Arvida Appears a Hit for Disney in Spite of Strains

BOCA RATON, Fla. â€”  Nearly two years have passed since Walt Disney Productions, under siege from hostile investors, paid $214 million to acquire Arvida Corp., a real estate development company headquartered in this seaside resort.

At the time, critics derided the deal as an anti-takeover ploy, since it increased Disney’s debt and made the company less attractive to raiders. Some also denounced the profits pocketed by the wealthy Bass family of Texas, which had made a cash down payment of just $14 million for its 70% stake in Arvida six months earlier. In effect, the deal gave the Basses a 5.5% stake in Disney for $7.50 per share, while Disney stock was trading at about $60.

Roy E. Disney, the son of the studio’s co-founder, voiced “serious reservations� about the acquisition, saying it might be “both dilutive and wasteful of corporate assets.�

Yet, bygones will be bygones. Before the summer of 1984 ended, Roy Disney and some of his colleagues teamed with the Basses to install a new management at Disney. Today, the co-founder’s son has nothing but praise for Arvida, according to a spokesman.

On the surface, Arvida is a big hit with its new owners. The unit has generated for Disney a total of nearly $115 million in pretax earnings, from sales of swank oceanfront condominiums here, to planned communities throughout Florida, Georgia and California, where Arvida owns 40% of the Coto de Caza development in southeast Orange County.

Stake in Management Firm

Arvida also owns one-third of a resort management company, overseeing such retreats as the Boca Raton Hotel & Club, where the cheapest room costs $200 a night.

Arvida is “doing better than their projections, financially,� Disney Chairman and Chief Executive Michael D. Eisner says, adding that he is most delighted by Arvida’s help in planning the development of Walt Disney World, a 43-square-mile tract near Orlando.

But real estate companies can become thorns for large public corporations because of their entrepreneurial style and roller-coaster earnings. Wall Street traditionally has disliked such companies because “earnings are not consistent,� explains David Londoner, a leisure-time analyst at Wertheim & Co. in New York.

Some Doubts Raised

And some sources contend that Disney is not using Arvida as shrewdly as it could. They suspect that Charles E. Cobb Jr., Arvida’s chief executive for most of the past 14 years, is already chafing under the corporate rein.

The chief executive of one New York company, citing his own sources within Disney, says he believes that Cobb is “suffering� because Disney President Frank Wells is actively overseeing land development projects, including Walt Disney World and a proposed park in France. “Chuck isn’t used to being someone’s gofer,� says the executive, who has known both men for a number of years and does not want to be identified.

Richard W. Miller, an RCA executive vice president and former Arvida officer, says Disney apparently has decided “that Arvida is not going to have a leadership role in the development of Disney real estate.� Miller says he has heard the reports not from Cobb but from friends in the real estate, theme park and entertainment businesses. “If I were Chuck, I would probably be a little disappointed.�

Points to Contract

When asked about such comments, Cobb replies that he, Wells and Eisner have “different backgrounds, objectives and different agendas, but I’d say we get along fine.� Cobb notes that he is contractually obligated to Disney until 1987 and personally eager to see the Euro Disneyland and Walt Disney World developments launched. Those projects might not be under way until 1988 or 1989, he says.

At 49, Cobb is a hard-driving, Stanford-trained executive who has guided Arvida through some perilous shoals. Undaunted by the recession of the mid-1970s and the bankruptcy of Arvida’s then-parent, Penn Central Corp., Cobb propelled earnings to $24 million from $3 million in his first nine years. In the process, he reshaped the company to his own vision, which was an accomplishment in view of Arvida’s colorful history.

The company was founded in 1958 by 91-year-old Arthur Vining Davis, a founder and longtime chairman of Aluminum Co. of America, who had moved to Florida from Pittsburgh 10 years earlier. He formed Arvida (using the first two letters of his three names) for the vast land holdings that he had acquired over that decade, including one-eighth of the usable land in Dade County, where Miami is located.

So much publicity accompanied Arvida’s 1958 decision to sell stock to the public that the Securities and Exchange Commission sued the underwriters. The agency complained that the advance press announcements caused a stampede to place orders for Arvida stock nearly a month before the offering was filed with the SEC.

Retained Lion’s Share

When the offering finally proceeded later that year, Davis retained about 60% of the Arvida stock. He died in 1962, and in 1965, his estate sold the Arvida holdings to the Pennsylvania Railroad, Penn Central’s predecessor. The railroad concern promptly reduced its stake to 51%, selling 9% to Stockton, Whatley, Davin & Co., the Jacksonville, Fla.-based management firm that actually ran Arvida from 1961 to 1971.

