The Predators’ Ball

by Connie Bruck

  “I’m sure the truth was that he didn’t like either one of us,” May said. “Frank is a real gentleman, and he plays everything very close to the vest, so he’s never said. But I’m sure that he thought of us as two Jewish guys from New York he’d never heard of, and we were the last thing he wanted.”

  LESS THAN TWO weeks later, on the night of April 4, the merger agreement was ready. Peltz had gone to $42 on his own and outraged his Drexel bankers. Then—unable because of Milken to go up another dollar—he had come up with the idea of a $4 million bonus pool for the employees (“I said to Considine, ‘I don’t need my bankers’ approval for this, because it will come out of earnings . . .’ ” he recalled). And after some further negotiations, in which Peltz agreed to stipulate that National Can would stay in Chicago and he would not strip off assets, all that remained was the signing.

  Peltz was nervous and exhilarated that night. “I was sitting in the National Can offices with May and Lovado [chief financial officer of Triangle], and I said, ‘You guys excited?’ Lovado said, ‘Don’t ask me. I’m just a bean-counter.’ ”

  For Considine, the experience was also intense. He had had a heart attack a couple of years earlier, and that night, as the documents were being finalized, he recognized recurrent symptoms. He went home, leaving his chief financial officer, Walter Stelzel, to sign the agreement.

  Considine, who had hoped to do the management buyout, topping Triangle’s offer, said that Citicorp had indicated that they had the financing all but ready. But at the last moment, with Triangle’s offer only a couple of days from expiration, Citicorp had backed out. “We wasted four or five days that might have made the difference with someone else,” he said ruefully.

  Then, referring to the ease with which Drexel had raised the money, virtually overnight, he added, “We weren’t in the network. If we had been, we could have done the deal ourselves.”

  BY THE FALL of 1986, it was clear that the paper miracle of Triangle–National Can had assumed proportions that exceeded any of its architects’ expectations. All the elements that make for success in this kind of superleveraged transaction converged. In the general economic environment, interest rates dropped dramatically and the stock market went up; at National Can, earnings rose, its stock price quadrupled—and management, which was excellent, stayed.

  In the familiar catch-22 of Wall Street, however, the feat, once so demonstrably successful, could not be replicated, though it was much imitated. In October 1986 Drexel’s David Kay commented, “Today you couldn’t do a National Can. Then hardly anyone had beaten out a management LBO, no one knew how it would work. Now there’s a feeding frenzy the minute one of these deals is announced, like Warnaco [where in the spring of 1986 management announced it was taking the company private, and a bidding war ensued that drove the price up to a point where Drexel’s bidder finally stopped].

  “There’s too much money chasing too few deals,” Kay lamented.

  In the spring of 1985 Drexel had raised a total of $595 million for the acquisition of National Can—$395 million for the acquisition itself, and another $200 million for the payment of its bank debt. By September 1986, thanks to falling interest rates, the rising stock market, and the company’s performance, only about $80 million of that original debt remained outstanding. The rest had been retired with money from a new bank line, and from an offering of convertible debentures and convertible preferred, which were later converted into common equity. Some of the original debt, then, had been turned into common equity, and the bulk of what remained had been refinanced at 8–9 percent instead of 14–16 percent. These refinancings brought Triangle’s annual interest charges down from about $85 million to about $35 million.

  “We’ve really taken the leverage out of the leveraged buyout,” crowed Drexel investment banker Fred McCarthy. “In the beginning, a company that had $65 million of equity borrowed $700 million—your basic ten-to-one ratio,” he said with a laugh. “Now it’s $500 million of long-term debt, and equity of about $350 million—one and a half to one.”

  Business at National Can has been helped by a number of factors—none of which was foreseen by the corporate-finance people at Drexel who structured this deal and gave it their blessing. Consumer-sector growth was one. Another was the decline in the prices of energy and aluminum, both used in the production of cans. And pricing in the glass business, which National Can entered several years earlier, became stronger.

