| The following article was printed in the Atlanta
Journal Constitution on July 30, 2006, and is repinted with permission. The
original AJC article is available
and the original Boycott Watch article is available
out, with limits
Peralte C. Paul, Shelia M. Poole - Staff
Sunday, July 30, 2006
In many ways, the 2005
initial public offering for Caribou Coffee was like any other.
contained information about the popular coffee chain's growth strategy, an
industry overview and its financials.
But Page 16 of its prospectus may
have left some would-be investors scratching their heads:
compliance with Shari'ah principles may make it difficult for us to obtain
financing and may limit the products we sell."
Arcapita Inc. in Atlanta, a majority owner of Caribou Coffee, is the
U.S. arm of Bahrain-based Arcapita Bank, which makes investments based on
Islamic law, known as Shari'ah. Shari'ah prescribes how individuals and
businesses should act.
For companies, that means not investing in
financial firms that offer credit or charge interest, or companies peddling
pornography or alcohol. Even pork is off-limits.
"We've got a pretty
good sense of where the boundaries are," said Charlie Ogburn, Arcapita's
executive director and global head of corporate investment, in an interview
from the company's Midtown offices in the Four Seasons hotel building. "Most
media businesses, because of R-rated movies or lyrics or Internet content,
anything that involves gaming, casinos, lotteries --- we would avoid that."
Case in point: The company passed on buying a call center firm that
activated credit cards because Shari'ah prohibits charging interest or dealing
with businesses that do.
But log houses, fried chicken and notebooks
Arcapita's diverse holdings, which include Southland Log Homes,
Cypress Communications, Church's Chicken and American Pad & Paper, show
that a company with strict investment guidelines can succeed in the United
States, the world's biggest --- albeit secular --- economy.
Bank, founded in 1997 as First Islamic Investment Bank, had $2.3 billion in
assets at the end of June.
Arcapita's story also illustrates some of
the dynamics of operating in global markets:
capital remains free-flowing, even during periods of world unrest.
public sentiment and nationalism can produce controversy in day-to-day business
"We certainly had a fair amount of attention after Sept. 11
because there were so many people who knew so little," Ogburn said.
For example, Caribou Coffee, which Arcapita
acquired with little fanfare in 2000, ignited a controversy on the Internet
after the 9/11 terrorist attacks.
Fred Taub, president of
Cleveland-based Boycott Watch, an organization that monitors and reports on
boycotts, said some people objected to Muslim ownership of the popular
U.S.-based coffee chain.
"A lot of people were upset about it,"
he said. "They basically said we're not going to drink there anymore."
But Taub said it's difficult to gauge what, if any, impact the
controversy had on Caribou's sales. Many companies don't like to acknowledge
boycotts are successful for fear of encouraging others.
call it a low-level boycott," Taub said, explaining he thinks it eventually
stabilized or died down. "I don't see many e-mails about it anymore."
Michael Coles, Caribou's chief executive, said the threats never
materialized into a major cause for panic.
"It's pretty much gone away.
The company has more than doubled its size since then," he said, explaining
that Caribou has grown from 175 stores when he took over in January 2003 to
more than 400 today.
"Since then, [Arcapita's] business track record
speaks for itself," Ogburn said. "We've done a large volume of transactions all
over the U.S. and Europe with reputable counterparts and banks."
Earlier this month, for instance, Arcapita
sold its Loehmann's business for $300 million after adding the off-price retail
chain to its portfolio in 2004 for $190 million. Arcapita's return on equity
--- not including borrowings for the initial purchase transaction --- was a
little more than 100 percent.
Arcapita executives say such transactions
show that, like any other private equity firm, their main objective is to make
Indeed, Arcapita's "sweet spot," Ogburn said, is making an
investment of $50 million to $150 million in a given company and holding onto
it for four to six years before selling.
Before a deal is consummated,
it has to get a nod from Arcapita's four-person Shari'ah advisory board, which
consists of a retired judge from Saudi Arabia's Supreme Court and religious
scholars from Pakistan and Bahrain.
