Why Should White Guys Have All the Fun?

by Reginald Lewis

  Before he left Paris for the United States, Lewis had a cordial but inconclusive talk with the Baud family, whose Paris-based grocery distribution business Lewis considered important to the success of TLC Beatrice.

  Lewis would be back to Paris many times before the deal closed on the December 1 deadline—not because of the Baud family, but because of difficulty in winning French government approval to take over Beatrice’s assets in France.

  Meanwhile, back in the United States a battalion of due diligence accountants and lawyers had to be assembled to assault Beatrice’s Chicago headquarters, unlike the preliminary initial effort. Most of the financial documents and agreements that would give Lewis an accurate financial picture of Beatrice International were located in a document room in Chicago. Cleve Christophe was put in charge of assembling a group of lawyers and accountants to handle the due diligence responsibilities.

  Poring over box after box of documents isn’t particularly glamorous or exciting, but it’s critical and absolutely essential work. It can reveal unexpected problems with the assets being purchased. Lewis wanted the work to be done and he wanted a full complement of people to do it. He also wanted people who would create the right aura, who would convey a sense of professionalism. The due diligence mission would be the first time many Beatrice executives encountered anyone associated with Reginald Lewis.

  However, his frugal side didn’t want to pay a lot of money for a due diligence effort. So three days before the second wave was to hit Chicago, Lewis’s team still wasn’t assembled. “Why don’t we overwhelm them with our strength—why don’t you hire a whole bunch of actors?” Lewis said to Christophe one day, tongue firmly in cheek.

  The due diligence effort did turn up previously unrevealed problems with Beatrice, specifically that extensive litigation had been filed against some operating units.

  “Henry Kravis knows that the fair thing to do is give me a $10 million reduction in the price,” Lewis told his wife one day as they were being driven home in Manhattan. “I’m telling Kravis, ‘If you don’t give me this discount—which is the only fair thing to do—I’ll walk away from the deal.’”

  Loida Lewis thought about that briefly, then offered this advice, “Darling, you have to pay a premium. You’re going through the door for the first time on this one, so to speak. This is your first transaction of this magnitude.”

  But that wasn’t what Lewis wanted to hear at the moment. “Why do you say that?” he barked. “You don’t know anything! You don’t know whether I can close this deal or not!”

  “I don’t know the deal, darling,” Loida Lewis replied, “but I know you. You will do it.”

  Her husband was quiet after that.

  Years afterward, Loida Lewis would ask rhetorically, “Would Henry Kravis run after him and say, ‘No, no, no, please don’t walk away—we’ll do it at a reduced price?’”

  “Success is the best revenge,” Loida Lewis says.

  BATTLING THE BEAR: THE STOCK MARKET SCARE OF 1987

  If Lewis or his acquisition team had any illusions about their ability to control the events shaping and guiding the Beatrice deal, that conceit was blown away on October 16, 1987, a Friday. The Dow Jones industrial average sank 108 points that day, triggering concern on Wall Street and worldwide.

  But the stock market wasn’t finished. It went through an even wilder gyration the following Monday, October 19, as the Dow sank a terrifying 508 additional points. Privately, Lewis was as concerned as anyone else—if not more so—because he stood to lose millions of dollars if the economic climate suddenly destabilized. But he could not afford to be viewed as nervous or panicky in front of his acquisition team, because those emotions might spread like wildfire. So an outwardly confident Lewis continued to push ahead, giving no hint he believed the Beatrice deal would do anything but close on time.

  By this time the transaction had picked up so much momentum that it seemed to have a life of its own that nothing could disrupt or throw off course.

  In one important regard Lewis viewed the stock market drop as fortuitous. Now he could play hardball with Henry Kravis and demand that the price for Beatrice International be reduced. “King Henry,” as Lewis was fond of calling Kravis, would simply have to come down on the price or Lewis would pick up his marbles and leave. A few weeks earlier he had backed down on seeking a cut in price because of undisclosed litigation Beatrice was involved with.

  This time, Lewis fully intended to state his case before Kravis. The stock market crash called for at least a $25 million to $50 million reduction in Beatrice’s price, and that’s what Lewis intended to ask for. The Dow had fallen more than 500 points; enormous amounts of value had been wiped out. The request seemed perfectly logical from a business standpoint.

  A meeting was set with Kravis at his KKR offices. Tom Lamia, Cleve Christophe, and Everett Grant were in the limousine that took Lewis from 99 Wall Street to see Kravis.

  “If he doesn’t do it, I’m walking,” Lewis said to no one in particular. “I’m not in this for my health—I’ll take my lumps and walk.” Lewis and his business partners got out of the limousine at 9 West 57th Street, the site of KKR’s offices. One day the headquarters of TLC Beatrice International Holdings, Inc. would be located in the same building—several floors above Kravis’s.

  Lewis was ushered into a meeting room at KKR. Also present were Leon Black and Dean Kehler of Drexel. Kravis was the last to arrive. In a calm and thoughtful manner, Lewis began telling Kravis that he was charging too much for Beatrice in light of the stock market stumble.

  Therefore, “an appropriate adjustment would be in order,” namely a price reduction of roughly $35 million, Lewis said.

