Bryan Hits the Wall: Handsome Investor’s $60 Million Goes Poof! as He Takes Down Malone With Him

J. Shelby Bryan is tall, smooth and charming–seductive, even. He is an incomparable salesman. A blend of old Texas money and East Coast establishment gloss, the 54-year-old Mr. Bryan offers something for everyone: a few years working for Ralph Nader in the early 70′s, a stint as a Morgan Stanley mergers and acquisitions banker later that decade, and, when such a move was still considered daring, a run as a telecommunications entrepreneur.

Vogue editor Anna Wintour left her husband for him. President Clinton shmoozed Manhattan Democrats in his Upper East Side salon. And on Feb. 29, cable titan and notoriously discerning communications investor John Malone took a $500 million stake in his high-flying Colorado-based telecommunications company, ICG Communications Inc.

Finally, though, Mr. Bryan had offered more than he could deliver.

When Malone’s investment vehicle, Liberty Media, and two other blue-chip investors–Thomas Hicks of Texas-based Hicks, Muse, Tate & Furst Inc., and former Morgan Stanley mergers and acquisitions ace Eric Gleacher of buyout boutique Gleacher & Co.–invested $750 million in ICG ($230 million from Hicks, $20 million from Gleacher), the stock was trading at $28. Today it trades at around 62 cents.

On Sept. 18, the company announced that it was confronting “serious customer service issues.” Around the same time, Hicks and Liberty representatives abruptly resigned from the board. And more recently, Morgan Stanley Dean Witter & Company announced that Kenneth de Regt, a senior executive overseeing the firm’s fixed-income division–the department that oversees trading in ICG’s debt–would be retiring, though Morgan Stanley denied it was linked to the ICG affair. Morgan Stanley reported disappointing third-quarter earnings earlier this month, and analysts blame the poor results on difficulties in the company’s high-yield debt division.

With $460 million in losses and $2 billion in debt hanging over ICG, bankruptcy is a possibility.

Since Mr. Bryan resigned as C.E.O. and chairman of ICG in August, little has been heard from him. Contacted by phone and e-mail, Mr. Bryan also decided not to comment for this story.

But seven months ago, his stock in ICG was worth more than $60 million; its value now is just a touch over a million. He is facing a barrage of class-action suits from irate ICG shareholders–not to mention what’s sure to be an expensive divorce from his wife, which is still pending.

Fellow Democratic money men suggest that his stock as an A-list Democratic fund-raiser is also on the wane. Money follows a winner, and these days J. Shelby Bryan is anything but.

It is a steep departure from Mr. Bryan’s high-flying days. Until this last deal went sour, Mr. Bryan had an impressive run as an ahead-of-the-curve telecom entrepreneur and C.E.O.

Before it was hip to blow off Wall Street for high-tech start-ups, Mr. Bryan did just that. He left Morgan Stanley’s M. & A. desk in 1977 to co-found Cellular S.A. International in 1979.

Mr. Bryan’s idea was to get in early on cellular technology. Millicom was one of the first companies to conduct cellular trials in the U.S., while also aggressively securing cellular licenses in out-of-the-way spots such as Pakistan and Sri Lanka. But even then it was the deals, not the details, that intrigued. According to his colleagues at Millicom, Mr. Bryan fancied himself more of an investment banker than an operational guy.

“He was a deal maker,” says one former employee. “He was always traveling around the world meeting people. He was not a detail guy, but he had vision. People respected him.”

But deals take money, and finance creates debt. That debt took its toll on Millicom, and the company was forced to shed many of its prized assets to stave off bankruptcy. The company is still in business, but has a primarily international focus these days.

Mr. Bryan, however, walked away with his reputation as a deal maker and a telecom thinker established–not to mention a sizable personal net worth. By then, he was a fixture on the Manhattan social scene and was on his way to becoming one of the fund-raising giants in the Democratic Party.

In 1995, Mr. Bryan was hired by IntelCom Group Inc. in Englewood, Colo., a small but aggressive phone company that was looking to take advantage of the telecommunications deregulation wave by competing with the large carriers for local telephone business. But to win business, they needed to invest in a line network–to start from scratch, in effect. And that would take money. Other people’s money. Which is where Mr. Bryan came in.

Mr. Bryan knew exactly where to go for the money he needed to fuel IntelCom Group’s ravenous plans for expansion: the junk bond market, courtesy of his friends at Morgan Stanley & Company. He had used Morgan Stanley at Millicom, too, but the deals were smaller. ICG would be different. The need for capital was so much greater.

In mid-1995, with interest rates low, investors the world over were eager for high-yielding debt. Markets were booming, risk was cool again and the Michael Milken fiasco of the late 1980′s was a distant memory. And Mr. Bryan, ever the salesman, could tell a mean story about his ambition to eat regional phone company U.S. West’s lunch.

In August 1995, after just three months as C.E.O., Mr. Bryan cut his first deal–a $300 million debt offering brokered by Morgan Stanley. What’s more, Morgan Stanley’s private investment arm, Princes Gate Investors, bought $29 million in preferred ICG stock. It was a big coup for ICG; not only did it get the cash it needed to grow, it also got the coveted cachet of having Morgan Stanley as an investor.

