Clinton noticed the off-kilter EBITDA numbers, too. But after more negotiation, and a lowered price, Monomoy and Clinton signed an agreement on January 31, 2013, to merge ROI and EveryWare Global and take the combined company public.
At the deal’s closing date, Monomoy received $246.9 million, $90 million of it in cash and the rest in stock. Monomoy retained almost two-thirds of EveryWare. Clinton paid the $75.1 million held in ROI and $16 million of its own money. The rest came from loans totaling more than $265 million. As always, that debt would be EveryWare’s.
Both Monomoy and Clinton stood to gain more by selling the stock, but there was a hitch. Most of the stock was handcuffed by a so-called lockup: Neither Monomoy nor Clinton could sell their shares for 180 days following the closing of the merger.
Such lockup agreements are meant to reassure investors that a stock’s sponsor will share risk rather than quickly bailing out of a company with little chance of success. But this lockup agreement was worthless. Under the terms, Monomoy and Clinton could sell earlier if the stock sold for at least $12.50 per share on at least twenty trading days during any thirty-day period after August 19 (ninety days after the closing date). This could provide an incentive to manipulate the share price during that period. Even if the price provisions weren’t met, they had yet another out: Monomoy and Clinton could sell earlier if the audit committee of the board of directors—made up of Clinton and Monomoy personnel—approved an earlier date.
Sheppard, Monomoy’s Dan Collin, and members of Clinton all hit the road to sell the new company to investors. They showed PowerPoint slides. They held conference calls. On one such call, Collin promised that “we believe in the business, we believe in its people and we believe in the future growth of the organization. We also believe that the structure of the transaction we are discussing today aligns the interests of all parties involved as we will work together tirelessly to drive go-forward performance and shareholder value in the years to come.”
All of them trumpeted words like “world” and “global” over and over, to hammer home the idea that EveryWare was going to compete worldwide. Sheppard took a moment to praise his CFO, Bernard Peters: “I’m proud to have a strong partnership with my CFO Bernard Peters who has a strong, very ethical financial background with unique global experience.”
Despite the hard sell, the stock strolled languidly out of the gate at $10 per share. It barely moved over the next several weeks. But by mid-June 2013, the price began to perk up as Oppenheimer, hired by EveryWare to prepare a secondary offering of stock in anticipation of qualifying for the shorter, ninety-day lockup term, talked up the shares to potential investors.
On July 8, it closed at $12.96. On August 1, EveryWare released earnings results for its first quarter as a public company and for the first six months of the year. They looked good. Revenue was up. EBITDA was way up—32 percent—and if you excluded one-time expenses like merger costs, earnings came in at twenty-seven cents per share for the quarter.
On August 19, ninety days after the closing date, the stock closed at $12.75. On September 3, it closed at $12.95 per share. On September 13, Monomoy and Oppenheimer entered into an underwriting agreement to sell four million shares. The stock price, however, had not met the ninety-day lockup terms set forth in the public filings. The audit committee waived them.
The market for EveryWare’s shares was fragile, and the price of the stock was already dropping before Monomoy could get to market. Monomoy had to settle for a sale of 1.75 million shares (90 percent of which were Monomoy’s shares) at $11.50 per share, yielding another $18.5 million.
Two weeks later, on October 30, EveryWare released another earnings statement. Sheppard sounded the upbeat notes CEOs always sound in such calls, but he also announced that EveryWare might pull back from some of its earlier, more optimistic predictions. He further said that, to save money, the company was not going to rebuild one of the Lancaster furnaces, as promised. Instead it would “reposition” the capacity.
The stock lost more than 10 percent of its value that day. On October 28, EveryWare shares opened at $10.50 per share. On November 11, they closed at $7.49. The price would never hit $10 again. By March 9, 2015, two days before Solomon called the lenders to break the news about the going-concern qualification from the auditor, it closed at eighty-nine cents.