Brown Whatley, as chairman of Arvida, took a conservative approach, modeled after Stockton, Whatley, Davin’s leisurely development of the Ponte Vedra Club in northeast Florida. Parcels of raw land were sold from the Davis inventory, but Arvida did not develop virtual cities, like those springing up in California.

Then Victor Palmieri, a management consultant hired to salvage the non-rail assets of Penn Central, demanded a more aggressive tack from Arvida. After a nationwide search for a new chief executive, Cobb was hired in 1972 from Kaiser Aetna, a real estate venture owned jointly by Aetna Insurance Co. and Kaiser Aluminum & Chemical Corp.

Liked California

Cobb, a Fresno native, says he was reluctant at first to leave California. “I was a fourth-generation Californian. . . . I had been (an alternate) hurdler on the (1960) U.S. Olympic team, so I was well known.� In the end, Cobb says, he was lured by the desirability of Davis’ land holdings, which resembled Southern California’s Orange County in development potential. “I could do in Boca what the Irvine Ranch had done,� he says.

During the 1970s, Arvida battled for concessions to build its planned communities. In Boca Raton, for example, where Arvida was the largest landowner, the company sued Boca Raton city officials to remove a 40,000-dwelling unit cap. Arvida won the eight-year lawsuit and the city’s approval for a 969-acre project in 1979, Arvida Prsident John Temple said.

Acquisitions Made

The company also acquired new properties, purchasing at least eight financially troubled projects during the 1970s. The acquisitions included five Atlanta-area project, Orange Tree Country Club near Orlando, CocoPlum in Miami and Sawgrass, a 4,800-acre Ponte Vedra Beach resort that has become the Professional Golfers’ Assn. tour headquarters.

But Arvida’s destiny still depended on Penn Central, which had bought out the remaining shareholders in 1976. In 1980, for example, Arvida acquired its only California property, Coto de Caza, from Great Southwest Corp., largely because the two real estate companies shared the same corporate parent.

Then, in 1981, a proxy fight erupted for control of Penn Central. Management placed Arvida on the block, reportedly seeking $450 million or more.

Another subsidiary, the Six Flags theme park company once owned by Great Southwest, was put up for sale. Cobb toyed with the idea of bidding for Six Flags and discussed it with Richard Rainwater, a top adviser to the Bass family. Cobb had become acquainted with Robert Bass, the third-eldest of the four Bass brothers of Fort Worth, a few years earlier when both served as trustees at Stanford Business School.

“They were very interested,� Cobb says, but he decided not to pursue the deal because he was in line to become the chief operating officer of Penn Central and decided to stay on the corporate track.

Sold to Bally

Six Flags was sold to Bally Manufacturing for $142 million in early 1982, but no satisfactory bid materialized for Arvida. Penn Central pulled Arvida off the market in May of that year, and Cobb was named Penn Central’s chief operating officer.

For the next 18 months, Cobb commuted to New York from his home in Miami. He urged Penn Central’s management to spin off its major subsidiaries, retaining 80% of the voting stock and utilizing Penn Central’s tax-loss carry-forward to maximize returns for the Penn Central shareholders.

“It was my strategy to basically liquidate Penn Central,� Cobb says. But he failed to persuade the board, Penn Central’s management or the controlling shareholder, financier Carl Lindner.

“I was deemed a short-timer, and in many ways, I was,� Cobb admits. “I hadn’t moved my family; I was commuting to New York; I wasn’t committed, but I didn’t think the company was worthy (of) that commitment.�

Penn Central managers did agree to the sale of the Boca Raton Hotel & Club, however, for $100 million in June, 1983. “I wanted to get a hunk of cash to Penn Central, and I did,� Cobb says. Although the 60-year-old hotel was the crown jewel of the Boca Raton property purchased by Arthur Vining Davis in 1957 for $22.5 million, Cobb says the hotel was no longer a critical asset for Arvida.

Another Try

Two months after the hotel sale, Penn Central decided to try to sell Arvida again, this time by offering 71% to the public. Cobb decided to go with the spinoff, returning to the chief executive’s job.

Before the Arvida stock offering began, however, Equitable Life Assurance Society called Penn Central with an offer to buy Arvida. Cobb, as a Penn Central director, was given 24 hours’ notice of the board meeting to vote on the sale.

“My friends and partners didn’t tell me,� Cobb says, “because they knew I would go try to put together a leveraged buy-out.� That, in turn, might have derailed either the Equitable offer or the planned offering, with no assurance that Cobb would come up with the cash.

Cobb turned to the Basses. He chartered a plane to Texas and secured their agreement to offer $1 million more than Equitable’s bid. Two months later, when the sale finally closed, the Bass-led group and 22 Arvida executives paid $203.7 million for the company, with all but $20 million borrowed from banks.

Options Exercised

Less than a week later, Arvida sold to Equitable assets worth more than $60 million, eventually collecting another $20 million after Equitable exercised certain options.

