by Connie Bruck
“We would announce to the world that we had raised one billion dollars for hostile takeovers,” one Drexel executive recalled. “There would be no money in this fund—it was just a threat. The Air Fund stood for our not having a client with deep pockets who could be in a takeover. It was a substitute for that client we didn’t have.
“That concept led to our making Carl Icahn real instead of nettlesome. Carl ended up being our Air Fund. Boone ended up being our Air Fund. We manufactured out of thin air—almost thin air—a credible takeover guy.”
PART TWO
Pawns Capture Kings
7
Triangle–National Can: Kingmaker
ON APRIL 2, 1985, the conference room on the eighth floor of the no-frills National Can headquarters in southwest Chicago was packed with the usual armies of deal advisers—M&A lawyers from Skadden, Arps, Slate, Meagher and Flom as well as from Paul, Weiss, Rifkind, Wharton and Garrison, and investment bankers from Salomon Brothers. There were some new investment-banking faces too, troops who were still a little green but who had launched a juggernaut that was now commanding the attention, and fear, of corporate chieftains across the country, as well as the one in this room.
Drexel—in the spirit of the GI Joe poster hanging behind the desk of one of Drexel’s senior executives, a poster which had been designed as a mock ad for the firm and featured the hero leading his platoon, their guns spitting fire—had arrived.
Two weeks earlier, Triangle Industries, controlled by Nelson Peltz and Peter May, had made a Drexel-financed, unsolicited $41 all-cash tender offer for all outstanding shares of National Can. Now, with other options for the company having failed to materialize, it looked as though a friendly deal might be struck. Frank Considine, the silver-haired, patrician CEO of National Can, threaded his way through the crowd and asked Peltz to come into his office. May was Peltz’s one-third partner, but Peltz was the lead player and deal-maker. Alone with Peltz, Considine told him that he might be willing to do the deal, but the shareholders would have to get a better price. The two men talked for about ten minutes, and then Peltz raised his offer to $42 a share.
“Nelson did that dollar totally on his own,” said Fred McCarthy of Drexel, who was advising Peltz. The additional dollar raised the price of the deal by $9 million. “Leon [Black] and I thought it was outrageous, but once he’d done it, what were we going to do? At that point we could have said, ‘We won’t play anymore.’ Instead we said, ‘Don’t do it again.’ ”
The negotiations continued. James Freund of Skadden, who was representing National Can, continued to pound away at Peltz, trying to get him to go up another dollar—which would have raised the price of the deal by another $9 million—but Peltz, now chastened, resisted. “I wanted to give another dollar,” Peltz said. “A dollar in this deal meant nothing. What was a dollar? But I had to get the OK from Mike Milken, and he was in Hawaii.”
According to one long-standing acquaintance of Milken, his wife, Lori, had made him promise that on his vacation he would not work from 9 A.M. on; so Milken took his family to Hawaii, where he slept for a few hours in the late evening, rose at 1 or 2 A.M. and worked until 9 A.M.—by which time it was 2 P.M. in New York and most of the business day was over.
“Mike was unreachable,” Peltz said. “They [his Drexel advisers] were blocking my calls. They thought I was being too gracious.”
Freund said, “I knew he wanted to go up a buck—assuming he could get the money. But I finally realized I was working over the wrong guy. All the discipline was being imposed by Milken and company.”
Peltz was indeed—as his Drexel advisers, McCarthy and Black, had so heavily reminded him—not the true principal here, only Milken’s chosen agent. He had come into the breach when Victor Posner, one of Milken’s longest-standing clients and a member of the high-rollers’ coterie, had been cornered. Posner had owned 38 percent of National Can. In February 1985, National Can, along with an employee stock-ownership plan, had launched an offer for 51 percent of the company’s shares which would have left Posner—who was in desperate need of cash to make interest payments on debt for at least two of his companies—with a sharply devalued minority position. If Posner was to be rescued from this worst-of-all-worlds situation, a competing bidder would have to be brought in.
