Cerberus had already shown an interest in the glass industry before it formed GHP. In April 2002, it bought Anchor Glass Container Corporation, the old container division Bill Simon and Vince Naimoli had spun off from Anchor Hocking. Vitro had acquired it for $900 million. It went bankrupt. Cerberus took it out of bankruptcy for $80 million.
As Cerberus transitioned into standard PE deals, it shopped hard. In 2003 it took control of the Alamo and National rental car companies and a Japanese bank. The following year, Cerberus and two other PE firms bought the Mervyn’s department store chain from Target for $1.2 billion; Guilford Mills, a North Carolina textile company; and a building products distribution business from Georgia-Pacific—along with Anchor Hocking and the other Newell businesses that made up GHP.
By the time it bought Anchor Hocking, Cerberus had an estimated $12 billion under management, a lot of it in Cerberus Institutional Partners II, a pool of cash handed over to Cerberus by institutions and wealthy individuals in the hopes that Cerberus would turn the pool into a lake. Some of this money was used to buy Global Home Products.
Just how much of the $310 million was pulled from the fund remained unclear, but most of the money to buy and form GHP was borrowed by GHP. When Cerberus, as Global Home Products Investors, bought the companies from Newell, it, on behalf of Global Home Products, opened a $200 million revolving loan with Wachovia, a bank based in Charlotte, North Carolina. GHP also took out a term loan and a revolving credit line for $210 million from Madeleine. In other words, Cerberus (Madeleine) loaned itself (GHP) up to $210 million.
The three companies bought from Newell booked $695 million in sales in 2003. Anchor was the largest contributor to that figure by far. But from the moment Cerberus took control, Global Home Products owed hundreds of millions of dollars and had to service all that debt. In addition to the interest payments, Global Home Products was supposed to pay preferred dividends to Global Home Products Investors (Cerberus). These dividends appeared to have amounted to about $841,000 per month. GHP would not last long enough to pay them.
Cerberus appointed George Hamilton, a former Newell executive who was already working for Cerberus, CEO of Global Home Products. Hamilton hired another Newell alumnus, Mark Eichhorn, to run Anchor Hocking.
Though Hamilton had served a rotation at Anchor under Newell and was sitting on the board of the Cerberus-controlled Anchor Glass Container, he was no glassman. Anchor employees were used to that by now, but Hamilton’s management alarmed them right away.
“Their idea was not to put money in anything,” Joe Boyer said. “Just let it break down, then work on it. Fix it then don’t do maintenance. It’s cheaper to do it that way. That’s the way the place was run.”
Lax maintenance led to breakdowns. Breakdowns led to equipment being pulled. The tanks hadn’t been maintained well during the last days of Newell, and now they were ignored by Cerberus.
Both the cookware and frame companies proved to be immediate drains on GHP. Both bought their products from low-cost sources in Mexico and China. Quality suffered. “It was garbage,” one employee told me. Anchor’s cash flow wound up supporting the structure of Global Home Products, and because of that it starved.
In an effort to cut expenses, Hamilton ordered an IT change. When Global Home Products was formed, it paid Newell for the right to continue using Newell’s enterprise resource planning (ERP) system for orders, pricing, inventory, and shipping. The expense made sense, since all three companies within Global Home had been Newell’s, and all had used the same system. Everybody understood it, and the infrastructure was in place. But in October 2004, GHP signed a deal with Perot Systems for an entirely new ERP at less cost.
Hamilton demanded an immediate switch. “We had to do it in eight months,” recalled Sue Powers, Anchor Hocking’s customer service manager, “because he didn’t want to spend the money [for the Newell system]. I said, ‘We can’t be ready. It’s not gonna happen.’ He said, ‘I don’t care; we’re doing it.’ We couldn’t ship; pricing was a mess. We fell to our knees. He was only seeing the short term, not the long term.”
Invoicing stalled. Shipments were delayed. Ware sat in warehouses. Cash stopped flowing. Bills to suppliers went unpaid, and customers screamed that their products weren’t arriving.