The question that puzzled Brian Gossett and so many other Anchor employees—Who was making money?—wasn’t so hard to answer once you chopped away the acronyms and footnotes and jargon. EveryWare Global was drowning in over $400 million in liabilities. It possessed just over $100 million in total assets. Sales were respectable, but the company had to pay high interest on all that debt. It had to lease a distribution center it used to own. It paid generous salaries and stock options to Sheppard and Peters—Sheppard was paid $2,281,966 in 2012. Most of all, it paid Monomoy, and Monomoy’s funds, many millions of dollars while Brian Gossett, Swink, Joe Boyer, Chris Nagle, Chris Cruit, and hundreds of other Anchor Hocking workers gave up wages and benefits.
* * *
After the summer shutdown of 2014, EveryWare’s board became increasingly desperate to find a way out of the debt prison it had constructed. Monomoy had used $20 million to buy preferred shares as a bridge over the covenant breach during the shutdown, and it was still the majority owner of the company. It wanted that money back. And Clinton hadn’t begun to recoup its investment. So the board formed a mergers-and-acquisitions committee.
“The concept is very simple,” Solomon explained. “I combine that company with no debt with this company with too much debt, and the combined company has about the right amount of debt. It’s basically: they’ll make beautiful kids together. That’s all you are lookin’ at. Clean balance sheet, ugly balance sheet—it’s an average kid.”
At one point, Clinton’s De Perio tried to bluster his way into a merger with CSS Industries, a maker of stationery, greeting cards, ribbons, bows, baby books, and photo albums under the brand names C. R. Gibson, Paper Magic, and Berwick Offray. On November 17, 2014, De Perio wrote to the CSS board of directors and issued an implied threat to mount a hostile campaign to win over CSS shareholders.
I write on behalf of Clinton Group, Inc., the investment manager to various funds and partnerships (“Clinton Group”) that invest in public equity securities of companies such as CSS Industries, Inc. (“CSS” or the “Company”).
We have monitored the Company from afar for the last few years and have owned its common stock in the past. We are ambivalent to owning stock of the Company if it continues to operate as an independent entity in a declining industry niche.… The liquidity in the stock is what keeps us on the sidelines today, and I imagine current shareholders wonder how they will eventually monetize their positions. [emphasis added]
I believe Clinton Group can set forth an alternative path to equity value creation. Clinton Group is also the owner of a significant stake in EveryWare Global, Inc. (“EveryWare”) (NASDAQ: EVRY), and I sit on both the Board of Directors and the Acquisition Committee of the Board. Assuming both parties can come to an agreement on a contribution analysis and an exchange ratio and based on our detailed review of the Company’s publicly available information and our substantial knowledge of the industry, I believe EveryWare Global can offer as much as $34.00 per share in an exchange offer to CSS shareholders.
“The rest of the story plays out, unfortunately, like much of my early dating exploits when I tried to date models,” Solomon laughed. “You can easily envision a model saying, ‘I understand why you wanna date me. Tell me why I wanna date you.’”
CSS, which had very little debt and a healthy share price, laughed off the threat from the crippled EveryWare. The idea sputtered out. Solomon did not tell me so directly, but by December 2014 it seemed clear to me that he believed bankruptcy was the most likely outcome for EveryWare.
Bob Ginnan knew as early as October 2014, just after the shutdown, that the company would probably collapse. A headhunter h
ad called him to talk about replacing the Alvarez & Marsal–supplied interim CFO, who was costing EveryWare more than $31,000 per week. Ginnan was CFO of an Ohio printing company that had navigated rocky financial shoals, so he wasn’t intimidated by EveryWare’s basic finances. But when he looked up the filings, he was alarmed by the nuances. “I could start to see there were some things going on here that probably weren’t right,” he recalled. “The way I saw some of the earnings and the words flow and the cash flow and the investments, it looked to me like this thing was headed towards a problem.”
Besides, there’d been a lot of turmoil inside the executive offices on Pierce Avenue, with executives like Sheppard, Peters, and Kerri Cardenas Love, the general counsel, suddenly departing. Ginnan decided he wasn’t interested.
Solomon later called Ginnan and asked him to rethink his position. Monomoy and Clinton were probably not going to be around forever. He convinced Ginnan that the Anchor Hocking and Oneida brand names, freed of the PE shops, had value. Ginnan liked the fact that Anchor made its glass in the U.S.A.—and, more specifically, in Ohio. He was a born-and-bred Buckeye with an affinity for manufacturing who would rather be on the shop floor than the New York Stock Exchange floor.