For ICG and Morgan Stanley, it was just the beginning. From 1995 to 1998, Morgan Stanley, just about exclusively, would raise more than $1.5 billion (including the first deal) for ICG. In many ways, Mr. Bryan was an investment banker’s dream come true: To grow and thus appease its growth-obsessed investors, ICG needed to invest in more lines. Since profits were nil, the money had to be raised from financial markets. On the ICG side, it added up to substantial debt. On the Morgan Stanley side, it was enormously profitable, with some $60 million in fees tallied in the three-year period, according to Security and Exchange Commission filings. Meanwhile, ICG’s sales in 1999 were just $480 million, just slightly more than the company’s net loss for the year.

It was a cozy relationship. Morgan Stanley’s research side supported its bankers with optimistic reports that pumped up ICG’s prospects on the Street. Indeed, in the months leading up to Mr. Bryan’s resignation, ICG was rated a strong buy–as high a rating as a brokerage house can put on a stock. Five days before Mr. Bryan’s resignation, however, Morgan Stanley’s rating was swiftly downgraded to “neutral”–Street code for a sell recommendation.

Through all this, according to interviews with associates and Mr. Bryan’s own description to other publications, Mr. Bryan was having the time of his life. He loved the deal making, fondly recounting his days as a mergers and acquisitions maven at Morgan Stanley, telling stories about being called off airplanes, on his way to a family vacation, to handle some last-minute twist.

Of course, there’s nothing preventing a company from farming out its investment banking business to a single entity–personal relationships are what make the Street tick. And Morgan Stanley’s M. & A. capability is about as good as it gets on Wall Street these days. In 1999, for example, its market share for worldwide M. & A. deals was 33 percent, ranking just slightly behind overall leader Goldman Sachs, according to data compiled by Thomson Financial Securities.

Together with Gleacher & Company, Morgan Stanley assumed a significant role in putting the Malone deal together, reaping $7 million in fees as well as $4 million in now-worthless stock.

One could certainly argue that the multi-layered and long-standing relationship between Mr. Bryan and his old firm contributed to a possible myopia in its understanding–or misunderstanding, as it would turn out–of the actual health of the company. No malfeasance, to be sure–just an eagerness to get business done. Getting too close to the client is a common trend these days.

“This is how Wall Street works,” said Scott Cleland of the Precursor Group, a former research analyst. “Whenever an investment bank is financially involved with a client, they may get better information, but with the added liability of less objectivity. Morgan Stanley was not omniscient, but they did want the deal to work.”

A Morgan Stanley spokesman acknowledged the firm’s role in the deal, but said that its research team reduced its price target in ICG, though not its rating, before Mr. Bryan’s resignation.

For Mr. Bryan, however, it was Mr. Malone’s involvement that capped his career, thus far, as a deal maker. In June 1995, when Mr. Bryan took over the reins at ICG, the stock was trading below $10. Following the deal’s announcement in February, ICG traded up to a high $39 in late March.

Mr. Bryan was then worth $85 million. Interviewed shortly after the deal closed in April, he was in an expansive mood.

“I think it’s a huge vote of confidence. Anytime you get an investment from John Malone, you can bank on the fact that he has done his due diligence over there at Liberty,” he told a Denver newspaper.

None of the investors would comment on the story. Sources close to the deal, however, say that Mr. Bryan was quite right in this regard. The due diligence done on the deal was extensive. Models were developed and the numbers were crunched. Nevertheless, while historic numbers were cold and true, the team needed to take a leap of faith when it came to future forecasts. And it was at this point that they needed to trust J. Shelby Bryan.

Sources say that it was Mr. Bryan himself who was the point man for the deal, pulling the principals together and providing the operating details of the company. With the same persuasiveness he used to court Democratic contributors, he pitched his vision to the three. However, Messrs. Malone, Hicks and Gleacher were not soft Democratic touches. Indeed, they bought into Mr. Bryan despite his reputation as a Democratic fund-raiser. Campaign contribution filings show Mr. Malone and Mr. Hicks to be solid Bush contributors. It was Mr. Hicks, in fact, who bought the Texas Rangers from George W. Bush in 1998 for $250 million, cementing for him his very first business success and thus paving the way for his run for the Texas governorship.

More important, all three are crack numbers men with hundreds of billions in successful deals to their collective credit, dating back to the 1970′s. Sources close to the company suggest that in this respect, there were degrees of trepidation.

Mr. Bryan was seen as more of a “Page Six” cut-out than the kind of person investors of this stature would want presiding over their considerable investment, according to sources close to the deal. For these deal makers, he had too many outside interests to stay focused on the business at hand. Accordingly, the source said, there was an understanding, though not a condition, that after the deal closed in April, Mr. Bryan would leave the company.

But it was not until August that Bryan left–he was pushed out, according to sources–when it became clear that there was a serious problem within the company’s Internet service division, previously a key business driver. Over the next month, the more the investment team dug, the more bad news they uncovered.

Those close to the deal now say that the numbers and projections that Mr. Bryan presented to the investor group failed to materialize. ICG’s core businesses, in fact, were failing or on the verge of doing so just around the time that Mr. Bryan was spinning his vision of ICG as a New Economy telecom leader to Mr. Malone and company.

Did Mr. Bryan know his business was imploding as he closed his last deal? Surely not. He, after all, had nothing to gain from it.

Always be closing , said Alec Baldwin in Glengarry Glen Ross . But for Mr. Bryan, the Malone deal may have been one close too many.