Milken recalls this meeting too. He found himself growing more and more enthusiastic about the thought of a Lewis-Beatrice alliance.
“From that point on, all of our interaction convinced me that he was the right person for this transaction,” Milken says. “I think it began a love affair of a different order between myself and Reg. My feeling was that he knew Beatrice better than I knew Beatrice. In fact, he knew it better than the people who ran it. It was complicated, it was diverse.”
I put together the due diligence effort. I got corporate lawyer Matt Nimitz of Paul, Weiss involved, in addition to Bob Schumer, one of the outstanding young corporate lawyers with the firm. We got the Deloitte accounting firm involved. We got the tax people involved. We put together a big delegation to go out to Beatrice’s headquarters in Chicago and hear the Beatrice story.
I gave one of my great speeches on this occasion. We had been listening to Beatrice’s presentation when Bill Mowry, who was the president and chief operating officer of Beatrice at the time, said we would like for each prospective buyer to come up and say a few words about their approach.
I remember opening my remarks by saying that “I have to sit through a lot of presentations, but the presentation that we’ve just heard was one of the finest that I’ve ever heard.” I wanted to thank them personally, because I knew what is involved in putting these kinds of things together. “There is an enormous amount of effort, and Bill, you and your team have really done an outstanding job.”
And then I gave them a little talk about TLC Group and our work on the McCall situation and how we handled that. All the Beatrice people had the 90-to-1 story from the New York Times in their folders. I emphasized that we believe in working closely with the operating managers and let them make virtually all of the operating decisions. After the presentation, Bill Mowry and I met privately in the Beatrice suite at the Drake Hotel with Cleve Christophe and Geoff Murphy, Beatrice’s chief financial officer. And Cleve and I sat down and said, “We’re in this thing to go all the way.”
Bill was a good man and started spreading the word around that “TLC is in this to win.” We were the proverbial long shot and we were the last people permitted to bid. We were sixth in line and starting to give up.
THE THRILL OF THE CHASE
By the summer of 1987, Lewis was locked into an incredibly grueling schedule. From late June until the early part of August, he would come into his 99 Wall Street office around 8:30 A.M. and work on things related to the Beatrice bid until around 3 in the morning. On the weekends he took something of a break, getting into his office around 9 A.M. and leaving around 11 P.M.. This wasn’t just a matter of discipline, which Lewis had in abundance. Just being able to pursue the Beatrice deal was a reward in and of itself.
“Reg enjoyed the competition, he enjoyed the struggle,” former Beatrice executive Everett Grant says. “Since his enjoyment came from competition, and he was able to compete so much and so successfully, I think he did enjoy himself quite a bit, more than most people can conceive.”
Lewis also derived pleasure from the fact no one expected a black man to be going after a two-billion dollar, international food company. He had paid his dues and had played the game by the rules and, miraculously, found they hadn’t been changed in mid-game. Nor did he expect them to, because a central tenet of his was that hard work and dedication invariably take a person where he or she wants to go. Lewis had traveled a road bumpier than that traversed by his white compatriots, but despite that, he’d made it to his destination anyway.
One thing Lewis didn’t like about the Beatrice chase, though, was the fact he couldn’t tell people he held near and dear. He desperately wanted them to know what he was up to, but you never know when a loose lip could sink a deal still in its nascent stages. There may have even been an element of superstition in Lewis’s reluctance, as if to talk about an unconsummated deal would result in jinxing it. His solution was to let folks know that something major was afoot, without getting into specific details. One of the first people he told of Beatrice in a very roundabout manner was his mother.
“He called and said, ‘Mom, I’m entering into something that’s so mind-boggling that I’m not going to tell you’.” Carolyn Fugett felt her son had underestimated her ability to understand, but she knew not to press the issue. “I wish you the best and I’ll put it on the altar,” she told her son.
“That’s what I need,” Lewis told his mother. He hung up the phone, smiling. At age 44 the desire to gain his mom’s approval and the pleasure he got from being able to do so was as strong as ever. By the same token, most big brothers like to be admired by their younger brothers—even into adulthood. Tony Fugett, an executive with IBM at the time, also received a cryptic heads-up about Lewis’s newest venture.
“Tony, I think I got a real big one here,” Lewis said conspiratorially. “A real big one. Keep your fingers crossed, because I think it’s going to work for all of us.” Lewis’s voice conveyed a mixture of confidence, excitement, and a touch of hesitancy, as though weighing the possibility of saying more. “You don’t know who’s going to run their mouth and who’s not when you’re talking about stakes like that,” Fugett says. “You don’t take chances. He was a very conservative, cautious kind of person and he didn’t want me running around IBM going, ‘Oh, guess what?!’ Not that I would have, but he didn’t want to take that chance.”
About to explode from having to keep his secret, Lewis called Ellis Goodman, his boyhood friend who was a lawyer and real estate developer in Baltimore. Following a brief exchange of niceties, Lewis tantalized Goodman as he’d done with his family members. “I’m working on a deal that’s so big, I can’t believe it myself,” Lewis said into the phone. “You’d laugh if I told you. I don’t want to say anything now, because I don’t know where I’m headed with it. But I’m telling you, it’s so big I can’t believe it.”