  Earnings have also been boosted by the introduction of an investment portfolio, which ranged from $200 million to $500 million in 1986. Here Peltz—who oversees the portfolio—played an interest arbitrage. Triangle pays an after-tax cost of roughly 5 percent on its debt (because interest payments are tax-deductible), while earning roughly 8 percent after tax on junk preferred (for a corporate holder of preferred stock, only 15 percent of the dividends earned are subject to federal income taxation—so 85 percent of those dividends are tax-free to corporations). According to Peltz, 20 percent of Triangle’s income comes from its investment portfolio.

  Peter May, when asked to explain the upturn at National Can, cited several of the fortuitous changes in the business environment. Then he added, “The business was on the brink of turning around significantly—we can’t take credit for that. But the great intangible is the change in atmosphere. They were unable to make any long-term business decisions because of Victor Posner, and now they know we are committed to the company’s long-term growth. And there is also the intangible of showing the new owners how good you are.”

  Peltz is more apt to claim credit, but in one frank moment he did not. In an interview in mid-1986 he remarked that National Can’s earnings were the same as they had been two years earlier, before all the debt of the acquisition was laden on the balance sheet. Asked what he would attribute this to, Peltz replied, “Not my management expertise!”

  Considine was interviewed by this reporter in September 1986, the week after Business Week canonized Peltz and May, featuring them on its cover as “The New Aces of Low Tech,” and publishing a separate editorial which stated, “Peltz and May are . . . what the U.S. needs more of: entrepreneurs with long-term vision.” Asked what made the business suddenly so great in 1985, Considine answered sharply, “It didn’t just suddenly become great. It’s been going on for ten years. We got ourselves in shape, positioned ourselves to be the low-cost operator in the right markets. We expanded the glass business when everybody—including articles in The Wall Street Journal—said I was nuts. We bought when everyone else was selling. So we positioned the company. And last year, putting aside any expenses associated with the rhubarb, was a record year. This year’s going to be another very good year.”

  Posner shared this long view of the company, believing in its strength, and missed out on the bonanza. Ever since he was forced to sell his National Can holdings, things have gone from bad to worse for the reclusive financier:

  In early 1986, Posner’s DWG defaulted on the principal payment of its Drexel-underwritten notes. Lindner lent Posner $55 million so that the notes could be paid off.

  Evans Products went into bankruptcy (advised in its reorganization by Drexel), and Posner—for the first time—was forced out of a company he controlled.

  Sharon Steel, advised by Drexel, continued throughout 1986 to extend its debenture-swap offer—making it the most extended swap in history—until April 1987, when Sharon Steel followed Evans Products into Chapter 11.

  In May 1986, Posner was featured on the cover of Business Week as America’s highest-paid chief executive—who also returned the least to shareholders for the money. He took total compensation of $12.7 million in 1985 from DWG, a holding company that earned $5.6 million on $989 million in revenues in ’85 and that in the first nine months of fiscal 1986 lost $5.9 million.

  In July 1986, Posner was convicted of having evaded more than $1.2 million in federal income taxes by inflating the value of land he donated to a Bible college in Miami. He was subsequently granted a new t
rial because of juror misconduct, but he later pleaded guilty and avoided a jail sentence by agreeing to pay back taxes and fines totaling at least $4 million, and to spend $3 million on the homeless and devote twenty hours a week for five years to working with them. His legal fees to Edward Bennett Williams were paid by the ailing Sharon Steel, in an arrangement made by that company’s board in 1982 but not disclosed until 1985.

  Had Posner succeeded in his buyout of National Can—and had he been able to maneuver it into the interlocking pyramid of his troubled empire—it would have been manna. But Posner, in a rare interview, asserted that he has no regrets about having let National Can go, and that he wants to clear up some prevailing “misconceptions.”

  He claimed that the reason he did not proceed with the buyout of National Can was that he believed the transaction was too leveraged, and the cash flow would not be adequate to cover the debt service. “We had the money,” he insists, in response to a query about Drexel’s having been unwilling to finance the transaction. “Drexel told us they would arrange it. There was no problem with the money.