With all the debt interest GHP had to pay, and now with a cash-flow backup, GHP found itself in a liquidity crisis. In January 2005, only seven months after Cerberus bought the company, Eichhorn announced that the workforce in the Monaca, Pennsylvania, plant would be cut in half. About 250 workers there would lose their jobs by spring. Eichhorn blamed foreign competition, health care and energy costs, and overcapacity. Some of the work done at Monaca would be shifted to Plant 1, on Pierce Avenue.
Union members in Plant 1 had mixed feelings about the news. More work for them was good news for the plant and for Lancaster, but they felt for the workers in Monaca. They also realized that everybody’s jobs looked shakier than they had just a few months before. The hope for a new beginning faded away.
The news also worried Lancaster and state-level officialdom. Both the city and the state reflexively resorted to what had become a standard response across the country: They tried to figure out a way to give Cerberus, an outfit managing $12 billion, more public money.
As if to ratchet up the pressure to deliver incentives, Eichhorn shut down Plant 1 for eleven days in April 2005. There was too much inventory and no place to put the ware coming off the lines. The shutdown seemed odd to Nagle. Just weeks before, Plant 1 had been ordered to speed up production to make more ware. A conspiracy-minded person (and workers had learned to be conspiracy-minded) might think management had been stocking up in preparation for a shutdown.
The next month, the state of Ohio, Fairfield County economic development director David Zak, and the city of Lancaster announced a deal to give Global Home Products a 55 percent tax credit and $100,000 to train fifty new glassworkers by 2008. Global Home Products was also still benefiting from the tax giveaway the schools gifted to Newell, but in June the city council anted up another 100 percent tax abatement on any new machinery the company installed in Plant 1.
“Anchor is like any business and we need to offer them incentives to stay and expand here,” Zak told the Eagle-Gazette. “They are committed to this city.”
The most charitable interpretation of this statement was that Zak suffered from willful blindness. Anchor Hocking leadership hadn’t been committed to Lancaster for nearly twenty years, and now it was impossible for Anchor to be committed to the city, because it wasn’t Anchor—it was Cerberus. Commitment to anything other than Cerberus was not part of its business model. Cerberus closed the factories and stores of its portfolio companies all the time and laid off workers by the thousands, as they had in Monaca. Six months before Zak said those words, Cerberus shut—without notice—an Anchor Glass Container bottle plant in Connellsville, Pennsylvania.
Unbeknownst to Zak, Global Home Products likely knew it couldn’t fulfill its obligations to hire fifty workers by 2008. It was already imploding. GHP sought the first in a series of forbearances from its creditors to avoid default.
GHP had even stopped paying into its employees’ pensions, though it didn’t tell anybody that. Before Newell bought Anchor Hocking, the company ran a traditional defined pension plan for its workers. After Newell took over, it switched to a 401(k) matching plan—cheaper for the company. When Newell sold the businesses to Cerberus, Newell transferred $43,885,449 in 401(k) savings plan funds to Global Home Products. The plan had been adequately funded, but under Cerberus GHP’s wasn’t.
“I was settin’ on the [labor management] council ’cause I was [union] vice president at the time,” Nagle recalled of a conversation he had with plant manager Dan Taylor. “I said, ‘We see you’re in trouble. You’re not payin’ your bills, ’cause the vendors are sayin’ you’re not even payin’ them.’ ‘No,’” Taylor said, “‘we’re okay. We’re okay.’ I set there, and I was heading the 401
(k) at the time, and I said, ‘Hey, you haven’t put in our 401(k) for two months,’” Nagle said of the company’s contracted contributions. “‘Our money’s comin’ out of our checks.’ And old Dan says, ‘Yeah, we are. That’s our 401(k), too.’ He checked into it. They weren’t puttin’ in 401(k). They was using money, our 401(k) money, to pay bills, ’cause they was so far behind, and he didn’t know anything about it.”
Between April 2004, when it formed Global Home Products, and April 2007, Cerberus shorted the 401(k) account by an estimated $5,749,809. The gap between the fund’s assets and the benefits it had promised employees amounted to $8,754,578. The plan had only $1.3 million to fund benefits of $10.1 million.
Cerberus was not alone in stiffing workers out of their pensions. In June 2005, after Nagle said he spoke to Taylor, the Pension Benefit Guaranty Corporation (PBGC), an insurance company created by the 1974 Employee Retirement Income Security Act (ERISA) and funded by premiums paid by companies that sponsor pension plans, testified before the U.S. Senate that 1,108 company pension plans were each at least $50 million underfunded as of 2004.