But beyond ensuring a potential
acquisition is Shari'ah-compliant, the board does not play a role in the
company's operations or decide the financial merits of a particular deal. Nor
does it dictate who can be hired or promoted, said Ogburn, an Episcopalian.
Arcapita has a separate two-man international advisory board that
provides advice on international relations and political issues. Its members
are Wyche Fowler, a former U.S. senator from Georgia and U.S. ambassador to
Saudi Arabia, and Samuel L. Hayes, investment banking professor emeritus at
"The business people we interact with, it's no
mystery to them that capital is sourced from the Middle East, and the people we
do business with understand global economic trends and capital flows," Ogburn
said. "My experience has been that business people focus on the business and
not anything else."
Mideast investments in the United States rose to
$8.2 billion in 2004, according to the most recent figures available from the
Commerce Department's Bureau of Economic Analysis. About half that amount, $4.1
billion, came from Israel, with Kuwait, Qatar and the United Arab Emirates
making up the bulk of the rest.
It's a small share of the total $1.5
trillion in foreign investments in the United States each year. But inflows
from the Mideast are growing, increasing by 26 percent between 2000 and 2004.
That outpaced investment growth from Europe in the same five-year span.
Ogburn said Arcapita's investors are eager to be in the United States.
U.S. investments represent about 48 percent of its total. The oil-rich Middle
East is a "vital" source of investment capital, he said.
capital is going to be redeployed somewhere, so we are a channel for that
capital to be redeployed back into the economies in the U.S. and Europe," he
Though the company says it got past
the boycott threats, it still has had to deal with several lingering questions.
Chief among them: Did Arcapita adopt a low-profile corporate name to hide its
roots? Do Mideastern cultural practices prevent women from holding positions of
authority in Arcapita's family of companies?
Arcapita officials said
the company changed its name to a single unifying brand last year because
potential business partners were confused about the relationship between First
Islamic Investment Bank, the Bahraini parent's original name, and its U.S. arm,
Crescent Capital. Adding to the confusion, its London-based operations had a
Ogburn, 51, who joined the company in March 2001 after
15 years at Robinson Humphrey, said some investors also wanted a more secular
"First Islamic was not the right name because we are not a
religious institution," he said. "Some of our investors didn't like the name
because they were uneasy that we were sort of taking commercial advantage out
of the name of the religion.
"We're almost five years after Sept. 11.
It certainly was not a reaction to that or we would have done it a long time
Even so, executives at some of their holdings sometimes have to
explain what being Shari'ah-compliant means and dispel some misconceptions.
They say the status of women is one of them.
Women hold key posts in
the Arcapita group of companies including the CEO position at Working Rx, which
processes workers' compensation claims for chain and independent pharmacies.
Some 60 percent of Caribou Coffee's core management team is female,
while at Church's the chief marketing officer is a woman, officials said.
And women hold several key spots in Arcapita's senior management team.
"My experience with Arcapita has been extremely different than whatever
the rumors may say," said Farnaz Wallace, an Iranian woman who heads Church's
Ogburn said he thinks the focus on his company
stems from mistaken attitudes about Islamic beliefs and Arab culture.
But he said he's found surprisingly few
cultural differences between working for a Western firm and one with a strong
Middle Eastern and Islamic culture.
"We all work hard, and we feel
essentially the same way about business," he said. "Are there people in the
United States who are uninformed or ignorant about what Islam really is? Of
course there are. It's really not our job to re-educate everybody in the United
Khaled Abou El Fadl, a law professor at the University of
California at Los Angeles, said Islamic financial institutions represent a
multibillion-dollar industry that is merely trying to make ethically and
morally sound business decisions.
Abou El Fadl has served on several
Shari'ah advisory boards in the United States and elsewhere.
most advisers don't get involved deeply in scrutinizing a deal for its economic
feasibility, instead leaving that to the experts. "You don't meddle with the
judgment of professional investors. Banks where the Shari'ah board has been
aggressive and controlling have never gotten off the ground."
people who say Islamic-based institutions support terrorism are "socially
irresponsible" and "Islamophobes."