  “I told Considine I wanted to go to fifty-one percent, and the company could have stayed with the same small amount of debt it always had, and he could have continued to run it the same way he always had. But he didn’t want that. I think that that twenty percent [which management would have gotten in the management buyout] did something to turn his head,” Posner declared.

  Asked about Dan Good and Paul Yang of E. F. Hutton attempting to raise the financing for him, Posner said, “They said, ‘Please give us a shot.’ I said I wasn’t convinced that they could do it—and we didn’t need them, because we had the money [committed from Drexel] and I wasn’t going to do the deal anyway.

  “From the moment Considine wouldn’t do the fifty-one percent deal, I only wanted to sell. And then Milken came to me [with the Triangle offer] and he says, ‘Vic, this is a helluva deal.’ ”

  Posner added that he cleared $80–90 million profit from the sale of his stock into the Triangle offer. “I would do the same thing again today,” he declared. “I thought the debt load was too high—interest rates have come down, so it’s worked so far, but I still think there is too much leverage.”

  Drexel’s David Kay, who has known Posner for many years, said, “There can never be too much leverage for Victor. The sad part is that when Victor tells you that, he believes it’s true. How could it be otherwise? Everything is as Victor mandates.”

  Posner became a dinosaur at Drexel, a relic of the not-distant but prehistoric past when the firm was more than happy to underwrite securities for just about anyone. In the eighties, however, while the firm’s fortunes skyrocketed, Posner’s went into a free-fall. By 1986, Posner was an embarrassment to many at the firm, an unlikely candidate for future Drexel financings, a reminder of a past that the members of this aspiring world-class institution preferred to forget.

  If Posner symbolized the old Drexel, however, Peltz—to his astonishment and the astonishment of many at Drexel—became for a brief, halcyon time the sign-bearer of the new. After one interview in early 1986, Peltz remarked to this reporter, somewhat wistfully, “Will you write something good about me? Nobody’s ever written anything good about me.” Then came the Business Week article in September 1986—in the issue that featured Peltz and May on the cover—breathlessly lauding them as revitalizers of smokestack America, who had not stripped off assets for a quick profit but were strengthening the business for long-term growth. Their key investment banker at Drexel, Fred McCarthy, chortled, “The question now is, will success spoil Drexel Burnham? Will we become hoity-toity?”

  Peltz no longer had to camp out on Milken’s doorstep, begging for a deal. When Milken traveled to Boston to address a group of security analysts in February 1986, Peltz met him in Boston and then—over a six-hour strategy session—flew him back to L.A. “Nelson was so excited, so thrilled, to have had Mike to himself for all that time,” exclaimed one friend of Peltz. “He came home bursting with ideas.”

  Indeed. Within the next five months, National Can reached an agreement to acquire American Can Company’s packaging operations, capping Peltz’s courtship of Gerry Tsai that had begun in Engel’s Bungalow 8 the year before. The purchase price of $560 million would be raised by Drexel.

  And Avery, a tiny holding company that was a leftover from the Trafalgar days and is controlled by Triangle, agreed to buy Uniroyal Chemical Company for $710 million.

  Finally, it was decided that the third segment of the Peltz-May empire—a target then unknown—would be acquired by Central Jersey Industries (CJI), the shell of an old railroad company with a tax-loss carryforward, which is 38 percent owned by Triangle. In August 1986, Drexel raised $381 million as a blind acquisition pool for CJI. “Play money,” Drexel’s Fred McCarthy said. “It’s all in hundred-dollar bills, and we’re filling a pool with it so Nelson can dive in.”

  Said in jest, it captures the spirit of what Milken has done with Peltz and May. With the American Can and Uniroyal acquisitions, Milken placed them atop an empire with $4 billion in revenues. Peltz and May reached that stratosphere of American industry not by years of work in building companies and creating products, but by putting what little they had on the line, rolling the dice—and issuing mountains of debt. Thanks to Milken the magician, these mountains can simply be moved from one place to another. Not surprisingly, some critical observers, such as Felix Rohatyn, investment banker at Lazard Frères, decried the creation of such empires as being achieved “with mirrors.”