While Lewis felt he had to play it coy even with his mother, he could lay all his cards on the table with his wife, Loida. He talked frequently about Beatrice, which was starting to become an all-consuming passion. “He was very excited,” says Loida Lewis, who would become TLC Beatrice’s chairman after her husband’s death six years later. “His eyes were brilliant and he was talking about what he was going to do with Beatrice and who would run it.” Lewis’s short list of potential CEOs included Earle Angstadt, who had been Lewis’s CEO at McCall; Jim Ferguson, the former CEO of General Foods; and Dave Mahoney, the former CEO of Norton Simon Industries.
A TAXING PROBLEM
Coming up with a tax structure that would allow Reginald Lewis to buy Beatrice was the toughest nut to crack in the entire acquisition. The tax considerations were incredibly complex, causing Drexel to get antsy about whether Beatrice could handle its debt service if Drexel came up with the money to buy the company. Drexel’s commitment to Lewis was starting to waver, a situation he would definitely have to rectify if the deal were to go through.
At the risk of oversimplifying things, the money to buy Beatrice was going to be borrowed in the United States by the top-tier holding company, TLC Beatrice International Holdings, Inc. And the interest on the debt had to be paid in U.S. dollars.
But Beatrice’s income was flowing in from 64 companies that were located in foreign countries—31 of them before Lewis started selling off assets. That meant the income was generated in foreign currencies. The question of the hour was: How do you get the income into the United States and into U.S. currency in order to pay off the debt? There were some intricate financial hurdles to be surmounted. Pesos earned in Spain, for example, would have to be converted into U.S. dollars, yet the cost of doing so would have to be kept at manageable levels and enough expenses would have to be tax-deductible to make the whole thing feasible.
When money is generated by overseas operating units, some of it disappears through foreign taxes and various charges, not to mention foreign exchange controls. And if those transactions collectively siphon away too much money,
there might not be enough left to put toward the interest payments on Beatrice’s debt.
It bears repeating that the Beatrice acquisition was the largest offshore leveraged buyout ever pulled off when Lewis did it in 1987. So there were no precedents or guideposts for Lewis and his people, vis-a-vis the tax structure.
None of that made any difference to Drexel, which had committed to raise $1 billion. Its only question was: How does Beatrice repay the debt on this loan?
Lewis would have to assuage Drexel’s fears in order to keep the deal on track. He and Christophe arranged to fly out to meet with the Drexel people on July 30, 1987. Two days before the trip, Christophe started running financial models on his personal computer at home. What slowly began to emerge was a table showing what the Beatrice deal would look like if there were a 100 percent tax deduction of all appropriate expenses associated with the transaction, with a special emphasis on interest expense. The table, which went in 5 percent increments from 100 percent deductibility down to 50 percent, examined the numbers in terms of all critical coverages, including financial covenant considerations and operating projections.
At 99 Wall Street the morning before their Drexel meeting, Lewis and Christophe went over the tax deductibility table, deciding which was the best way to present the analysis and methodology contained in it. They decided against walking into the meeting and triumphantly throwing the computer model on the conference table. Instead they would let Peter Ackerman articulate all of Drexel’s fears and misgivings, allowing Lewis to set the stage. Then he and Christophe would pull out the model and walk Drexel through it.
Lewis and Christophe actually wrote a script that anticipated what the Drexel people would say, how Lewis would respond and the best juncture for introducing the financial model.
When they got to Drexel’s offices in Beverly Hills, Michael Milken, Dean Kehler, Peter Ackerman, and John Moriarty—a Drexel vice president in the corporate finance area—waited with grim expressions. “I just don’t know if we’re going to get there on this deal,” Ackerman said once the meeting started. “You guys have not been able to come up with answers on this tax structure.”
Ackerman went on for about five minutes before Lewis took center stage, reciting to perfection the lines he and Christophe had painstakingly crafted.
“You know, Peter, I can understand why you have those concerns,” Lewis said reassuringly. “I mean, we too are concerned about how all of this will work out. But you know that’s why we have the finest minds working on this problem and we think we’re just about there. But clearly it’s in our interest, just as it’s in your interest, to know that what we’re doing is well founded.
“So Peter, you would expect us to have been proactive in how we approach this.
“Do you think it might be useful if we ask ourselves the question: ‘Well, what if we achieve different levels of deductibility? What are the financial implications of that, what are the implications in terms of coverages and what are the implications in terms of deal returns?’ Would it be useful to construct something that allows us to measure those things?”
“And suppose we then separately go to our tax advisers and ask them where they are in the process, then pose this question: ‘Given that you’ve got all these moving pieces in all these different areas and given where you are, what level of comfort do you have that at the end of the day you will be able to achieve a certain level of deductibility? How comfortable would you be that you can, say, get 95 percent deductibility?’
“Or suppose we ratcheted that down and said, ‘Okay, given all of these pieces, how comfortable are you that you can get 75 percent deductibility?’ And suppose I said that we were 90 percent probable that we’d be able to achieve that. Would something like that prove useful?”
