A man of property
Peter Munk plans to spin profits from gold into real estate
As a younger man, Peter Munk, now 66, made several of the big mistakes that can claim the fortunes of less resilient entrepreneurs. In his 30s, during his first business incarnation, the Hungarian-born engineer’s ambition to manufacture Clairtone Sound Corp. hi-fi systems exceeded his capital, and his dream was soon snuffed out by debt. He left Canada and recouped those losses by developing a chain of resorts and hotels in the South Pacific. Munk returned to Canada in 1979, and within a few years began buying gold mines because he was convinced that the price of gold would rise. Instead, it dropped. But, cautious after his first failure, Munk had developed such a carefully hedged financial strategy that even when gold prices fell, his revenues held steady. Then, through a combination of good managers and luck, Munk and his mining company, American Barrick Resources Corp., struck a mother lode of gold in Nevada in 1987. Last week, he deployed his latest investment strategy. This time, instead of trying to build from scratch or to buy into the hottest investment of the day, Munk revealed a plan to acquire a bargain-priced chunk of the most depressed and unfashionable business of the 1990s: commercial real estate.
Munk’s holding company, Horsham Corp. of Toronto, announced last week that it wants to invest $600 million in Trizec Corp. of Calgary. In return, it will secure a 43-per-cent stake in the debt-hobbled real estate company controlled by the Edper-Bronfman group of companies in Toronto. The P deal, which was immediately opposed by a group of Trizec creditors whose loans are secured by individual properties, is far from complete. But industry analysts—who say that Trizec’s portfolio of 91 shopping centres and office buildings is one of the biggest and best in North America—said that if Munk is able to overcome the legal hurdles, he will have control of a company that is likely to prosper if the North American economy continues to recover. “It’s not a licence to print money,” said one real estate expert who commented anonymously, “but it has the potential to make some very big returns.”
For his part, Munk says that he is most attracted by the unique opportunity Trizec presents. “It’s not so much real estate per se,” he said from a public telephone in Poland last week. “From our position, having $1 billion U.S. cash, it was the right time
69 RETAIL and OFFICE BUILDINGS
22 RETAIL and OFFICE BUILDINGS and 2 HOTELS, including ROYAL CENTRE in British Columbia BANKERS HALL in Calgary CANADA PLACE in Edmonton PLACE VILLE MARIE in Montreal MARITIME CENTRE in Halifax BAY-ADELAIDE CENTRE in Toronto
(held for future development)
and the right company. They do need our help, and they need it now.” Still, it was an unexpected move for Horsham. In addition to its main investment, a 20-per-cent stake in American Barrick, Horsham owns 100 per cent of Clark Refining and Marketing Inc., a U.S.-based oil company, and has a $40-million investment in a 600-acre real estate development on the outskirts of Berlin. Last year, Horsham raised $925 million with the stated intention of making new investments. But at the time, Munk seemed more focused on opportunities in China than on real
estate in North America. “Real estate is very regional,” he said then in an interview with Maclean’s in his dramatic black office in Toronto. ‘Toronto, maybe not. But Rio de Janeiro or Mexico City, yeah, we might be interested.”
Munk, like his friend George Soros, a U.S. investment adviser, and the Reichmann family, fled Hungary during the Second World War. But he did not appear to share their enthusiasm for property. Last year Soros, whose investment moves are carefully followed by others, formed a partnership with the Reichmanns to undertake a major development in Mexico City. “We like real estate,” Munk said in November, “but it’s not real estate in the Reichmann sort of way. They like leverage; we don’t like leverage so much.”
Just four months later, however, Munk appears ready to plunge almost half of his cash into a highly leveraged North American real estate company that is teetering on the brink of collapse. But analysts welcomed the move based on Munk’s record of success since Clairtone. “Munk has done well with distressed assets in the past,” said Marc Cohen, an analyst with Kidder Peabody & Co. Inc. in New York City. “He bought Clark out of the bankruptcy court.”
Trizec’s secured creditors, however, may not be willing to fuel such a fire sale. In fact, they are already trying to gain control of Trizec properties that they hold as collateral for their loans. And they question some aspects of the Trizec-Horsham arrangement, particularly a guarantee to Horsham of an opportunity to match any other bids that are presented, and a $15-million fee to Munk’s company if the planned purchase falls through. “They appear to have cut' a sweetheart deal for Horsham,” said Derrick Tay, lawyer for the debenture holders. He noted, furthermore, that if Horsham’s offer succeeds, Edper-Bronfman managers would be able to retain a small interest in Trizec’s properties. Munk has a long-standing relationship with the group and one of its top executives, Trevor Eyton, is a director of American Barrick. But Horsham executives say the terms of their arrangement are not unusual, and Munk says that the deal was “absolutely not” influenced by his relationship with Edper.
