Sunday, October 10, 1999

Zell's world: A tycoon talks


Billionaire explains philosophy, eccentricity

zell
Sam Zell
        Chicago financier and billionaire Samuel Zell has played a long-distance role in Cincinnati commerce for a decade. And that role, though changing, is not expected to end anytime soon.

        He was controlling shareholder of the former Jacor Communications radio giant and now is a significant shareholder of Cincinnati-based Blue Chip Broadcasting. He also is chairman of the companies that operate a fleet of paddlewheelers like the Delta Queen and the Chart House restaurant on Newport's riverfront.

ZELL IN CHARGE
  Billionaire Sam Zell is chairman of the board of:
  • American Classic Voyages, holding company of The Delta Queen Steamboat Co., America's oldest cruise line. It operates the Delta Queen, the Mississippi Queen and the American Queen.
  • Chart House Restaurants, a chain of 57 restaurants, including one on the Ohio River in Newport. It had revenues of $145 million in 1998.
  • Equity Office Properties Trust, the nation's largest publicly held owner and manager of office properties, with more than 76.3 million square feet of office space. It has no property in Greater Cincinnati, but its portfolio includes buildings in Columbus, Cleveland and Indianapolis.
  ›Equity Residential Properties Trust, the country's biggest apartment company, with more than 192,000 units in 34 states.
  • Manufactured Home Communities, a company that leases 53,391 home sites to owners of manufactured homes in 26 states.
        At 58, Mr. Zell is more likely to wear a starched Sylvester-the-Cat shirt to his office on the Chicago River than worsted wool. He maintains a broad array of investments — and a disdain for reporters. Rarely does he grant sit-down interviews. Despite his media shyness, he is well-known in international investment circles, as much for his astute investing ability as his eccentricities.

        On most days he rides one of his half-dozen motorcycles to work, usually a yellow Italian Ducati ST-2. He knows how to have off-duty fun, too. When he throws a party, it may be a 24-hour affair that spans Chicago to London to Paris on a private jet with stops at buildings his company owns along the way.

        He annually takes a two-week motorcycle jaunt with friends, known as Zell's Angels, trips that include a mechanic and chase truck for repairs. Excursions may begin in Greece and end in Nice or span the beaches of Thailand one year, the Alps of Slovenia the next or the cities of Spain.

        No primitive camp-outs under the stars for this crew, either. It's five-star all the way, and here's one reason why: Mr. Zell's net worth is estimated at $1.8 billion. He started out in business by buying apartment buildings after graduating from the University of Michigan. Today, his interests range from office space to fiber optics.

        Enquirer reporter John Eckberg recently spent time with Mr. Zell in his sixth-floor suite of offices off the Loop in downtown Chicago. Excerpts from that interview:

        Q: Why don't you own any buildings in Cincinnati?

        A: “We actually tried very hard to buy the Chiquita building when it was for sale and failed. We couldn't make a deal at a level we liked, and we've owned stuff in Cincinnati in the past but not currently.”

        Q: Are you looking?

        A: “We are always looking.”

        Q: You have this reputation of being a “vulture investor,” the ...

        A: “Grave Dancer?”

        Q: Yes, but I understand you are paying some fairly steep prices for some office buildings now. You no longer are making low-ball offers?

        A: “Oh, I don't think we've ever done that. I really don't. I think we are cold-cocked realists. When your market is 25 percent vacant and your building is 50 percent vacant and you're seeking to sell it, what else can I do but make you an offer based upon what I think it's worth?

        “We bought the BP building in Cleveland, a huge building. They put it on the market. That was a building I wanted to own. We pre-empted the bidding and bought it. There were lots of reasons. Rarely are reasons limited to the specific asset. When you look at something like Equity Office, which is the largest owner of office space in the United States, how a building fits has a lot to do with its value to us. So I don't think it's fair to even make a judgment to, quote- unquote, value, because really, it's value to who and under what circumstances.”

        Q: Let's switch to radio. In 1997, the average station sold for $8.03 million. It dropped $5 million in 1998. In 1996, about $14.3 billion worth of radio stations changed hands. In 1997, about $18 billion changed hands. In 1998, $9 billion. There seems to be a trend there that maybe it was time to get out of radio. Is that why you got out of Jacor?

        A: “I think the statistics that you just quoted reflect the fact that in February 1996, (Congress) passed telecom deregulation. That created an extraordinary period: consolidation. That consolidation was primarily finished by the end of 1997. So it would frankly scare me if the numbers went the other way. But I don't necessarily agree that there's any correlation between the completion of the consolidation phase and the prospects of radio going forward.”