  Even some at Drexel find Peltz’s coronation hard to take, not for ideological reasons but because they feel he was merely their pawn, who never deserved to be king. “Nelson is floating. Nelson the industrialist,” commented one adviser drily, shortly after the American Can and Uniroyal acquisitions were announced. “In your [this] book, call him ‘Nelson the industrialist’ and make us all vomit.”

  In the truest sense, of course, Peltz was as much a pawn as ever. For what he was really doing as he undertook this dramatic expansion of his empire was satisfying Milken’s needs—and, only incidentally, his own. As Meshulam Riklis, who portrays himself as a conservative elder statesman to this new generation of high-rollers, put it in an interview in mid-1986, “What Mike and Drexel must now do is create the guys that will maintain the pressure in the market for the buying and selling of these publicly held corporations. . . . They [Milken and Drexel] will work with me for whatever I need, but I am not interested in buying a company for three billion dollars, I don’t want the responsibility. . . . Someone else may do it, who has got nothing much to lose.

  “They have to find the one, two, three, four guys who are ambitious, and they’re gonna give them the money, and they make bids for companies, and they use those companies to make bids for other companies. They have to create these guys, otherwise their business stops. That’s what they’re doing, and they’re gonna have to do it more and more. They have to create—I call these guys the monsters.”

  AVERY’S ACQUISITION of Uniroyal Chemical is a good example of one of Milken’s created “monsters,” Peltz, performing his function perfectly. In April 1985, Carl Icahn made an offer for the outstanding shares of Uniroyal. In response, Uniroyal’s management took the company private, with the leveraged-buyout firm of Clayton & Dubilier and Drexel as money-raisers. The debt was designed to be paid down quickly, and it soon became apparent that in order to pay down that debt the company would have to not just sell off pieces but be liquidated.

  The chemical business was the core, healthy business of Uniroyal. Salomon Brothers—Uniroyal’s longtime banker, which had attempted to fend off Icahn and then brought in Clayton & Dubilier—had the first shot at trying to sell that business, had put an overly rich price tag of $1 billion on it in an auction, and had failed. Then Drexel tried, and after some difficulty with the natural buyers, which were other big chemical companies, Leon Black settled on Peltz. “Avery was a shell, so the leverage was great,” B
lack says. “Avery stock was selling at about two dollars, so if it all worked, and the stock went to fifteen, it would be terrific.”

  Drexel, of course, would raise the money—$1 billion—for this shell to make its $760 million acquisition. The Milken machine would thus be kept in high gear. The holders of Uniroyal paper would be paid off, in the amount of time allotted in the deal’s structuring. And there would be $1 billion of new, 15 percent interest-yielding paper, to feed all the hungry buyers. So the mountain of debt would simply be moved from one place to another (probably with many of the same buyers, since if they liked Uniroyal once, chances were they would like it again) and Drexel would make its fees, again. This story, however, would have a less than happy ending when, a little more than a year after Avery’s buying Uniroyal Chemical, it announced plans to sell the company. Peltz would attribute his decision to an inability to build the company into a big concern through acquisition, given the rich stock prices of companies in the chemical industry.

  “We are increasingly on all sides of transactions,” Black commented in mid-1986. In the negotiations between Avery and Uniroyal, Drexel (mainly Black) was representing both seller and buyer. Moreover, Drexel had an equity interest in both parties, since it had gotten warrants which gave it 10 percent of Uniroyal, and it would be collecting warrants as part of its fee in the $1 billion Avery offering, giving it 12 percent.

  Black remembered a time, not long ago, when Drexel was anything but so ubiquitous. It was effectively shut out of the divestiture business—which is the selling of pieces of companies and comprises about 40 percent of M&A—because the big, established companies who were the sellers would never use Drexel. But those companies, one after another, were felled by Drexel’s avenging bidders. These companies, all in their past lives the clients of Salomon Brothers, had all now come forcibly, via acquisition, into the Drexel fold: Northwest Industries, Uniroyal, National Can, TWA, Beatrice, Pacific Lumber. “We didn’t have the list. We’ve been buying the list,” Black concluded. “And all this has given us the M&A product to work with that we never had.”