Investor Michael Price usually gets his way with financial services companies. Three years ago, for example, he helped spur Chase Manhattan Corp. into its historic merger with Chemical Banking Corp.-and walked away with millions.
Mr. Price, however, may have met his match in Cityscape Financial Corp., a troubled subprime mortgage lender based in Elmsford, N.Y.
After toughing it out for months, his Franklin Resources appears to be dumping its stake in Cityscape. So far, according to filings made available this week, six mutual funds of Franklin have sold more than one million shares, or about a quarter of their told Cityscape holdings.
The average selling price: 13 cents a share, versus a purchase price of $18 in early 1997. Indeed, with Cityscape headed for reorganization under bankruptcy laws, the Franklin funds stand to lose most of their roughly $75 million investment in the company.
The episode makes Mr. Price perhaps the most prestigious investor to take a beating in the volatile subprime industry. That business has been rocked over the past year by rising loan prepayments, credit quality jitters, and outright blowups.
"It's not just Price" who has been hurt by the sector, said Lehman Brothers analyst Tom Facciola. "A lot of people have been burned on a lot of different names. These stocks are a perpetual value trap."
A representative for Franklin said Tuesday that the company and Mr. Price "have nothing more to say about Cityscape."
Mr. Price typically invests in companies he feels are not living up to their potential and then agitates for management to make changes. His track record is full of successes, including forcing Michigan National Bancorp and SC Bancorp to sell to bigger banks.
Cityscape once was one of the rising stars of the home equity industry, with a skyrocketing stock price to match.
Franklin moved in on the company in November of 1996 by purchasing options to a 14% stake held by Jay Botchman, a controversial consultant to the company who was said to be a drag on its stock price.
Cityscape shares jumped more than 25% on the news, to over $25 and analysts renewed their confidence in the company. Ray Garea, senior vice president at Franklin, said at the time that the "valuation was pretty attractive" and that "management was doing nicely."
Cityscape exercised the option and bought the shares in early 1997.
But that year and this proved rough going for subprime lenders as a whole-and Cityscape in particular.
The company's stock was battered by a faltering U.K. division, rating agency downgrades, and a debt offering that forced the company to flood the market for shares. Since last December, Cityscape has traded at less than $1.00.
Another large investor, Palladin Group, has also unloaded 1.2 million shares that several of its institutional funds held.
Although observers say that Franklin's loss is relatively minor compared to Franklin's total $236 billion in investments, some are puzzled by Mr. Price's strategy.
"Honesty, I can't imagine why he waited so long" to sell, said one expert.
The moves, noted in filings with federal securities regulators, come in anticipation of a bankruptcy filing by the mortgage company that is expected to wipe out all value of the company's shares.
Cityscape met with a group of creditors early last month and got their nod to file for a reorganization aimed at restoring net worth. The company now has until the end of this month to submit its formal Chapter 11 filing, according to federal bankruptcy law.
In hanging on to the investment, Mr. Price "may have felt that there was a chance they could turn it around," said Anita Boomstein, a partner in the law firm Hughes, Hubbard & Reed.
Buyers of the shares, meanwhile, could hope the reorganization would grant them, if not a rise in the old stock, new warrants or other investment instruments, Ms. Boomstein said.
Curiously, Cityscape's share price has risen over the past weeks, to 30 cents. Analysts, however, dismiss the movement as a fluke.
Franklin, for its part, still has significant exposure-not just through stock but through debt. It is the third largest holder of Cityscape debt, with more than $19 million.