Real estate veterans also question another aspect of Horsham’s plan to diversify into real estate. One suggested that in the current depressed market—there are virtually no buyers for the many commercial buildings now for sale in Canada—Munk would have done better by shopping for individual properties rather than trying to buy a company that is the focus of legal disputes and is encumbered with debt and management problems. But Horsham spokesman Greg Wilkins said that by acquiring Trizec, Horsham would gain not only a diversified group of properties, including a prime collection of California malls, but also the experienced managers able to operate them.
Selecting good managers and then following their advice appears to be one of Munk’s guiding principles. When he decided to invest in gold, his first move was to acquire skilled management. Munk says that he bought Camilo Mines Ltd., a small Ontario gold mine, in 1984 mainly to acquire a group of managers led by veteran mining engineer Bob Smith, now president of American Barrick. Munk recalls his shock when, on the day he took over Camilo, the previous owner advised him to fire Smith. Munk rejected the advice. “Bob Smith was the only Camilo board member who’d voted against my takeover,” says Munk. “That was a plus. It showed that the guy had guts, that he wasn’t afraid to stand up and disagree.” It was an astute judgment. Smith is the one who recommended investing in a Nevada property that eventually produced the Goldstrike mine. And Goldstrike is the reason that mining analysts consider American Barrick to be the best gold producer in North America.
Observers credit Munk’s hands-# management style for much of his success. “He’s a visionary,” said Peter Cavelti, a Toronto investment manager who specializes in gold. “And most visionaries have such strong personalities and opinions that they think they know everything better than anyone else. Munk is different, he listens to his people.” Munk says that he recognizes his own limitations. “If I always make the decisions, the mathematical chances are that I will be wrong a good percentage of the time,” said Munk, settled into the depths of a soft leather chair in his office overlooking a chic street of art galleries and antique shops in Toronto’s Yorkville district. “But if you make group decisions you reduce the chances of error. The more heads the better.”
In fact, Munk, who spends much of the winter skiing in Switzerland
and the summer at his retreat on Ontario’s Georgian Bay, prefers to portray himself as being only remotely involved with Barrick’s management. He tells an anecdote about his grandfather, a banker, in Hungary. “After he’d made a loan, he’d go out that night with his silver-tipped cane and he’d go around the building tap-tap-tapping the foundation, to make sure it was sound,” says Munk, pausing to allow the image to ripen. “I don’t do that.” On the contrary, he says that he delegates a great amount of responsibility. “My contribution is really minimal,” he says, smiling serenely. “I owned a hotel chain once, and I didn’t go around checking all the rooms, fluffing the pillows. In fact, I have to admit, I hadn’t even visited all the hotels.”
Whatever he is—or is not—doing, Barrick has prospered. A $100 investment in Barrick shares at the end of 1988 would now be worth about $780. Even though the price of gold declined steadily from 1980, when it peaked at $850 (U.S.) an ounce, until early 1993, Barrick shares have soared. There are two reasons for the phenomenal performance.
As Barrick gradually explored the Goldstrike mine site, it discovered that the ore body was much bigger and contained a richer grade of ore than originally anticipated. Goldstrike’s proven and probable reserves are now estimated at 30 million ounces of gold, the largest known ore body in North America, on a par with some of the biggest South African gold mines.
The other reason for Barrick’s share performance is the company’s conservative financial strategy. Barrick pioneered the practice of hedging its gold production by selling it forward on the futures market. Using the commodities market, Barrick, in effect, agrees to supply gold bullion at a future date for a price agreed upon at the time the contract is originally signed. Munk says that Barrick’s hedging developed out of necessity. “I couldn’t take any chances,” says Munk, who founded Barrick using proceeds from the sale of the hotel chain and money raised from investors who included Saudi Arabia’s royal family. “I couldn’t afford to lose the money I’d invested.”
American Barrick is many analysts’ favorite gold miner. Leanne Baker, with the New York investment firm Salomon Brothers Inc., said: “It’s the best managed gold mining company, and it’s the most entrepreneurial. It’s very shareholder-oriented. It has a quality ore base. And it also has a strong balance sheet.” Even an early critic, top-ranked gold analyst John Tumazos, with Donaldson, Lufkin & Jenrette Securities in New York, has become a fan. At the time Munk acquired the Goldstrike property in 1986, Tumazos criticized Barrick for paying too much for a mediocre property. At one point, Tumazos dismissed Munk and his Barrick associates as “a bunch of bullshit artists.” But last year, Tumazos wrote in a research report: “American Barrick is one of the finest companies that this analyst ever has had the privilege of following.”
