by Arkansas Business Staff on Monday, Dec. 24, 2012 12:00 am
Arkansas Business takes its annual look at the most important business stories in Arkansas that took place during 2012.
1. The Razorbacks’ Annus Horribilis
Optimism surrounding the University of Arkansas football program was high entering 2012.
In two previous seasons the Razorbacks had tallied 21 victories. Ticket sales and donations had hit record levels, enabling the UA to push forward with construction a $40 million football operations center.
Quarterback Tyler Wilson and running back Knile Davis passed on the NFL Draft and were recognized nationally as potential Heisman Trophy candidates. Wilson and Davis were among 17 starters set to return for the Razorbacks as they chased a Southeastern Conference championship and national title.
Hopes weren’t high just locally. National pundits projected 2012 as the year Arkansas would win it all. There was no doubt as 2012 dawned that the year would be a memorable one for the Razorback football program.
And it was.
Bobby Petrino, the man regarded as the architect of the Razorbacks’ success, was fired after four seasons for “a pattern of misleading and manipulative behavior” after it was revealed he had hired an extramarital girlfriend to a position on the football staff. Jessica Dorrell, 25, was with Petrino during an April 1 motorcycle accident, and until a police report was released four days after the crash, the coach had not acknowledged, not even to his bosses, that she was with him.
Arkansas Athletic Director Jeff Long fired Petrino with cause. Petrino, who made $3.56 million annually, lost his salary and forfeited an $18 million contract buyout.
Even in the immediate aftermath of the firing, optimism was high for Arkansas. Las Vegas oddsmakers still considered them a national title favorite, keeping their odds to win it all at 15:1 even after the hiring of John L. Smith as interim coach.
Hiring Smith, a former Razorback assistant under Petrino, was supposed to provide much-needed stability. Players loved his freewheeling attitude. All but one of the staff’s assistant coaches were familiar with Smith.
Ultimately, though, the season wound up in the ditch right along with Petrino’s motorcycle and his career.
Smith rarely seemed to be in control of the team as the Razorbacks finished 4-8. His performances in press conferences were bizarre and invited national ridicule.
Making matters worse for Arkansas was a $40 million bankruptcy filing by Smith during the season. Failed real estate deals in Kentucky caught up with the interim coach, who insisted the financial troubles weren’t impacting the product on the field.
Long and the UA were left defending not only the decision to hire Smith, but their willingness to defer more than 70 percent of his salary until after he finished coaching the team. Creditors argued at a bankruptcy hearing during the season that Smith was trying to hide money that should be theirs.
Injuries, losses and unfavorable headlines piled up by the week.
There were few highlights to 2012 when it came to Razorback football. Long did manage to lure Bret Bielema from Wisconsin as head coach. It was a hire that suggested the program might one day return to the success enjoyed in Petrino’s final two seasons.
But that’s in the future. In the meantime, no Razorback-watcher is going to forget 2012.
2. Health Care Industry in Transition
As U.S. House Speaker John Boehner famously noted after the re-election of President Barack Obama, “Obamacare is the law of the land.” Now, a Republican-dominated Arkansas Legislature must deal with that fact.
The president’s re-election coupled with the U.S. Supreme Court’s June ruling that upheld most of the Patient Protection & Affordable Care Act puts much of the burden of implementing the new health care system on the state’s General Assembly.
Obamacare, approved in 2010, seeks to extend health insurance to about 30 million Americans who don’t currently have coverage. Many in the middle class are to get government subsidies to help them buy private insurance. Low-income Americans would be added to Medicaid, but the Supreme Court allows states to choose whether they want to expand their Medicaid programs. That has been something Arkansas Republican lawmakers have been reluctant to do, while Gov. Mike Beebe and his fellow Arkansas Democrats have supported expansion.
In January, it will be up to the Legislature to decide whether Arkansas will expand Medicaid to about 250,000 additional low-income Arkansans, which would bring an estimated $800 million more federal dollars into the state every year.
The effects of the implementation of Obamacare, which includes cost-containment and other measures designed to encourage efficiency, trickle down into almost every aspect of health care in Arkansas. Health care providers — from nursing homes to hospitals to individual physicians — have been trying to figure out how best to deal with those effects.
In many cases, the result has been consolidation in the health care industry, and the announcements started early and came often in 2012.
In January, St. Vincent Health System of Little Rock bought Heart Clinic Arkansas, the state’s largest cardiology group with 29 doctors, and Baptist Health and Arkansas Cardiology partnered to form Baptist Health Heart Institute. Arkansas Heart Hospital of Little Rock said it would open a cardiology clinic on the campus of Saline Memorial Hospital and provide the Benton hospital 24/7 coverage for emergency heart care needs.