  In an equally calm and thoughtful manner, Kravis adopted a hard-line approach. “Drexel has given us a letter in which they said they will get this done,” Kravis said. “We expect them to get this done.” Then Kravis asked Lewis if they could continue their conversation in Kravis’s office.

  “We appreciate your views on the matter,” Kravis said quietly after closing the door to his office. “We’ve done our analysis and we don’t quite get there the same way you do. We’ve really come a long way on this and we’d really like to see you consummate this deal. We’re pulling for you.”

  “King Henry” had spoken: The price was to remain unchanged.

  With the situation unchanged from when Lewis came over to see Kravis, he left. Lewis was ticked off and felt that he was being mistreated, not to mention that KKR and Kravis weren’t doing the proper thing. Lewis gave some more thought about whether to actually pull out, as he had been privately threatening to do, but decided against it.

  “I would have expected them to reduce the price by $25 million at the very least—that’s what we were talking about to keep the deal together,” Tom Lamia says. “But no, they didn’t budge one inch.”

  Ultimately, the price reduction issue wasn’t a dealbreaker from Lewis’s point of view. He should have been granted his price cut, but Lewis knew that he would lose the deal if he insisted.

  His meeting with Kravis took place on Thanksgiving weekend. The deadline for closing the deal—December 1—was fast approaching.

  With the tension mounting exponentially with each passing day, Lewis was spending a fair amount of his time at 99 Wall Street inside his office with the door closed. “He was calm under pressure and thought well under pressure,” Tom Lamia recalls. “He didn’t let the little things get in the way and he was able to focus on the right things.”

  Away from the office, Lewis was dealing with the tension by popping movies into his VCR, or by going to classical music concerts. His favorite movie during the Beatrice negotiations was “Chato’s Land,” a Western featuring Charles Bronson as a half-breed being hunted down by a posse for killing a drunken man. Bronson gunned down each of the twelve posse members one by one—perhaps Lewis saw the movie as a metaphor for what he was going through in trying to get the Beatrice deal done.

  GALLIC ROAD
BLOCK

  The Beatrice transaction could have closed as early as late October 1987. The holdup was due to a problem Lewis was having with France, where his European headquarters would be based and where most of his operations would be located.

  Lewis had to find a way to get the interest on the acquisition debt deductible in France, because a lot of the income to be generated in France was taxable there. So it was critical that Lewis be able to set up a French holding company, which would be the borrower and would pay the interest. In addition, the holding company had to be able to upstream income from the French operating companies, use that money to pay interest and have those interest payments deductible for French income tax purposes.

  The only problem was, the French government had to give its approval, and the French weren’t cooperating. The lack of cooperation was partially a function of chauvinism, because one of the unsuccessful bidders in the auction for Beatrice’s international foods business had been Bon Grain, a French company.

  For a time, Lewis practically lived at the Crillon Hotel in Paris as he waited for the French to act. Lewis’s last day for gaining approval from the French was November 30, or he would have to scuttle the entire Beatrice transaction.

  We had a big legal issue with the structure because we needed approval in France from its Ministry of Finance. Everybody thought it was going to be simple, but it got complicated. I had to make several trips to France to meet with its Finance Minister (Edouard Balladur, now Prime Minister of France). I was really shuttling for a while. Finally, I got to see the Minister’s first deputy, Charles Dequase, and I looked him dead in the eye and said, “This delay is costing me $6 million.” He was shocked, of course—that was about 30 million French francs. The next day we got the approval.

  The green light from the French government came on November 28, just two days before the deadline.

  The approval didn’t come a moment too soon. The pace of the entire Beatrice deal had slowed down while everyone cooled their heels waiting for a final determination from the French. Also, putting the divestiture sales on hold for nearly a month had started to cause problems, too.

  The senior management at Cadbury Schweppes, for example, had come to the conclusion they were paying Lewis too much for the Australian operations. So Lewis was told that up until December 1 Cadbury Schweppes would pay the agreed upon price. After that, all bets were off.

  “There could not have been any greater pressure in any deal Reg ever did,” Tom Lamia says of the French negotiations. “I think it was only when he got French government approval that he saw that the Beatrice deal was going to be done.”

  In the meantime, we also had to do a multicity road show to finalize the debt offering. We went to Los Angeles, Chicago, Boston, Minneapolis, New York, and Philadelphia to sell the debt notes, which struck me as kind of odd, since I think Peter Ackerman had once told me that he had sold the damn debt in a phone booth, between Columbia Savings, First Executive, and a few others. Most of the debt was taken by that, but they still wanted to do the road show, which I think was probably for some sort of after-market in the debt paper.

  The lead bank basically was good but was a little bit of a pain in the ass. They were trying to insist that they had control over what I would sell and what I would keep. Christophe said they weren’t going to change. I told them that we weren’t going to do a deal. I just said, “Absolutely not!” They wanted to list all the assets that we had and select from it. Under no circumstance would I agree to that, and they finally caved in on that point. There were a number of other points that they didn’t cave in on that hurt us—we should have been able to take out some of the higher cost debt before we paid them off entirely. But by and large they hung in: banks can be banks. In any case, that basically concluded the financing. When we got the French approval, everything was in place.