Within three months, Arvida was discussing possible joint ventures with Disney, and then, a merger. Together, the Basses and the Arvida management group “had $20 million of equity which we sold for $200 million in (Disney) stock, which is now worth maybe $400 million,� Cobb says. “Obviously, it was a good transaction from our point of view.�

With Penn Central’s near-sale of Arvida still fresh in Cobb’s mind, however, he negotiated certain safeguards, such as a seat on Disney’s executive committee, where pivotal corporate decisions are shaped. “It was important to me,� he says, “so that (surprise) wouldn’t happen again.�

In addition, Cobb made a private pact with seven other Arvida officers not to sell more than 25% of the Disney stock that they received as a result of the merger. “Together, we wanted to make an impact on Disney,� he says.

Cobb also took steps to insulate Arvida; to preserve what he calls its “special culture,� characterized by “informality� and “self-confidence.�

“Disney is a different kind of organization,� he explains. “Much more centralized. Much more formal.� Although Disney encourages even top executives to go by their first names, “it is quite formal and quite structured,� he says.

Cobb arranged for Arvida to continue running its 20-odd projects from its Boca Raton headquarters, while creating a new company, Disney Development, to plan the development of Disney’s properties in Florida and California, as well as the proposed theme park in France. About 25 key employees from both Disney and Arvida were tapped for the new unit, which is headquartered at Walt Disney World. Both Arvida and Disney Development report to a holding company called Arvida Disney, headed by Cobb.

Raymond L. Watson, the Disney director who instigated the Arvida acquisition during his tenure as Disney chairman, says he believes that Arvida has meshed with Disney “amazingly well.� Watson, a former Irvine Co. president, says Disney and Arvida staffers appear to be working well together at Disney Development, instead of fighting to protect their “turf.�

Mutual Respect

“I’m surprised that there wasn’t civil war,� he says. As for any tension between Cobb and Disney President Wells, Watson says they are “two tigers. . . that will go at each other once in awhile, but they really respect each other.�

Wells insists that his relationship with Cobb is cordial and warm. The Arvida chairman “has taught me a lot. He has a classic business background . . . that I didn’t have,� says the Disney president, who practiced entertainment law before his 15-year stint as a Warner Bros. studio executive.

Wells says it seemed only natural to handle recent negotiations on a 2,300-room hotel project for Disney World, instead of Cobb, because of his legal training. Some outsiders say it is an example of Wells’ “hands-on� style.

If Cobb has lost ground to Wells, one investment banker says, Sid Bass and his colleagues “are not going to spend any time trying to put Chuck Cobb into the loop. They’re really hands-off.�

Indeed, Cobb has consistently maintained that he is not the Basses’ representative on the Disney board, noting that he is not part of the Bass-led group that increased its Disney holdings to nearly 25% in October, 1984.

Recently, members of the Bass group have sold some Disney holdings, reducing their stake to about 21%. Cobb has also sold more stock, for a total of about one-third of his original Disney holdings. In part because the Basses have reduced their stake, Cobb says he and seven Arvida colleagues have changed their minds about not selling more than 25% of their own Disney shares. Last month, the eight men amended their agreement, allowing sales of up to 50%.

Greater Reticence

Cobb won’t speak with his usual candor about Disney World projects. Most are still under wraps, with the exception of the hotels and a previously announced $300-million studio tour attraction, scheduled to open in late 1988.

Cobb will only say that Disney Development has completed design work on more than 10 different “product categories,� such as convention facilities, time-sharing vacation units, moderately priced hotel units and “some sort of Hollywood hotel related to the new studio tour, (and) more children’s environments.�

If Disney starts a time-sharing program, it would take pains to distinguish itself from some industry practices, Cobb says. Disney might create a non-commission sales force and offer vacation homes just on its own properties.

“We already have extensive resorts in Florida; we already have terrific potential in Coto and Southern California; we already have an emerging potential (site) in France; and we’re going to have to supplement that with a ski experience and several other swap programs, if we do this. That’s easy,� he says.

But Wells, in a separate interview, seemed to apply the brakes. “I doubt,� he says, that Disney would back into “anything as management-intensive as a ski resort off of time-sharing.�

Joint Conclusion

Disney is willing to see Arvida acquire more properties, Wells says, although no major development sites have been added under Disney’s ownership. Arvida proposed one purchase but came to a “joint conclusion not to do it� after a meeting with top Disney officials, Wells says.

Both Eisner and Watson suggest that Arvida and Disney have more in common than many outsiders realize because they are project-oriented, whether it be in film production, theme park construction or development of real estate.

A developer’s entrepreneurial spirit often “gets snuffed once it gets taken in by the big bureaucracy,� Watson says. “But I think it is working, and only time will tell.