Is Duke Energy Playing Showdown with Morgan Stanley over Crescent Resources?
Did Duke play the bankruptcy card to force Morgan Stanley into selling back their 49% share of Crescent?
Palm Coast, Florida – June 7, 2009 – In September ’06, Duke Energy was "forced" into divesting more than 50% of its real estate subsidiary Crescent Resources. (Crescent owns LandMar Group, Palm Coast’s second largest real estate developer.) It was the peak of the real estate market and Crescent’s profits were substantial. So substantial in fact, they threatened Duke’s classification as an energy company.
Duke solved the problem by creating a joint venture in which it owned only 49%. Morgan Stanley Real Estate Fund purchased another 49%. 2% is held by Crescent’s CEO Art Fields. The transaction established a $2.1 billion value for the new venture and provided Duke Energy with $1.4 billion in after-tax proceeds. Crescent was recapitalized and borrowed approximately $1.2 billion of new debt at closing.
Things have changed. As reported in the Charlotte Observer, Crescent lost $420 million on $407 million in revenue in 2008, compared with a net income of $76 million the year before. Crescent is likely to miss an upcoming interest payment on what is now a $1.4 billion debt and has been liquidating properties to raise cash. During Duke Energy’s quarterly earnings call, Crescent’s possible bankruptcy was mentioned.
Morgan Stanley is likewise suffering as a participant in the recent financial meltdown.
Does this spell trouble for Duke Energy or opportunity? Is Duke engaged in a game of showdown with Morgan Stanley? If so, Morgan Stanley holds the weaker hand. Certainly they regret their investment in the joint venture and would like to move on.
Fields may be the dealer in this high-stakes poker game. He can create a majority by throwing in his 2% with either side. The mention of bankruptcy may have been a Duke strategic ploy to force Morgan Stanley’s hand. Duke stands a good chance of recapturing Crescent for a fraction of Morgan Stanley’s original billion dollar investment.
Duke Energy director James Hance recently purchased 30,000 shares for $407,000 or $13.58 a share in May. He now owns 75,444 shares directly, less than 1% of the Charlotte-based company. Hance’s purchase was the largest insider buy at the company in five years, according to Thomson Reuters.
A former Bank of America CFO and Duke board member since 2005, Hance also serves on the boards of real-estate investment trust Cousins Properties (CUZ) and forest-products company Rayonier (RYN). Rayonier is also active in real estate.
Calls to Crescent Resources seeking additional information have not been returned.
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