        Q: In other words, you think radio revenues will continue to be at peaks? Broadcast cash flows at peaks?

        A: “My view on radio revenue is that the analogy is probably very similar to the railroad business. For years, the truckers ate the railroads' lunch and the railroads ended up getting smaller and smaller percentages of the railroad freight. The railroads woke up one day and said, "We have to do something about this.' And that led to the creation of container trains and efficiency, and in effect the railroads have been taking business back from the trucks.

        “Well, if you look at the radio business prior to 1996, it was highly fragmented. It had consumptive competition — in other words, it was self-destructive competition, all kinds of people owning all kinds of stations, and nobody had a big enough piece to make a difference.

        “The consolidation that occurred after the Telecommunications Act made radio a much more viable media if for no other reason than that advertisers could go to Jacor or Clear Channel or Chancellor orCBS and make one deal across the country. In the old days, you were limited to 17 stations, so you had a cluster that owned big-market stations, a cluster that owned middle markets and small markets you had to do this, and in many cases, the biggest radio station in the market had 6-8 percent share. That's a hell of a lot different from being offered the opportunity to sign on with Jacor in Cincinnati, where they have 40 percent market share. That's all making radio a much more attractive media. Therefore, I think it's going to get going forward a higher percentage of the advertising dollar than it previously got.”

        Q: Are we ever going to see another Jacor again?

        A: “In the radio business?”

        Q: Any business?

        A: “The radio business? Unlikely. But other businesses? Quite possible. All kinds of consolidations are possible. I think much of this is a result of a changed view of antitrust law.

        “If you remember back to the late 1960s, (regulators) were taking on companies solely based on their size. In those days, they never considered foreign competition. In the enlightened '90s, where foreign competition is much more relevant and size itself is not bad, I think there are lots of businesses where more effi ciency is possible and the ability to extract redundancies is also very real.”

        (A STAFFER BRIEFLY INTERUPTS)

        Q: So is everybody wearing bluejeans in here today?

        A: “Absolutely. It's really simple. If you're really good at what you do and you dress funny, you're eccentric. If you're not so good at what you do and you dress funny, you're a schmuck. So our motivation here has always been to be extraordinarily good at what you do, so therefore we can wear whatever we want. We've been doing that for 30 years.”

        Q: Back to real estate. Are you going to have all your office buildings wired for broadband Internet?

        A: “Yeah, as a matter of fact, I invested in a company called Allied Riser Corp., which is going public in about 60 days, and ARC is basically in the business of putting fiber-optic backbones into buildings and they are selling services to tenants on a per-desktop basis.”

        Q: Is anybody else doing that?

        A: “There are some others in similar places, but this is by far the leading company in the industry and has signed up approximately 300 million square feet, so it's signed up a lot more than Equity Office.”

        Q: What would you tell other companies about how to get highly regarded and competent employees?

        A: “We have been very fortunate in our ability to attract and, more important, keep good people. I think an integral part of that is No. 1: We are constantly a growing entity. And because we have such diverse interests, there is rarely a time where some part of our world is not growing very rapidly and creating opportunity.

        “Second: We have always been focused on a meritocracy. Consequently, people who join our organization are measured by what they contribute, not necessarily how old they are or where they are in the pecking order.

        “And three: I'd like to think that the leadership I provide is quite different than most scenarios in that I'm very accessible. I really, really believe in the 11th Commandment.”

        Q: What is that?

        A: “Thou shalt not take thyself seriously. And I think that under that set of circumstances, we are able to keep and recruit good people.”

        Q: If you had five minutes with the President, what would you tell him?

        A: “Resign!”

        Q: OK, you have five minutes with the president-elect, whoever that may be, what would you say?

        A: “Globalization is not a fad but a reality. That the interlocking of the world from an information point of view has enormous implications upon everything we do. And what makes America great and what makes America the leading power in the world is that we have created an open environment. So I would encourage him to advocate less regulation and less impairment to everybody's ability to function.

        “Can you imagine if there were regulations on the creation of Internet companies, what would have happened? Or what wouldn't have happened? It's very interesting that the U.S. is way ahead of the rest of the world on the Internet. A lot of that has to do with the fact that it's easy access — a society that encourages innovation, it encourages challenge.”

        Q: What advice would you give to a college graduate who wants to become another Sam Zell?

        A: “I think what I would tell an aggressive person first and foremost is make no little plans. Go for greatness — meaning nobody makes it with (halfway) efforts, and nobody succeeds without pain and without extraordinary effort.

        “(And) although it's a cliche, the long-term investor always wins.”        



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