In April, Capella Healthcare of Franklin, Tenn., which owns National Park Medical Center in Hot Springs, announced plans to buy Mercy Hot Springs, formerly St. Joseph’s Mercy Health System.
And in late August, St. Vincent and the University of Arkansas for Medical Sciences announced that they were studying an “affiliation” that would allow them “to deliver collaborative and/or integrated services.”
3. Wal-Mart Hits 50 Years While Under Scrutiny
2012 should have been a banner year for Wal-Mart Stores Inc.
At the beginning of the year, the Bentonville retail chain was preparing to celebrate its 50th anniversary in business. It has grown from a 35,000-SF store in Rogers to a retail empire that spans the globe and generated $446.95 billion in revenue and $15.7 billion in income for its fiscal year that ended Jan. 31.
But a bombshell report from The New York Times in April took some of the shine off the company’s July milestone. The story alleged that Wal-Mart’s Mexico division paid millions of dollars in bribes to grease the skids for store openings. Making matters worse, the paper reported, high-level executives knew about the allegations but took no action to notify authorities.
Shareholders sued Wal-Mart’s board over the allegations that the company had violated the U.S. Foreign Corrupt Practices Act.
Michael Duke, Wal-Mart’s president and CEO, addressed the issue at the company’s shareholder meeting/anniversary celebration.
“We’ve all heard the recent allegations about the company,” he said. “Let me be clear: Wal-Mart is committed to compliance and integrity everywhere we operate. I want to personally assure you, we’re doing everything we can to get to the bottom of this matter.”
But the issue didn’t go away. In November, Wal-Mart announced in a Securities & Exchange Commission filing that investigations into alleged violations of the U.S. Foreign Corrupt Practices Act had expanded to other foreign markets, including Brazil, China and India. And Wal-Mart has already spent $99 million related to the investigation. The final bill, though, could be much higher, it said in the filing.
Meanwhile, Wal-Mart faced worker unrest in the United States. The union-backed OUR Walmart, or Organization United for Respect at Walmart, which was formed in 2010 to promote better working conditions for the 1.3 million U.S. Wal-Mart employees, planned a number of walkouts on the day after Thanksgiving, traditionally the busiest shopping day for retailers. OUR Walmart said it wants more full-time positions with routine schedules rather than unpredictable part-time positions.
Wal-Mart was concerned about the threat because about 90 workers walked off the job in Dallas, Oakland, Calif., and Seattle in October and others left their positions in early November.
Before Black Friday, Wal-Mart filed with the National Labor Relations Board an unfair labor practice complaint against the United Food & Commercial Workers International Union, saying the demonstrations threatened to hurt the retailer’s business. In the end, Wal-Mart said, there were only “a few dozen protests” on the day after Thanksgiving.
“We had our best Black Friday ever and OUR Walmart was unable to recruit more than a small number of associates to participate in these made for TV events,” Wal-Mart said in a statement.
4. Murphy Oil Shakes Up, Spins Off
El Dorado’s Murphy Oil Corp. experienced a couple of milestones in 2012, as the company changed its top leadership and announced plans to spin off its highly lucrative retail arm.
The retail arm consists of Murphy Oil USA Inc., the widespread gas stations and convenience kiosks traditionally attached to Wal-Mart supercenters. The company had about 1,100 kiosks at Wal-Mart stores and an additional 140 stand-alone units in 2012.
In January, then-CEO David Wood said the company was considering spinning off Murphy USA to “unlock” its value, claiming that it was “unrealized within the current corporate structure.”
At a May shareholder meeting, Wood said Murphy USA was a “premium business” and was experiencing “tremendous growth,” but left out any details of the spinoff.
A month later, Wood unexpectedly retired and was immediately replaced by Steve Cossé, a director who previously was executive vice president and general counsel. The company stayed quiet about the spinoff for the next few months.
The issue returned in force in October when a New York hedge fund, Third Point LLC, gave Murphy a bit of an ultimatum. The $9.3 billion hedge fund claimed it had a “significant stake” in Murphy Oil and had sought approval to increase its position “should we so desire.”
In its letter to Murphy investors, Third Point quoted lyrics to songs by Boyz II Men and rapper Tupac Shakur while simultaneously recommending “four easy steps” Murphy needed to follow to increase its share value from about $50 to about $90.
The hedge fund’s first major piece of advice was to spin off Murphy USA.