Despite that achievement Munk remains a
controversial figure whose life has been marked by narrow escapes and lavish success. He was born in Budapest in 1927 into a wealthy Jewish banking family. But the outbreak of the Second World War ended that privileged life. His half-brother, Paul Munk, a Toronto pediatrician who is 17 years younger, says that although his brother does not talk much about those experiences, they have shaped his life. “The family was able to avoid a stay in a concentration camp,” said Paul, “only through dealing with Adolf Eichmann and his associates.” Eichmann was the Nazi who, in
1942, was put in charge of implementing Adolf Hitler’s Final Solution, a mass execution of European Jews. Paul says that in 1944, after spending six weeks in Bergen-Belsen, the German concentration camp in which Anne Frank died the following year, the Munk family, including Peter, was able to flee to Switzerland. Munk’s grandfather had traded part of his fortune for his family’s lives.
In 1948, Peter Munk joined an uncle in Canada and began studying electrical engineering at the University of Toronto. But like so many other things in his life, Munk says that turning point came about only because of a failure. “I would not have come to Canada,” says Munk, “if I hadn’t flunked the technical examination to get into the university in Zurich.” He compares the happy result of that failure to the lessons he learned from the collapse of Clairtone Sound Corp.
In retrospect, Clairtone was a business idea that may have been ahead of its time. Munk, who had been working as assistant chief engineer at Atlas Radio Corp. in Toronto, joined forces with David Gilmour, the son of a wealthy Winnipeg family and an industrial designer who was importing Swedish furniture. Their idea was to build hi-fi audio components into wooden cabinets attractive enough to be displayed as living-room furniture. The company started in Toronto in 1958 and sold its first shares to the public in 1960. By the mid-1960s they had become the first Canadian company to win an award at the prestigious Milan design competition and sales were booming. But the partners also had plans to manufacture color television sets, and they were running short of cash. To obtain financial help from the province of Nova
Scotia, they agreed to build Clairtone’s television manufacturing plant in Pictou County.
In 1967, however, because of ongoing financial problems, Munk and Gilmour were ousted from the company, and in 1971 the Nova Scotia government closed Clairtone down. Since then, case study after case study has analysed what went wrong. Eventually, the name Clairtone became synonymous with the collapse of overly ambitious Canadian business dreams and of the failure of regional economic development schemes.
The failure cost Munk his business and his reputation. Most damning were allegations of insider trading that were made after it was discovered that he and Gilmour had sold shares in 1967 just before some of Clairtone’s most serious problems became publicly known. Dr. Morton Shulman, then the New Democratic Party finance critic in the Ontario legislature, launched a scathing attack on Munk in 1969. He released details of a private financial agreement Munk made with a shareholder who had been accusing him of improper trading.
But now, Shulman, who in the intervening years as a stock promoter has had his own brushes with securities regulators, has a mellower view of Munk. “He was wrong, he did something terrible, he damaged shareholders badly,” says Shulman. “But that was 25 years ago. You can’t take something he did in his youth and hold it against the man of 60.” Shulman says that since then Munk has worked hard to make up for his early mistakes. “He’s led a fine life,” said Shulman. “I respect him.” In fact, Shulman says that he still uses a Clairtone hi-fi that he bought for $1,800 in the 1960s. “It works perfectly,” says Shulman. “It was 20 years ahead of its time.”
Munk insists that Clairtone’s failure, although devastating for him at the time, worked out for the best. Indeed, all of Clairtone’s North American competitors have since folded as well. “I shudder to think what would have happened to me if it had succeeded,” he says. “I often think about that. Imagine, I would have spent 20 years living in Nova Scotia trying to compete against the Japanese in consumer electronics. What a nightmare!”
So now Munk dreams the dreams of an experienced man. His deals are conservatively financed and analysts say that Munk’s companies are structured in such a way that any losses would be contained and limited. “The refreshing thing about Munk is that he’s extremely frank about what he’s been through, and humble enough to say that he’s learned from it,” observes one analyst. “He’ll never bet the ranch again on anything.” But Munk does keep betting. Even as one team of his executives was at work last week analysing Trizec’s real estate, another group was on the other side of the world trailing International Trade Minister Roy MacLaren through China, scouting for investment opportunities. Munk, who as a young man had more business ideas than cash, must find it satisfying to be in exactly the opposite position now. □