“I like dealing in things that have value and use beyond the intellectual value,” he said. “It’s just something about the craftsmanship of people, and seeing that, and these guys out there on the forming process. They’re craftsmen. They really are.” He changed his mind and took the job.
In early March 2015, on the Thursday before Ginnan was scheduled to be in Lancaster, Solomon called him. Referring to a bankruptcy filing, Solomon said, “Oh, by the way, we’ve got this little project we need to start on Monday.”
The board, however, refused to go quietly. On March 12, the day after the going-concern call to the lenders, it appointed Solomon to a seat so he could explore another junk-financing scheme involving the issuance of high-interest securities in return for a cash infusion.
But when the plan was presented to the lenders, they rejected it. The board asked the investment banking firm Jefferies to draft other possible out-of-court restructurings. Jefferies offered advice on at least five occasions between March 19 and the end of the month. The lenders rejected them all.
EveryWare had been servicing the debt at the sacrifice of the plants and the workers. The payments arrived on time. No skin would be shaved off the lenders’ backs if they let EveryWare try to figure a way out of the going-concern qualification. If a new financing plan failed, or proved inadequate down the road, the lenders could take the keys at that time. Meanwhile, why not wait and keep collecting the interest payments? The lenders could have done just that, Solomon said. “Or they could say, ‘I don’t like you.’”
By now, most of the lenders were disgusted. Had there not been the shock of the previous year, and had Monomoy not left them with a soured relationship, the lenders might have been willing to explore such alternative financing schemes. But they insisted they would only settle for bankruptcy.
As much as he seemed to favor it, Solomon had mixed feelings about heading for court. On the one hand, he thought of Monomoy as abusive parents and longed for “a forever home.” But he was the CEO, and not interim anymore. And now he had a board seat. From the outside, EveryWare looked like his ship. He didn’t relish the idea of being the CEO of a corporate Titanic. He worried about the patina of failure, especially if he decided to look for another job. That reluctance, however, was outweighed by his desire to rid the company, and himself, of Monomoy and most of the debt. Freed of both, he might finally be able to do what he’d come to do: build that billion-dollar company beneath himself.
NINE
Pump It and Dump It
April 2015
They turned off the lights at Foundation Dinners, the little charity on West Fifth Avenue that fed all comers at outdoor picnic tables, the food prepared in its overworked kitchen. Fifteen yards across Fifth and half a block down, Lloyd Romine, his girlfriend, and whoever happened to have dropped in watched TV and got high. One block behind Lloyd’s house and halfway down Garfield, Michele Ritchlin and her teaching staff of one closed up the West After School Center after the last parent/guardian picked up the last child. Directly through the West School playground and across Pierce Avenue, Sam Solomon, Bob Ginnan, EveryWare general counsel Erika Schoenberger, vice president of sales and marketing Colin Walker, and new vice president of operations Anthony Reisig pored over numbers.
They were only partway through a fourteen-hour day preparing the bankruptcy filing of EveryWare Global. Coordinating with the partners at Monomoy, with two law firms—Kirkland & Ellis, and Pachulski Stang Ziehl & Jones—and with Jefferies, the investment bankers, they planned to blitz the Delaware federal bankruptcy court with a prepackaged plan they hoped would sail through with no delays and not many questions.
The filings hit the court on April 7. On the afternoon of April 9, Ross M. Kwasteniet, from Kirkland & Ellis, rose to address Judge Laurie Selber Silverstein.
So, Your Honor, I’ll spend a few minutes on how we got here. In 2013, the company engaged in an aggressive strategy of international expansion that, frankly, fell flat. We built inventories that we expected to sell overseas and that simply didn’t sell. We also embarked on a supply chain consolidation effort that went poorly and that resulted in key outages of key products and the company started losing customers. This led to a financial and liquidity crisis and led to potential covenant violations. The company simply had a situation where we had a lot of unsold inventory and we were running low on cash. This resulted in the board deciding to make a change in management. We brought in a new CEO [Solomon], and we also brought in the Alvarez & Marsal firm to help turn things around at the business level.