By this time, in early 1985, Milken was moving his players across the M&A field as though it were a chessboard. The Air Fund had matured into the “highly confident” letter, in which Drexel would announce that it was “highly confident” it could raise a given sum, necessary for its client to take over his desired company. It then would obtain from its buyers “commitment letters,” in which each promised to buy a certain amount of junk bonds. These bonds would be issued by the shell corporation formed to acquire the target, and secured by the assets of the target.
It was an evolving strategy, changing slightly each time it was implemented. Thus far Milken had launched the junk-bond-financed hostile takeover on behalf of T. Boone Pickens, in Mesa’s run at Gulf; Saul Steinberg, in Reliance’s bid for Disney; Carl Icahn, in his bid for Phillips Petroleum; and Oscar Wyatt, in Coastal Corporation’s bid for American Natural Resources (ANR). Only one of these targets, ANR, had actually been acquired—less than a month before Triangle made its offer for National Can.
Even for Drexel—home of the underdog and the proverbial outsider—Peltz and May were small-time. All they had to their names was a controlling interest in a tired old vending-machine, wire and cable company, Triangle Industries—its 1984 revenues were $291 million, compared to National Can’s $1.9 billion—plus about $130 million of cash that first L. F. Rothschild and then Drexel had raised for Triangle from the sale of junk bonds. But none of the bigger players to whom Drexel had shopped the National Can deal had been interested. None considered the deal a bargain. And as one longtime associate of Peltz said, “The others all had more at risk—only Nelson had so little to lose.”
So Peltz and May were brought to the fore. And on April 4, 1985, they reached an agreement with National Can to acquire the company at $42—not needing to go up the extra dollar after all.
For a while, Peltz recalled, everyone held his breath, waiting to see whether this paper miracle would collapse. The only other Drexel-backed takeover to achieve consummation, ANR by Coastal, was a sturdier construct. “There is no comparison between Coastal and this,” Peltz asserted, visibly offended at the suggestion that Triangle was not the first of Milken’s minnows to actually swallow a whale. “Coastal was a big company, with significant assets. It wasn’t so leveraged. Triangle was a company with a fifty-million-dollar net worth. This was the first of the superleveraged buyouts to go through.”
The acquisition of National Can cost $465 million. Triangle contributed $70 million as equity, to which another $30 million was added through its sale (underwritten by Drexel) of preferred stock; the debt portion layered above that consisted of $365 million raised with junk bonds by Drexel. And after the deal closed, Drexel raised another $200 million from junk bonds, in order to pay down National Can’s preexisting bank debt. So the total debt of National Can, once the $200 million was added to the preceding $365 million, was $565 million.
Five hundred sixty-five million dollars was a towering debt load for $100 million of equity to carry. And Peltz pointed out that even the $70 million from Triangle, at the equity base, came from its earlier offering of junk. “We put the hundred million in the sub [the subsidiary, Triangle Acquisition Corporation, formed for the buyout]. But it was all debt! We called it equity here [at Triangle Acquisition Corporation], but it was debt over here [at Triangle]. Do you understand the leverage in this deal? It was eleven to one!
“And for the next two months, every Friday after the market closed, Peter Ackerman [Milken’s key aide for buyouts] would call me and say, ‘You’re going bankrupt! You’re going bankrupt! You miscalculated the debt!’ And I’d say, ‘You guys did the calculations. What are you talking about? What kind of smoke is blowing throu
gh the air-conditioners out there on Wilshire Boulevard?’ ”
Leon Black acknowledged, “We were nervous. The first year or two of these buyouts is very risky. We have a franchise to protect. It’s not unusual in the early stages for us to make sure that the runners of these companies are keeping their eye on the ball. We hadn’t seen Nelson manage much of this size before.”
Peltz appeared to share little of his bankers’ anxiety. In mid-1985 he purchased through Triangle a $2 million apartment in Paris. “Mike made him put it on the market,” commented one Drexel investment banker, “which was the right thing to do. We have a responsibility to our bondholders. What’s he going out and spending the company’s money like that for, when he’s got this mountain of debt?”