Sure enough, later that month, Murphy Oil announced that the spinoff was happening. The new company would be independent and separately traded, similar to its 1996 spinoff of Deltic Timber Corp. Murphy Oil said its board had authorized a special dividend of $2.50 per share for a total dividend of about $500 million and a share buyback program of up to $1 billion of the company’s shares of common stock.
The spinoff was slated to be complete “by 2013,” company officials said at the time. After the spinoff, Murphy USA would comprise the gasoline kiosk network as well as seven product distribution terminals and two ethanol production facilities in North Dakota and Texas.
Murphy Oil Corp. will focus entirely on exploration and production with activities fo-cused in the U.S., Canada and Malaysia.
At the end of 2012, the company still had not announced who would lead the new Murphy USA, and its stock value was hovering around $60 per share.
5. USA Drug Sold
The pharmacy chain owned by media-shy Stephen LaFrance Sr., mainly branded as USA Drug, made plenty of headlines in 2012, primarily when it was sold to drugstore giant Walgreen Co. in September for $438 million.
The purchase of the 144-store chain and private label SAJ Distributors from Stephen L. LaFrance Holdings Inc. deprived Arkansas of one of its largest private companies. LaFrance had revenue of $825 million in 2011, Walgreen said at the time the acquisition was announced.
The deal also prompted Walgreen to reduce redundancy by closing 76 drugstores across LaFrance’s seven-state footprint, including 27 USA Drug stores in Arkansas. But rather than limiting consumer choice, the deal energized smaller operators who no longer had to compete with two big chains.
“What you’re going to see in the next six months are some independent pharmacies opening up,” said Terry Perkins, owner of Oak Grove Pharmacy in North Little Rock. “The public will really benefit from it.”
In November, Walgreen turned around and sold SAJ Distributors to L&R Distributors Inc. of Brooklyn, N.Y., for an undisclosed price. L&R planned to operate the SAJ Distribution Center and offices in Pine Bluff under the SAJ name and retain “many existing SAJ staff who work in customer service, accounting, purchasing and operations.”
The sale of the USA Drug chain was announced days before a former executive, Garret Sorensen, was sentenced to 33 months in federal prison.
After maintaining his innocence for three years, Sorensen had pleaded guilty in May to money laundering and mail fraud in exchange for the dismissal of all charges against his wife and her sister.
The three had operated a side business that collected commissions for advertising inserts that USA Drug placed in newspapers, and prosecutors said the business was kept secret from the LaFrance family while Sorensen’s defense team suggested that at least one of Stephen LaFrance’s sons knew and approved of the arrangement.
Sorensen was originally scheduled to report to prison on Dec. 3, but he was granted additional time — until Feb. 4 — to complete some jobs as a flooring contractor.
6. GOP Takes Control
While Democrats retained the White House and made gains in the U.S. House and Senate, the November 2012 General Election in Arkansas was historic and antithetical to national trends. Most notably, Arkansas Republicans won majorities in both the state House and Senate for the first time in 138 years, and the election of Tom Cotton from the 4th Congressional District gave the state a solidly Republican delegation in the U.S. House.
It took a recount in House District 52 in northeast Arkansas to confirm the GOP dominance. The 45-vote margin by which John K. Hutchison defeated L.J. Bryant gave Republicans the slimmest of majorities in the state house, 51 of 100 seats. Also in January, Republicans will serve in 21 of the state Senate’s 35 seats.
On Nov. 6, 11 Republicans won in a total of 18 Arkansas Senate races, and 30 Republicans won in a total of 54 state House races.
As part of the transition to Republican leadership, during election week, the Arkansas Senate elected Republican Sen. Michael Lamoureux as its next president.
In addition, nine days after the election, Republican state Rep. Davy Carter of Cabot was elected Speaker of the House. Carter’s win was a surprise because Rep. Terry Rice, R-Waldron, was the presumed speaker if Republicans took control of the chamber. But backing from House Democrats and a handful of Republican defections changed the story line.
Despite the Republican fervor across much of the state, Arkansans didn’t blindly favor GOP members just because they were Republicans. Democratic rivals defeated Republican candidates Rep. Loy Mauch, Rep. Jon Hubbard and Charlie Fuqua in House races. All three men had been criticized for making controversial statements. Mauch called Abraham Lincoln a “war criminal.” Hubbard said slavery had been a “blessing in disguise” for African-Americans. And Fuqua suggested that American Muslims should be deported.
7. Dillard’s Continues Strong Showing
In 2011, Dillard’s Inc. landed on Arkansas Business’ list of top 10 business stories for its dazzling performance. The Little Rock retail chain didn’t slow down in 2012.
