Want a glimpse into the regulatory mindset of government?
This earlier post passed along Don Boudreaux’s response to the Wall Street Journal letter-to-th editor of Arnie Celnicker, a former attorney for the FTC and the Antitrust Division of the Justice Department, in which Celnicker defends the FTC’s opposition to the proposed Whole Foods-Wild Oats merger (previous posts here). In an attempt to have the last word, Celnicker has written another letter-to-the editor in which he contends, in part, as follows:

We agree that consumers want more organic products, and that there has been increased investment to meet that demand. The financial markets, however, have deprived Wild Oats of the capital to compete head-on with Whole Foods. Mr. Boudreaux’s assertion that this indicates Wild Oats’ assets are now poorly managed, and that they would be better managed by Whole Foods, is a non sequitur.
Avoiding head-on competition with Whole Foods indicates that Whole Foods already has such market power that the risks of head-on competition are great, for Wild Oats or any other firm. It does not mean Wild Oats is poorly managed; it does show the capital market’s respect for a firm, Whole Foods, with a dominant market position. Even if Wild Oats were poorly managed, it does not follow that an acquisition by Whole Foods would enhance consumer well-being. These two firms are the only two national premium natural and organic supermarkets. Surely there are others, besides Whole Foods, who can efficiently manage Wild Oats’ assets, without reducing competition.

Celnicker suggests that capital markets “have deprived” Wild Oats as if the company has some entitlement to capital, and that such deprivation justifies government intervention. But if there are others who can efficiently manage Wild Oats’ assets, then why did they not outbid Whole Foods for those assets?
The Wild Oats board has determined that the best value for the company’s shareholders can be derived by selling to Whole Foods. Celnicker contends that the government’s judgment regarding “consumer well-being” should trump the Wild Oats board’s judgment on behalf of Wild Oats’ shareholders. But will the government provide a safety net for the loss in value to Wild Oats’ shareholders if the Wild Oats board’s judgment is correct and those assets decline in value without the merger? If the government is not willing to step up and arrange alternative capital, then the value of that “consumer well-being” that Celnicker seeks to have the government protect is largely ephemeral in nature.

It wasn’t a good end of the week for Landry’s Restaurants, Inc CEO Tilman Fertitta (previous posts here).
First, there was Landry’s public disclosures that the company was delinquent in its regulatory filings with the SEC and that it was in need of refinancing over $400 million in debt in a rapidly deteriorating debt market.
Those missteps led to Fertitta’s public announcement on Friday that the refinancing “was no big deal,” which led to the inevitable comparisons in some media circles of Landry’s and Enron, and Fertitta and Donald Trump (actually, that comparison has been made before). Not surprisingly, the company’s stock closed at a 52 week low on Friday ($25.43), falling almost 20% in the past week alone.
Fertitta is an easy target, but the situation is probably not as grim as it might seem at first glance. Landry’s has always been a highly-leveraged company. Heck, the latest news resulted in Moody’s downgrading the corporate family rating from B2 from B1, and S&P lowered its ratings on Landry’s corporate credit rating to CCC from B-plus. So, it’s not as if Landry’s stock was blue chip even before the latest developments.
Where things appear to have gone awry is that the company decided that building stores from within wouldn’t allow it to grow fast enough. Back a few years ago when Landry’s was a popular growth stock, the company’s casual dining seafood eateries were popular and growing quickly in generally first-rate locations. But in an attempt to accelerate that solid growth, Landry’s overpaid for the high-volume Rainforest Cafe chain a few years ago and then went on to make a relatively big investment in buying and revitalizing the Golden Nugget casino in downtown Las Vegas. It looked as if Landry’s had decided to pull back on its debt-loaded buying binge when it sold off its its Joe’s Crab Shack chain late last year in a $192 million deal, but the company came right back a short time later to make an unsolicited offer to buy the high-end steakhouse Smith & Wollensky before being topped by a rival bidder.
As the price of Landry’s stock slumped over the past several months, the company sensed value and initiated a program to buy back $87 million in stock. Nevertheless, the market did not respond all that positively to the buyback program, so the stock is still trading at a relatively small 14 times this year’s profit estimates, Thus, a case can be made that Landry’s is a good buy if it can extract itself from its current debt refinancing problems, but the downgrades reflect that the market is a bit skeptical regarding Fertitta’s assurance that arranging such refinancing “is no big deal.”
Nonetheless, this just might be the kick in the rear that Landry’s needs. Building well-located and good-looking restaurants while providing solid service is how Landry’s grew quickly. Paying substantially more for financing the debt necessary to buy overpriced stores may be just the way to persuade Landry’s board and management that building from within wasn’t such a bad strategy after all.

Cerberus Capital Management’s decision earlier in the week to terminate its attempted sale of $12 billion in Chrysler debt underscored the quickly tightening U.S. credit markets (except on oil patch deals!), and the ripple effects are already being felt in Houston. Check out this Houston Business Journal article about Houston-based restaurant company Landry’s:

Landry’s Restaurants Inc. is looking for new financing to replace its current credit agreement and outstanding 7.5 percent senior unsecured notes.
The Houston-based casual dining chain operator said Wednesday that it would not be able to file its annual report for the year ended Dec. 31 because an internal review of stock option granting practices is not complete.
As a result, Landry’s (NYSE: LNY) said it has been notified by U.S. Bank National Association — the trustee of its $400 million unsecured notes — that the unpaid principal and any interest is now due.
Landry’s expects to be able to refinance the loan, but due to “the recent tightening of the credit markets,” it could be under less-favorable financing terms.
The company also said it is not in compliance with a $450 million credit agreement with Wachovia Bank, National Association and other lenders. Landry’s expects it can get a waiver of the covenant and does not expect Wachovia to accelerate the indebtedness of the agreement. The amount outstanding is about $97 million.

Late yesterday, Standard & Poor’s Ratings Services lowered its credit ratings of Landry’s and continued to place the company’s ratings on negative watch because of Landry’s failure to file its 10K regulatory filing with the SEC for fiscal 2006 and its 10Q for the first-quarter 2007.
H’mm.
Update: Tilman’s bad dream.