The same month Ohio gave its gift to Global Home Products, Cerberus paid $2.3 billion to buy papermaker MeadWestvaco. (Mead had a large paper plant in Chillicothe, about thirty miles from Lancaster.) That was just one of a number of 2005 deals engineered by Feinberg, who, the New York Times reported, was thought to have paid himself about $75 million in 2004.
* * *
Global Home Products became a snowball rolling down a mountain of debt, with nothing but bad news left in its wake. For years, Anchor had shut down for a couple of weeks—in July and in December—to clean and maintain the plant, but two months after the unscheduled April shutdown, it decided to extend the July shutdown. Altogether, workers would lose at least four weeks of work and a month’s pay that year.
By fall, GHP had stopped paying the offshore companies making its picture frames and cookware. The Chinese issued stop orders on goods making their way across the Pacific Ocean. They also instructed the shipping company not to release any frames that had already landed in the United States.
Cerberus, however, wasn’t slowed down at all by GHP’s troubles. It began discussions to buy the Albertsons grocery store chain. At that point, some Global Home Products managers began looking for new jobs. “We didn’t have any money, and Cerberus wasn’t going to put any more money into it,” one said. “Once they bought Albertsons, that was their entire focus.”
The cash crisis paralyzed Global Home Products. By January 2006, GHP wasn’t even paying the rental fees on forklifts used in Plant 1, or on the air compressors that powered the machines. Looking for options, it called in a consulting firm.
Mirro/WearEver and Burnes had to go. That was obvious. But Cerberus apparently wanted to keep Anchor Hocking, the only profitable part of the company. Because it wanted to keep Anchor, Cerberus plotted to avoid bankruptcy court. As good as its lawyers were, the proceedings could be unpredictable, and it might lose Anchor. So it explored a recapitalization of GHP as a way to stay out of court. But by March, with creditors pounding on the doors, there wasn’t much choice but to declare Chapter 11. GHP filed for bankruptcy on April 10, just twenty-four months from the day Cerberus formed it.
In those twenty-four months, Global Home Products had accumulated nearly $400 million in debt. It owed Madeleine about $200 million and Wachovia $115 million. Debts to other creditors added another $66 million or so.
When Cerberus bought GHP, Lancaster’s leaders voiced enthusiasm. When those leaders offered enticements from the public coffers, they thought they were assuring Anchor Hocking’s long-term future. Now, after a century, Anchor Hocking found itself in a bankruptcy court.
A few tried to muster some optimism for the outcome of the proceedings, but much of Lancaster had ceased caring. They tried to rally around Newell, but then they were betrayed. Their hopes for Libbey rose, then were sunk by the FTC and the impotence of their political leaders. Some let themselves be talked into the benevolence of Cerberus, but that faith became grist for absurdist slapstick. Nobody wanted the glassworkers or the shippers and customer service reps in the DC, or the people in Monaca, to lose their jobs, but the saga of Anchor wore everyone out.
* * *
The bankruptcy proceedings were long, messy, and contentious. Burnes and Mirro/WearEver were sold off—Burnes for $33.5 million in May and WearEver for $35.7 million in August. But Cerberus didn’t give up on Anchor Hocking. Global Home Products continued to make glass in Plant 1 and in Monaca as court-supervised “debtors-in-possession.”
Nothing improved for the employees, though. In December, Cerberus announced it wanted to scratch the health care plan for all future retirees and to stop workers from accruing service time used to calculate pensions and benefits. Pensions and benefits would be based on the years worked until then, but no more. Health insurance would be cut back for current employees. Even those who’d already retired would lose much of their health care security—just what Dale Lamb had fought to prevent in 1992. There’d be no more holiday pay for Thanksgiving or the Sunday before Labor Day for Plant 1, no more extra pay for the day after Christmas and the Saturday before Labor Day for the DC. The judge sitting on the U.S. Bankruptcy Court for the District of Delaware, a district with a long reputation for being debtor-friendly, approved it all.