By the beginning of 1986, however, the first good news was in (and Peltz took the apartment, still unsold, off the market). National Can had had a record year in 1985; its earnings (for April 17 through December) were $162 million, up from $68,775 the year before; Triangle’s stock had quadrupled, making it the third-best performer on the New York Stock Exchange. With interest rates down, Peltz and May were refinancing the company’s acquisition debt, meaning they were paying down that debt and replacing it with newer debt at lower interest rates. And their combined personal stakes in the company had gone from a market value of roughly $8–9 million when they purchased the controlling block of Triangle stock, in 1983, to about $34 million. Adding in a premium for control, which would have been present if they were to sell their block, it was now worth more than $40 million.
Alan Brumberger, another Drexel banker who worked on the National Can deal, noted in mid-1986, “All my clients were pleading with me, ‘Make me Nelson.’ ”
NOWHERE WAS Milken the magician’s prowess—creating out of (almost) thin air a takeover entrepreneur—more stunningly displayed than in the case of Nelson Peltz and Peter May. Others he backed before and after—T. Boone Pickens, Saul Steinberg, Oscar Wyatt, Carl Icahn, Ronald Perelman, Sanford Sigoloff, William Farley—were all given access to pools of capital that they could only have fantasized about were there no Michael Milken. But each of them had been successful in his sphere, however much smaller—and in some instances disreputable—it may have been before they joined the Drexel party. (For Icahn, for example, it was greenmailing.) Only Peltz and May were virtually empty-handed when they arrived at the threshold. And when it was all over, they would reign over an empire with $4 billion in revenues.
Peltz’s love of luxury did not stem from early deprivation. Asked where he thinks his younger brother Nelson acquired his opulent tastes, Robert Peltz says, “He had them from the first moment he opened his eyes.” The Peltzes were a comfortable upper-middle-class family. When Nelson was small they lived in the Cypress Hills section of Brooklyn, later moving to Park Avenue in Manhattan. Nelson attended a private school, Horace Mann. In 1960 he entered the Wharton School at the University of Pennsylvania, in 1961 he took a leave of absence, he returned in 1962 and he left later that year.
He went to work for what was intended as a brief stint in the family food business, Abe Peltz and Sons (started by Nelson and Robert’s grandfather). It was then a $2.5 million business with about a dozen employees, which sold frozen foods to institutions. Peltz says he intended to stay there for two weeks, just long enough to earn his fare out to Oregon, where he had a job teaching ski-racing to youngsters. But he got hooked.
While his brother managed the day-to-day operations of the business, Nelson set out on an acquisition course, buying up small food businesses along the East Coast—among them a company called Flagstaff, whose name he adopted in 1969. In 1972 he took Flagstaff public; through his acquisitions, the company now had sales of $50 million. Robert Peltz was chairman of the board of this newly public company, and Nelson was its president.
In the process of taking the company public, Peltz met Peter May, who was then one of his auditors at Peat, Marwick, Mitchell and Company. Like Peltz, May came from an upper-middle-class family in New York. He had received an M.B.A. from the University of Chicago, and, like Peltz, he was hoping for far greater vistas in business, seeing his stint at Peat, Marwick as a stepping-stone. He went to work for Peltz at Flagstaff.
Nelson Peltz’s grand plan was to use Flagstaff as a vehicle for acquisitions by doing stock swaps. “But the stock never really performed, so we couldn’t use it for acquisitions,” said May. “Instead, we did acquisitions for debt. This was, of course, before Milken. So we were limited to bank debt, which was keyed to standard ratios. If we had a twenty-million net worth, we couldn’t borrow a hundred million.” In 1975, Flagstaff bought 51 percent of Coffee-Mat, a maker of vending machines for beverages and snacks, and the following year it acquired the rest of the company.
By the late seventies, Peltz was leading a fast-track social life. He had a press agent. He often showed up in the “Suzy Knickerbocker” column. His lifestyle, one friend who knew him then commented, was like an Oriental potentate’s. He and Saul Steinberg (chairman of Reliance, Inc.) were notorious for throwing wild parties at their respective summer houses in Quogue, Long Island. The story that floated around the Drexel corridors, one which may be apocryphal but which was told and retold so many times that it became legend, featured Peltz and Steinberg as hosts to a women’s tennis match—four topless women on the courts, and Peltz and Steinberg the spectators.