"They're trying to hit Islamic
institutions in the knees. ... The vast majority of Islamic businesses are
entirely respectable and professional and run within a sound economic
Caribou's Coles, who is Jewish, agreed, saying
that he researched the coffee chain before joining it to ensure the corporate
environment wouldn't be at odds with his own principles.
"It turned out
to be a great company," Coles said.
Church's, franchisees expressed concerns after being acquired by Arcapita in
December of 2004.
"There were initial concerns by our franchise board,"
said Harsha Agadi, Church's CEO. Some of those concerns stemmed from changes
Arcapita made such as substituting turkey for pork in its red beans and rice
Pork comprised less than 1/2 of 1 percent of sales for
less than 250 stores out of 1,600 outlets, Agadi said.
ownership isn't an issue with franchisees, he said, since the company has had
annual same-store sales growth of 5 percent to 7 percent. The company surpassed
the $1 billion sales mark for the first time in February.
start demonstrating those kinds of sales increases, you would expect
franchisees to be pleased," he said, explaining franchisees haven't made
Arcapita's ties to the Middle East an issue.
Agadi, who hails from
Mumbai (formerly known as Bombay), India, said the globalization of world
economies are making such concerns less of an issue.
"Long term they do
not have a lasting impact," he said. "It will be common for a lot of companies
overseas and here in the U.S. to have multinational interests."
ARCAPITA'S CORPORATE INVESTMENT GROUP, ITS LARGEST OF FOUR PORTFOLIOS:
> Ampad --- Richardson, Texas-based provider of paper-based office
> Bijoux Terner --- Miami-based supplier of watches,
jewelry, handbags and other retail soft goods to airports, cruise ships, hotels
and entertainment locations.
> Caribou Coffee Co. --- Second-largest
non-franchised specialty coffeehouse chain in the U.S.; based in Minneapolis.
> Church's Chicken --- Atlanta-based fast-food, franchised chicken
> Cirrus Design Corp. --- World's second-largest maker
of single-engine, piston-powered, aircraft for general aviation; headquartered
in Duluth, Minn.
> Cypress Communications --- Atlanta-based
telecommunications provider to small and midsize businesses.
Meridian Surgical Partners --- Nashville-based company that operates ambulatory
surgery centers nationwide.
> Roxar --- Stavanger, Norway-based firm
that helps manage reservoir problems in the oil and gas industries.
> Smart Document Solutions --- One of the world's largest health
document processors; headquartered in Alpharetta.
> Southland Log
Homes --- One of the largest log home manufacturers in the United States; based
in Irmo, S.C.
> Tensar Corp. --- Atlanta-based provider of site
development and transportation infrastructure services for properties.
> Tender Loving Care Health Care Services --- Home health care and
hospice service providers; based in Lake Success, N.Y.
Transportation Safety Technologies --- Indianapolis-based manufacturer of
specialty electrical components and safety products for vehicles.
Vogica --- Paris-based retailer and wholesaler of kitchens and bathrooms in
> Working Rx --- Salt Lake City-based manager of workers'
compensation claims for retail pharmacies.
> Yakima Products ---
Beaverton, Ore., manufacturer of multisport racks and accessories for
> Based on Islamic law, Shari'ah
is a set of religious principles that prescribes how its followers should act
in their personal, social and business lives. A key tenet: Businesses may not
pay or earn interest on borrowed money, which is viewed as usury. So how does a
financial business like Arcapita do business and stay compliant? To finance a
commercial project, the bank invests in specific assets, such as a piece of
property or building, which the borrower leases. At the end of the lease, the
borrower can acquire title to the assets for a fee.
> Money Weekly
magazine says more than 250 Islamic financial institutions operate worldwide
and that Islamic banking is estimated to be managing about $550 billion.
ELIZABETH LANDT / Staff
Illustration of a tree with the bank's
customers "branched out."
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