  12

  * * *

  Bravura and Brinksmanship: Closing the Beatrice Acquisition

  November 29, 1987 was a Sunday, the day before the Beatrice closing was scheduled to commence. Lewis, Tom Lamia, Cleve Christophe, and Everett Grant met at 99 Wall Street for a final preclosing briefing.

  Lewis conducted a lengthy review to make sure everything was proceeding as planned on the Beatrice acquisition. He wanted to make sure that his team had everything in order, specifically regarding what was to take place during the closing, as well as the postclosing strategies they would pursue. “The real work will begin once the deal has closed,” Lewis repeatedly informed his bundled up lieutenants. Something was wrong with the heating system at 99 Wall Street that weekend, putting a distinct chill in the air inside Lewis & Clarkson.

  Meanwhile, activity related to the Beatrice closing was also underway that Sunday at the closing site, the offices of the Paul, Weiss law firm at 1285 Avenue of the Americas. Lawyers were busily going through the conference rooms where the closing was to take place and laying out tons of documents in accordance to the activity scheduled to take place in that particular room.

  The goal was to make sure that all of the documents were in place so there wouldn’t be any surprises when the closing got underway the following two days.

  CLOSING BEATRICE: DAY ONE

  The closing of the Beatrice transaction was a draining, grueling affair that officially started November 30, lasted two days, and was played out in the Manhattan offices of the Paul, Weiss law firm. There were plots, subplots, things that came together smoothly, and things that had to be glued together by roughly 180 lawyers, accountants, financial advisers, and corporate executives working in concert to get the deal closed.

  In a figurative sense as well as in a literal sense, the whole process was akin to a byzantine maze: The different teams working on the Beatrice closing were spread out over the 23rd floor of Paul, Weiss, as well as floors 24, 25, 26, 27, and 28. On various floors and in separate conference rooms were the banking team, the equity team, the subordinated debt team, and the divestiture team.

  Due to the fact that Lewis was selling three of Beatrice’s units—those in Canada, Australia, and the meat packing firm in Spain—the divestiture team was further subdivided into three units, each with its own conference room and concentrating totally on one piece of an immense puzzle.

  Of the various conference rooms, the one set aside for the bank people was the biggest, because their transactions generated the most paper.

  There was also a conference room designated for the acquisition team, which was concerned with the purchase of the shares of the various companies being bought and sold, including Beatrice.

  Because each party had its own high-powered legal counsel, attorneys from a number of prestigious Manhattan law firms were also involved.

  Through a process of transactional natural selection, each conference room broke down into cells of people working on a different aspect of the particular transaction closing in that room. For example, there were people working on a legal opinion seated together at one end of the table going over some documents.

  Others would be on telephones dealing with some condition to their closing, and there were periodic conference calls with people who weren’t present but who were responsible for advising a client on an issue.

  So in each conference room there were typically four or five little meetings taking place at any given time, with the sound of several voices going at once creating a hum in the air.

  Most of the people in the rooms were white men, wearing white or blue dress shirts, ties loosened in many instances, shirt sleeves rolled up. Monograms adorned many of the shirt cuffs not rolled up. It was a safe bet that the guys with the suspenders were investment bankers, since they tend to be partial to that fashion accoutrement. And each room had many Italian suits costing $1,000 and flashy pairs of $500 shoes.

  Practically no one smoked in the conference rooms and when someone did light up, it was usually a very expensive, very large, odiferous cigar.

  Down in the basement of the building, copy machines were r
unning nonstop, as were secretaries hauling documents up and down the elevators on their way to and from floors 23 through 28. To say there was a sense of urgency in the air would be overstating things slightly—a sense of purposefulness would be more accurate. Millions of dollars were at stake.

  On the second floor, typists worked around the clock to churn out documents, because as the lawyers and accountants and businesspeople moved closer to closing, they invariably found it necessary to draft additional agreements to flesh out the structures of various deals.

  The best way to generate a mental snapshot of something as unwieldy and complex as the TLC Beatrice closing is to view it as a series of hundreds of mini-closings. When everyone of those smaller transactions was completed and the banks were finished wiring their funds, only then would the overall deal “close.” To get the smaller deals closed, thousands of conditions had to be met to the satisfaction of parties on both sides of the transactions.

  Thousands of documents also had to be in place and ready to be signed, which is why a pre-closing team had located the majority of the germane documents and laid them out in the appropriate closing room. To mention just a few, there were certificates of good standing, certificates of incorporation, certificates from state taxing authorities, employment agreements, and corporate contracts. In addition, the various parties typically had opinions of counsel regarding certain legal facts and conclusions.

  A tiering of funding events had to take place in a certain order, or else the deal would disintegrate. There were closing activities geared toward bank financing, divestitures, and tax planning.

  Canadian bankers were present to represent Onex, which had to turn over its funding in order to acquire Beatrice’s Canadian operations. Australian bankers were at Paul, Weiss to handle matters associated with the Australian asset sale, Spanish financial advisers were present, and so on.