But Peltz’s business life was considerably less fast-track, and he was frustrated. He couldn’t even expand the food business the way he wanted to, and his real aspirations were for something far more glamorous.
“Nelson didn’t want to be in the food business,” a friend declared. “He wanted to be a big shot! He wanted to buy Columbia Pictures! He was assiduously cultivating Herbert Siegel [CEO of Chris-Craft Industries], Charlie Bluhdorn [chairman of Gulf + Western], Saul Steinberg. He was like the kid who wants to hang out with the varsity football team.”
Peltz did make overtures to Herbert Allen of Allen and Company, which held only a relatively small block of Columbia Pictures at that time but was nonetheless viewed as being in control of the company. According to one insider, Peltz called Herbert Allen and said he would be interested in buying a controlling block, but Allen never took him seriously because he did not believe that Peltz had the means to buy any sizable block. “It was just that Peltz wanted to go Hollywood,” the insider said. “He wanted to socialize with Herb Allen.”
Even the limited expansion of the food business had not worked. In 1978, the food businesses of Flagstaff were sold to a group headed by Philip Sassower, Lawrence Schneider and Ben Jacobson for approximately $31 million (most of which went to pay off the bank debt accumulated in the acquisitions). Robert Peltz stayed with the food business and its new owners, while Nelson and Peter May set out to make Coffee-Mat, all that was left of the public company that had been Flagstaff, their new vehicle. They renamed the company Trafalgar. Robert Peltz remarked about the grand expansion engineered by Nelson that ended with selling out, “It could have made sense. It could have become a Staley or a Kraft, if things were done differently. But they weren’t.”
“The company was not performing,” one insider said. “Too many luxuries were taken. A food company doesn’t need offices on Madison Avenue [where Nelson Peltz moved the offices], they should be over a warehouse. And it doesn’t need layers and layers of nonproductive management.”
What happened to Flagstaff after the buyout is a lesson in the perils of leverage when interest rates climb. The Sassower-Schneider-Jacobson group had acquired Flagstaff in a leveraged buyout, with variable-rate financing, in 1978. In the next two years, interest rates skyrocketed, the interest on the Flagstaff notes went from 8 percent to 20 percent—and in 1981 Flagstaff went into Chapter 11.
Meanwhile, Coffee-Mat had deteriorated severely since Peltz took it over. Its earnings went from $1,111,000 for 1976 to a loss of $2,291,000 by 1978. Over the next several years the losses continued. But throughout these losing years, Peltz drew an
annual salary of at least $230,000. Says an insider, “Coffee-Mat had been dominant in its industry for many years. But by the early 1980s it was damn near bankrupt.”
In 1979, Trafalgar had a $1 million capital-loss carryforward, and Peltz was looking for an investment to take advantage of it. Saul Steinberg introduced him to Michael Milken. “Mike and I were remembering the other day that he had come to call on me at Coffee-Mat,” said Peltz, “and we were laughing, saying he must have really been desperate.” Milken persuaded him that Trafalgar should buy Penn Central bonds, then selling for thirty cents on the dollar; in the end, Trafalgar got the full dollar.
Peltz commented, “Milken has always been very private. He has a lot of information, and he channels it very carefully.”
Peltz recalled an incident at his office, where his son had dropped off a parrot he had just bought. “Mike calls, and immediately the parrot started to squawk—no words, just squawking. Mike said, ‘Are we alone?’ I said, ‘Yes.’ ‘What’s that noise?’ ‘A parrot,’ I said. ‘Call me back when the parrot’s gone,’ Mike said, and hung up.”
While the investments Milken recommended were successful, nothing else was. Peltz and May had planned, initially, to use Trafalgar as a vehicle for acquisitions, but by the early eighties it was clear that that had been a pipe dream; they’d be lucky to keep it out of bankruptcy. They started a consulting company called NPM, to do workouts for troubled companies; the first client was their own former company, Flagstaff, which went into bankruptcy despite their efforts. In 1980 they acquired a 9.5 percent position in Sterling Bancorp, a New York bank holding company, but management repulsed their advances. Peltz went on the board, briefly. But in 1981 they sold their position for roughly the purchase price.