Its stock price opened at $45.81 on Jan. 3, 2012, and reached an all-time high of $89.42 during the day on Nov. 29. It closed on Dec. 19 at $83.75, an increase of 82.8 percent since the beginning of the year. As a comparison, the Standard & Poor’s 500 index rose only 12.5 percent during that period, and the S&P’s 500 Department Stores Index as reported by Bloomberg.com noted a 1.4 percent uptick.
In 2012, Dillard’s made moves to expand its online reach by investing $4 million in the e-ecommerce company Acumen Brands of Fayetteville. Dillard’s also opened in September a 852,000-SF Internet fulfillment center in Maumelle to support the growth of its online sales, which Dillard’s doesn’t separate in its filings. Dillard’s also operates a 285,000-SF center in Nashville, Tenn.
In the fall, Dillard’s announced it was building three stores. The stores won’t open until the fall of 2014, but they will be the first new stores for Dillard’s since early 2010.
“We’re just seeing more opportunities for construction than we have in the past couple of years,” said Dillard’s spokeswoman Julie Bull.
Dillard’s sales soared for the 39-week period that ended Oct. 27. Same-store sales, a key metric for retail analysts because they measure sales at stores open at least a year, were up 4 percent during that period. Net sales for the three quarters that ended Oct. 27 were $4.49 billion, up 4 percent from the same period in 2011. The chain’s net income for the first three fiscal quarters dropped to $174.5 million, down from $322.4 million a year earlier — a figure that was plumped up by one-time items that included the sale of two former retail locations and a tax benefit.
Still, Dillard’s announced in November that it would pay a one-time cash dividend of $5 per share before the end of 2012, which would allow investors to avoid higher taxes if “fiscal cliff” tax hikes go into effect on Jan. 1, 2013. The fiscal cliff includes automatic tax increases and cuts in government spending.
Dillard’s $5 dividend was the highest in the company’s history. With 47.25 million shares outstanding as of Nov. 24, that comes to $236.25 million for shareholders.
The special dividend will amount to more than $35 million for members of the Dillard family, who own more than 7 million shares of the company.
William Dillard II, the CEO of Dillard’s, told investors at the annual shareholders’ meeting in May that the company was in “good shape.”
“We have done a good job in the last 18 months,” he said.
8. Real Estate Fallout Continues
The procession of real estate transactions driven by financial travails remained in motion during 2012 — four years after the bubble burst. In many cases, a lender’s bad loan was transformed into someone else’s bargain.
The most eye-catching was Joe Whisenhunt’s $19 million cash deal for 375 acres of prime improved real estate in Benton County.
The Arkansas developer picked up land mostly in the famed Billion-Dollar Mile along Interstate 540 in Rogers through a series of transactions with affiliates of Bank of America.
The property was associated with bad loans totaling $80 million to three northwest Arkansas development groups led by Bill Schwyhart, Charles Reaves and Gary Brandon.
The sell-off of Gene Cauley’s once extensive real estate portfolio also continued. Among the 2012 highlights was the sale of four Little Rock properties.
Two parts of the Bowman Plaza office-warehouse project at 4700 Col. Glenn Road, totaling 175,000 SF, were sold out of court-appointed receivership for nearly $10.2 million to a local investment group.
Pavilion in the Park, an 82,000-SF office-retail project, was sold for $4.2 million to a local investment group.
A 572,800-SF industrial facility at 7400 Scott Hamilton Drive was sold for $2.4 million to Goodwill Industries of Arkansas Inc.
During 2012, Cauley was hit with an IRS lien of $2.3 million for outstanding taxes owed from 2007. It added to the $8.7 million Cauley owes on court-ordered restitution to clients he bilked, a crime that cost his law license and sent him to federal prison.
Developer Bruce Burrow of Jonesboro filed for Chapter 11 bankruptcy protection, listing $17.27 million in debts and $14.1 million in assets. The move followed a growing line of bankers seeking money on outstanding real estate-related loans.
In tangential matters, a $96 million deal was struck to sell The Mall at Turtle Creek, a 760,000-SF retail center in Jonesboro. The buyer to be is Rouse Properties Inc., a New York real estate investment trust.
The deal freed up cash for its owners, which included Burrow and Belz Enterprises of Memphis.
Belz also put a deal in motion to free up yet more cash by selling the 18-story Peabody Little Rock. The prospective buyer of the 418-room and 22-suite hotel in downtown Little Rock is Fairwood Capital LLC of Memphis.
9. Banks Make More Deals Out of State
The stream of bank closings and attendant FDIC-assisted acquisitions slowed considerably during 2012. Regulators closed 51 lenders across the nation through mid-December compared with 92 in 2011.