GHP worker Brenda Stone despaired. “I was a very dedicated employee from 1982 until March 2, 2006, always giving 100 percent,” she told the judge in a letter. Brenda worked in quality control. She retired before the bankruptcy, fully expecting the benefits of the retiree health plan that had been agreed to by the company. She had diabetes, high blood pressure, acid reflux, and arthritis. She might as well have tried to buy the Hope Diamond as pay for her medical costs. “Now, without insurance, there is no way of surviving.”
As 2006 turned into 2007, creditors accused Cerberus of delaying the proceedings. Cerberus, meanwhile, was trying to figure out a way to buy Anchor Hocking back out of bankruptcy without spending another penny.
Section 363 of the bankruptcy code was written to provide for the quick sale of a bankrupt company when delay would critically wound its chances of emerging from Chapter 11. Under 363, a judge can allow a company’s creditors to bid for it at auction. The bid can consist of the debt the company already owes to a creditor, a so-called credit bid. Cerberus planned to make a credit bid for Anchor Hocking based on the $200 million owed to Madeleine (essentially $200 million owed by Cerberus to Cerberus). If the credit bid was successful—and it would be, because nobody was going to top $200 million for Anchor Hocking—Cerberus would own Anchor free of bankruptcy, and largely free of creditors like vendors and the pension plan.
The Pension Benefit Guaranty Corporation pointed out the obvious self-dealing. “Under the Amended Bid Procedures, Madeline [sic] may submit a credit bid for the Subject Anchor Hocking Assets,” it told the Delaware court. (Like roughly half of all U.S. corporations, GHP was legally domiciled in Delaware, a tax haven that allows companies to move revenues to Delaware tax-free as a way to avoid state taxes in the state where they’re headquartered or do business.) “If Madeline is the Successful Bidder, closing of the Anchor Hocking Sale is conditioned on confirmation of a plan of reorganization that releases Cerberus, Partners, Madeline and the members of the Debtors’ Board of Directors ‘from any and all claims which may be asserted against them by the [Committee], the Debtors, or any other creditor.’”
Cerberus should not be allowed to walk away from its obligations to the workers, the PBGC argued. Though GHP, which now amounted to just Anchor Hocking, was technically separate from Cerberus, the distinction was a fantasy of law. GHP was a “controlled group.” Global Home Products Investors, LLC, owned 97.7 percent of the company, and Global Home Products Investors was controlled by Stephen Feinberg.
The back-and-forth continued until April 2, 2007, when Wachovia refused to extend the debtor-in-possession financing that was keeping Global
Home Products afloat. Without that financing, Cerberus was forced to hold a quick 363 auction, at which it did not offer a credit bid. The sole bidder was a much smaller private equity outfit: Monomoy Capital Partners.
Wachovia was repaid in full, but other creditors, including the pension, lost most of what they were owed.
The Pension Benefit Guaranty Corporation negotiated a settlement. Cerberus agreed to provide $912,347 for “administrative costs” to the PBGC. In return, the PBGC assumed control of the Global Home Products pension plan; agreed to release Cerberus, and anybody who worked for Cerberus, from any debts, damages, claims, or causes of action; and agreed to pretend, for the sake of the deal, that, based on a declaration by Cerberus, “there is no ‘controlled group’ under applicable provisions of ERISA that would support a potential claim against the Cerberus Affiliates for liabilities under the Pension Plan.” In other words, to make the compromise work, the PBGC had to say that Cerberus did not control GHP after all, letting Cerberus off the hook for any future pension-related claims.
Some Anchor Hocking executives who had lived through the two years of Cerberus ownership remained convinced that Cerberus walked away with a profit. That seemed doubtful. After paying Wachovia, there was little left for Madeleine to collect. Still, as we’ll see, private equity outfits have ways of making money even when they appear to only be losing it. And since Global Home Products was a private company, the total payouts to Cerberus over the course of its ownership were opaque.
But whether it lost money on this particular deal, broke even, or made a profit, its ownership of Lancaster’s largest private employer was just one of many transactions in which bankruptcy was part of doing business. Lancaster didn’t understand that. Under the capitalism it knew, bankruptcy was failure, perhaps even evidence of one’s flaws as a professional, if not as a person.
Glass House Page 11