Ackerman took a second to ponder the scenario Lewis laid out. “Yeah, I think that would be damn useful,” he said. “Can we do something like that?”
Lewis paused for effect. “Well Peter, we’ve been thinking about this and Cleve has some thoughts that perhaps he could share with you,” Lewis said, handing things off to Christophe in a well-choreographed move. Christophe then began passing copies of the computer model around the table.
The Drexel team was comforted by what they saw and heard, notwithstanding the fact that Lewis’s tax advisers still hadn’t categorically said how the tax structure would play out.
Having restored Drexel’s confidence and enthusiasm, Lewis flew back to New York. A bevy of smaller crises awaited his immediate attention.
It bears repeating that Michael Milken’s role was to add credibility, because Henry Kravis was conducting the auction of Beatrice through Salomon and Morgan Stanley and they didn’t even want to let us in to bid. It was kind of funny to me that I had Christophe and Sheehy meet with Morgan Stanley and Salomon and presumably those guys were checking out our bonafides. I was in California at the time. I remember saying over the telephone, “Well, tell Henry Kravis that we have as much bonafides to do this deal as he did when he bought Beatrice in the first place.”
But in any case, I got Michael on board. Mike delegated the thing to Ackerman, but he stayed involved and kept his foot up Ackerman’s butt. Ackerman then started to get kind of excited when he heard my basic strategy, which was to bid the deal at the perimeter, then immediately sell off some businesses. Mike was comfortable that Ackerman could raise $500 million of high-yield securities. Although he naturally said, “We’ll raise anything you need,” I once asked Mike confidentially, “What are you comfortable doing?” He told me $500 million.
That let me know that I had to sell at least $400 million of assets and get a bank piece for $200 million to $250 million. That’s because even though he said $500 million, I discounted what he said to a certain extent. But I did think that as long as Mike stayed involved that he would be able to do it. While I needed Drexel, I think the ability to hold on to control of that deal would have been very tough if they had been forced to raise more money.
With the commitment for $1 billion in place, the next issue was to get Drexel to understand that I was going to control the deal. And that was a tough, grinding battle that we finally came to terms on after the time had elapsed to bid. In fact, I just stopped the clock and said, “I will not participate in this deal unless I control it, pure and simple. No ifs, no ands and no buts.” And they thought I was bluffing—of course I was not. And I think it was mostly Peter who wanted control. I don’t think it was Mike.
Michael had to sit down with Peter in a very dramatic meeting at one point and tell him, “Peter, what we’re doing is backing Reg. That’s what we’re doing here.” And he just cut him off.
After some hard bargaining, Lewis did agree to allow a Drexel entity to purchase a 26 percent share in the deal’s equity for a token amount because they had after all arranged for a significant portion of the transaction’s financing. Drexel, and Michael Milken in particular, had also enhanced Lewis’s credibility at a critical time during the bidding by committing up to $1 billion of the firm’s capital, if necessary, to finance the transaction.
In addition however, Lewis gave up the equity because he believed that there was a commitment on Drexel’s part to assist TLC Beatrice going forward in terms of raising money for future acquisitions and refinancing the debt. In this expectation, he would be bitterly disappointed. Drexel did not fulfill any of these promises. Although the firm would raise billions of dollars for acquisitions by Henry Kravis, Ron Perelman, and other dealmakers, it never raised another cent for Lewis after the close of the Beatrice transaction.
In fact, not only had the Drexelites been given common stock but, unlike the rest of the original investors in the deal, they had been given the privilege of purchasing this potentially lucrative stock without having to purchase any preferred stock, which essentially was a loan to the company with limited upside. In the end, Lewis regretted giving up the equity and he worked diligently until his final days to take Drexel and its minions out of the deal
completely.
Now, in terms of the bid process itself, I pretty much felt that the price was around $950 million. We bid $950 million to be preemptive. But I was nervous about it. I was nervous because a lot of the operating units had sizable minority stakeholders, meaning you couldn’t automatically bring the cash back into the United States. If the market for assets fell, then I would be stuck with a high-cost debt structure in a business that was generating all this cash out of the country.
We explored a number of different alternative financing structures, but none of them could be implemented under the time constraints we had for putting the entire deal together. Essentially, the strategy that evolved was very simple: We would bid $950 million or so and between the time of signing the contract and closing the deal, we would sell off at least three businesses for an aggregate price of $400 million. Then immediately after the closing, we would decide which businesses we wanted to keep and which businesses we wanted to sell. By then we would have a lot more information about them, because I would have had a chance to get out into the field and find out what was going on.
The aim was to retain a core group of businesses that had some synergies and would improve operating results even as we reduced expenses. That was basically the operating strategy, and it was a sound strategy, because we were in effect piggy-backing on the auction work that Morgan Stanley and Salomon had already done. They had effectively heated up the market for sales of pieces of the business. So while the fact that there was an auction was a negative from the standpoint that you knew you were going to pay a high price, it was a positive from the standpoint that the market for the various assets was going to be well heated. And that’s the way we looked at it.
Why Should White Guys Have All the Fun? Page 25