Arkansas financial concerns played the role of buyer in three of those transactions as well as four conventional buys that were completed or announced during the year.
Simmons First National Bank of Pine Bluff expanded its Missouri holdings with FDIC-assisted purchases of Truman Bank of St. Louis in September and Excel Bank of Sedalia, Mo., in October. The Truman transaction closed at a $20.9 million discount for assets of $282 million, while the Excel deal was recorded at a $21 million discount for assets of $201 million.
The deals represented the third and fourth FDIC-assisted buys for Simmons since the conveyor belt of bank failures began moving in 2008.
In November, Centennial Bank of Conway bought Heritage Bank of Florida, based in the northern Tampa suburb of Lutz. The bank’s seventh FDIC-assisted deal included $194 million in assets plus a cash settlement. Centennial Bank also took over performing loans of $158 million and deposits of $223 million.
Centennial’s parent company, Home BancShares Inc., completed a semi-conventional purchase of Premier Bank, with total assets of $282 million and six locations in Tallahassee and one in Quincy, Fla.
The $1.4 million cash deal, completed this month, was struck as Premier Bank declared bankruptcy one step ahead of a regulatory takeover.
In February, Home BancShares completed the $27.9 million purchase of 17 Vision Bank locations in southern Alabama and the Florida Panhandle from Park National Corp. The conventional transaction was part of a deal that included $354 million in loans on $520 million in deposits.
In October, Little Rock’s Bank of the Ozarks Inc. struck a conventional $27.3 million stock/cash combo deal to buy Genala Banc Inc. GBI owns the $170 million-asset Citizens Bank, a single-location operation in Geneva, Ala., on the Florida border about 80 miles north of Panama City, Fla.
In June, Arvest Bank of Fayetteville completed the purchase of the financially challenged Union Bank of Kansas City, Mo. The $456 million-asset lender recorded losses of $15.6 million in 2011, $23.5 million in 2010, $20.8 million in 2009 and $4.1 million in 2008. Arvest also announced the purchase 29 bank branches in four states (including nine in Arkansas) from Bank of America Corp.
10. Manufacturing: Up, Down and All Around
The state’s manufacturing sector experienced changes both sour and sweet this year, with heavy job losses and a few replacements.
On the sweet side, Schulze & Burch Biscuit Co. of Chicago announced in January that it would resurrect Yarnell’s Ice Cream Co. of Searcy. The venerable ice cream maker closed suddenly in June 2011. The company cited a difficult dessert industry as the main reason for its sudden closure. Yarnell’s assets, including its recipes and its factory in Searcy, were auctioned off.
Schulze & Burch, which already had a factory in Searcy, bought Yarnell’s assets at auction in December 2011 for $1.3 million. By April 2012, the factory was operational, some lost jobs were restored and Yarnell’s ice cream was back in Arkansas grocery store freezers.
On the sour side, the shutdown of Fort Smith’s Whirlpool Corp. plant cost west Arkansas more than 900 jobs. The Benton Harbor, Mich., appliance company announced the plant’s closure in October 2011 — part of a companywide layoff of about 5,000 workers — and the 1.2 million-SF facility finally shut its doors in June 2012.
City officials remained optimistic after the closure. Whirlpool reported in September 2012 that Infinity Asset Solutions Inc. of Canada had made an unspecified offer on the shuttered plant. Unfortunately, in late November, officials revealed that the deal was dead for unclear reasons. At the end of the year, a replacement for the huge plant had still not been found.
However, Walther Arms Inc., a firearm manufacturer, announced in November that it would locate its U.S. headquarters to Fort Smith’s Chafee Crossing. The company will hold a joint facility with Umarex USA, which makes sporting and replica air guns. Both companies said they expected to create 70 to 120 new jobs during the next five years.
In October, Florida-based NextLife Enterprises LLC announced that it would hire 350 workers at the new headquarters for its NextLife Asset Recovery Services subsidiary in Rogers. NextLife makes plastic resins from recycled materials for a wide variety of applications, including consumer and commercial products.
More bad manufacturing news came when Hawker Beechcraft Corp. of Wichita, Kan., announced in November it was closing its Hawker Beechcraft Services facility in Little Rock.
The closure was related to the company’s post-Chapter 11 bankruptcy assessment. About 240 workers among Little Rock, Mesa, Ariz., and San Antonio lost their jobs as a result of the closure. Another 170 were also laid off at the Little Rock Completions Center and the company’s headquarters in Wichita.
The closure occurred after a $1.79 billion Superior Aviation Beijing Co. Ltd. takeover of Hawker was scrapped.
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