At the very least, Kwasteniet was admitting to the court that the combined brains of John Sheppard, as CEO, and the Monomoy partners—to whom EveryWare had been paying millions for advice—were lousy business operators.
A former EveryWare executive agreed with that assessment. “These guys were financial engineers, not operators,” he told me. “They don’t know how to run businesses. They think they do, but they don’t.” Monomoy, he argued, was too interested in “foisting financial engineering” on the two companies to operate them.
As embarrassing as poor management may have been, though, it was a far better excuse than the alternative theory: EveryWare’s debt was so deep by design—allowing Monomoy to strip the company of cash—that EveryWare couldn’t move.
In order to reward itself with all that money, Monomoy was forced to engage in stomach-churning corporate maneuvering. In the space of just a few months, Monomoy bought Oneida, rid itself of Anchor CEO Eichhorn, merged two companies—Anchor and Oneida—executed a merger with the Clinton SPAC, and took the company public.
“That’s too much change very rapidly,” the former executive said. “We would all think to ourselves, ‘We need to tap the brake pedal here.’ But Monomoy always had the pedal to the metal.”
As damning as these interpretations of the events leading to the bankruptcy may have been, they were innocent when compared with the one suggested by other EveryWare insiders. “There was communication between Kerri and Peters about what Peters knew about the numbers and the real state of the company and filing fake information,” a source recalled, referring to EveryWare general counsel Kerri Cardenas Love and CFO Bernard Peters. Cardenas Love, the source alleged, believed that Peters, under pressure from Monomoy, knowingly released phony results and estimates in order to make EveryWare seem healthier than it was before the September 2013 secondary stock offering that allowed Monomoy to begin cashing in its shares. Alarmed, Cardenas Love purportedly confronted Peters. “Kerri said, ‘You guys figure this out, or I’m going to the SEC.’” Peters asserted that “he could make the numbers say anything he wanted them to say,” the source alleged.
Cardenas Love was fired in October 2013, three weeks after the secondary offering. She wrot
e a whistleblower letter to the SEC and followed up with a lawsuit of her own. On April 1, 2014, EveryWare settled out of court by paying her almost $1 million in damages, back salary, and legal expenses.
The International Brotherhood of Electrical Workers bought stock at the time of the secondary offering. When the stock price collapsed shortly afterwards, the IBEW mounted a class action lawsuit that accused CEO Sheppard, CFO Peters, Monomoy, Clinton Group, and the stock sale underwriters of an illegal stock “pump-and-dump” scheme, “in which the Monomoy Defendants refinanced, merged and took their privately owned and thinly capitalized company public, while stripping it of the cash necessary for it to operate.” The IBEW further alleged that
Monomoy accomplished this by developing a wholly baseless set of 2013 operating projections—revenues of $457 million and [EBITDA] of $61.1 million—which it continued to tout and reaffirm until the weeks following the Secondary Offering, while EveryWare’s operations sharply deteriorated as a result of the Company’s inadequate capital and its inability or unwillingness to pay its suppliers. To convince EveryWare’s creditors, ROI, and the merged company’s public shareholders to fund this scheme, the Monomoy Defendants, Sheppard and Peters made a number of material false and misleading statements and misleading omissions.
According to the suit, “when an information technology manager tasked with investigating Ms. Love retrieved incriminating electronic files—which he was required to report to CFO Peters, the subject of Ms. Love’s charges—the technology manager, too, was fired.”
The suit further alleged that, “by July 2013, the Company was unable to pay its vendors and was on track to run out of money by the end of the year.” At that point, EveryWare “engaged in accounting manipulations that misstated EveryWare’s inventories. Even after taking out all of EveryWare’s capital, causing the Company to become deeply insolvent and threatening the livelihood of thousands of EveryWare employees, the Monomoy Defendants had additional plans for extracting wealth from EveryWare,” the suit charged. “Specifically, the Monomoy Defendants retained over 15 million shares of EveryWare which they needed to sell before investors realized that the Company was essentially worthless.”
Glass House Page 19
