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Originally published Saturday, June 2, 2012 at 8:00 PM

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Big hole near Green Lake starts to fill up; Esterline investor prompts takeover speculation

Lorig Associates stopped work in late 2007 when negotiations with a prospective grocery tenant fell through, leaving a 3-acre crater in the Green Lake neighborhood's center. The project came back to life a year ago when PCC Natural Markets agreed to lease half its 50,000 square feet of retail space.

By Seattle Times business staff

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After a four-year hiatus, developers have restarted construction of Green Lake Village, a closely watched apartment and retail project on the site of the old Vitamilk Dairy.

Lorig Associates stopped work in late 2007 when negotiations with a prospective grocery tenant fell through, leaving a 3-acre crater in the Green Lake neighborhood's center. The project came back to life a year ago when PCC Natural Markets agreed to lease half its 50,000 square feet of retail space.

But Lorig CEO Tom Fitzsimmons said the design needed to be updated before construction could resume.

"The project had gotten a little stale," he said.

Green Lake Village should be finished in January 2014, he said.

In addition to retail, the three-building, five-story project will have 297 apartments and 430 underground parking stalls. It will cover the entire block bounded by Woodlawn Avenue Northeast, Fifth Avenue Northeast and Northeast 71st and 72nd streets.

Michael Cornell, president of the Green Lake Community Council, said the neighborhood "is anxious to see this project move forward, especially the PCC market."

Green Lake has needed a grocery store since the Albertson's — later replaced by an apartment and retail complex — closed in 2006, he said. And that need was magnified when the QFC in nearby Roosevelt closed last month to make way for a light-rail station.

No other retail tenants have signed on at Green Lake Village yet, Fitzsimmons said, "but quite a few folks are looking at it," including restaurants and fitness centers.

The project also has a new part owner — insurance giant Northwestern Mutual, which formed a joint venture late last year with the family that owned Vitamilk. In addition to its equity stake in Green Lake Village, Northwestern Mutual also has loaned the project $50 million, according to county records.

The insurance company's last foray into Seattle real estate went well: It acquired downtown's Russell Investments Center in 2009 for $115 million, then sold it in April for $480 million.

While it builds Green Lake Village for the project's owners, developer Lorig is exploring opportunities for residential/retail projects in South Lake Union, Capitol Hill and the Eastside, Fitzsimmons said.

— Eric Pryne, epryne@seattletimes.com

Esterline investor

prompts takeover

speculation

A call from one of Esterline's largest investors to boost the company's performance has increased speculation the Bellevue-based aerospace supplier could become an acquisition target.

Relational Investors, Esterline's third-biggest stockholder, urged Esterline management to improve profitability and make better use of its capital, adding that its stock sells "at a substantial discount to the value available in a strategic sale to a larger company."

Relational cited Esterline's "suboptimal size and product scope" as one challenge to management, which it said has "a history of poor capital allocation, including overpaying for acquisitions and overleveraging the company's balance sheet."

It also complained about the company's "suboptimal operating performance" as measured by profit margins and return on invested capital, and what it called "inadequate disclosure and communications" with analysts and big investors.

Bloomberg News reported that even after rising about 14 percent this year through Friday, Esterline was valued at a multiple 28 percent below the average for North American aerospace and defense parts makers.

Esterline, which closed at $63.68 Friday, may command at least $90 a share in a takeover, analysts at Stephens and Credit Suisse Group told Bloomberg.

"Any of the big conglomerates that want to get bigger in defense could find Esterline attractive," said Eric Green, a Philadelphia-based fund manager at Penn Capital Management, which oversees $6 billion including Esterline shares. "It's trading at a very attractive valuation and the fundamentals and outlook are very good."

Esterline has more than 9,000 employees worldwide. Its subsidiaries include Korry Electronics, which makes cockpit controls, switches and displays, and employs about 650 people in Everett; and Hytek Finishes, a metal-finishing shop that employs about 175 in Kent.

Ralph Whitworth, Relational's co-founder, told Bloomberg in a May 24 interview that while he hasn't urged the company to put itself up for sale, he "wouldn't want them to be eschewing offers."

Esterline, which generates 45 percent of its revenue in the commercial-aerospace market, may lure buyers seeking more commercial customers as its sales and earnings ramp up, said Eric Hugel, an analyst for Stephens.

Esterline would also be appealing to suitors looking to increase their presence in the defense industry because 40 percent of its sales are military products such as infrared decoy flares used to confuse heat-guided missiles.

Acquirers would be getting a company that boosted its free cash flow in four of the last five years and is projected to produce a record of about $224 million this fiscal year, which ends in October, data compiled by Bloomberg show.

"You've got a company here that generates good, consistent free cash flow," Hugel told Bloomberg. "They have a lot of good technology. It would be an attractive candidate for the right kind of business where there would be a fair amount of synergies."

But Esterline's depressed valuation may not be enough to persuade buyers to take on the company, said Michael Callahan, a New York-based analyst for Auriga USA.

"It doesn't fit a plain-vanilla defense or commercial-aerospace company," Callahan told Bloomberg. "They have a lot more going on than just that."

Still, Esterline's market capitalization of about $2 billion is "in the sweet spot" for many potential suitors, said Julie Yates, a New York-based analyst for Credit Suisse.

Esterline has "a very attractive set of capabilities on the commercial aerospace side," Yates said. "They have an accelerating organic growth profile."

Takeover offers for the company may range from $90 to $100 a share, Yates and Stephens' Hugel speculated. That implies a premium between 37 and 53 percent to Friday's closing price.

Zachary Prensky, a New York-based fund manager at Little Bear Research, told Bloomberg that Relational is "pushing these guys in the right direction. They will find somebody who will want the whole thing."

Esterline President and CEO Brad Lawrence didn't address Relational's comments in a conference call Thursday after the company's quarterly earnings release, but sounded optimistic about Esterline's business outlook.

"We're still at an early point in what should be a strong and lengthy global up-cycle in commercial aerospace driven largely by international demand for new aircraft and significant upgrades to existing fleets," he said.

Comments? Send them

to Rami Grunbaum:

rgrunbaum@seattletimes.com

or 206-464-8541.

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