kris Hundt