The Predators’ Ball
Page 28
But as is always the case, the investment bankers’ take makes the lawyers’ seem modest by comparison, though the bankers typically have far fewer people working on any deal than the lawyers do. Goldman, Sachs and Company received about $3 million from Forstmann Little. Lazard Frères received about $11 million from Revlon. Morgan Stanley, once all the divestitures were done, received under $25 million—far less than the $30 million that had been established as their ceiling. In fact, Drexel had tried to persuade Perelman to ditch Morgan Stanley when they refused to put their name on the tender offer, and Drexel continued to argue that all Morgan Stanley deserved was its fee for having brought Perelman the idea.
Not surprisingly, Drexel claimed the lion’s share—over $65 million. In its July public offering of $750 million of Pantry Pride notes, Drexel received an underwriting discount, or fee, of about 3.5 percent, which equaled $25 million. It received another $11 million as an advisory fee. And then it received on its private placement of $770 million about $30 million.
Moreover, when MacAndrews and Forbes made its purchase of 37.6 percent of Pantry Pride stock for $60 million in the spring of ’85, Drexel-related entities known as Prime Capital Associates had bought $10 million worth of that stock on the same terms as MacAndrews. This stock was distributed, as such extras always are, to those whom Milken favored—himself, his people, some of the key individuals in corporate finance. Engel was one of those in Prime Capital Associates.
Revlon’s most senior executives lost their jobs, though they did not walk away empty-handed. Golden parachutes totaling $42.2 million were paid out to thirteen executives. Fifteen million of this went to Bergerac’s own parachute—the largest ever given. In addition, he received five years of salary and bonus, valued at about $7 million; and stock options and accelerated payment of restricted stock worth $13 million. In all, his severance package came to $35 million.
Revlon’s shareholders also did well. The stock was trading in the low thirties before the Pantry Pride rumors drove it up, and Pantry Pride paid $58 per share in the end. (Immediately after the argument in Chancery Court but before Justice Walsh wrote his opinion, Pantry Pride had raised its bid from $56.25 to $58.)
Pantry Pride shareholders were not left out. That stock was trading at about three and three quarters before Perelman took control of the company in the spring of 1985. Less than a year later it had tripled.
And those who signed up for the bonds and bought them but wanted to trade out quickly also profited. One of the buyers said that over a period of several months—starting before Perelman announced his offer, but when the company was known to be “in play”—he had accumulated about $16 million of Revlon stock. When Drexel called to sell him the bonds, therefore, he had a powerful interest in seeing the deal go through. He sold his stock for about $18 million, he says, and then put that money up for the bonds at an interest rate of 13.75 percent, plus his commitment fee of .75 percent.
The deal closed in mid-November, and within two weeks there were reports that Revlon was going to sell its Norcliff Thayer health products and Reheis special chemical businesses to the Beecham Group of Britain for about $400 million, and its ethical-drug division to Rorer for over $600 million. Both deals were announced by the first week of December. Some onlookers were puzzled by the speed with which the Rorer deal, particularly, was done, and by the absence of an auction. Howard Gittis, however, explained, “They had an exclusive. Well, almost an exclusive. We said, ‘If we get the company, and you commit to us now, then we won’t shop the deal.’ ” This agreement should arguably have been disclosed in SEC filings if it was indeed made during the course of the deal. When later asked to comment, Gittis denied that anyone had been given an exclusive.
“At that point [in December], the money was just sitting there in the bank, but they couldn’t call [buy back] the bonds for six months,” this buyer said. “So it was completely safe now, good for the S&Ls, and Milken wanted the bonds back.” That suited him, he added, because he wanted to get his money out. And he was eager to be a team player so that Milken would come back to him in the next deal.
This is the same kind of movement of the bonds—out of the hands of a high-rolling buyer into those of the more reticent thrifts, insurance companies and pension funds—that took place in Triangle-National Can. Here the high-risk, private buyers were freed to go on to the next megadeal, which in December was GAF-Union Carbide; while the more risk-averse but still hungry players could be fed.
The only dissonant note in this chorus of happy profiteers came, as is usual in these transactions, from the bondholders of the acquired company who found their paper suddenly downgraded now that the company was so debt-laden. (Their prices, however, have since rebounded.) This illustrated the gospel according to Milken, which proselytized that while low-grade bonds might be upgraded, high-grade could go only one way—down. Of course, when he first started spreading that gospel he had been speaking as an observer; now, many years later—as Milken’s raiders menaced companies which did defensive restructurings and then had their bonds downgraded, or acquired companies whose bonds were subsequently downgraded—he was often the propulsive force. According to Drexel, in 1985 $4.6 billion of junk bonds moved up into the investment-grade category, while $9.1 billion of investment grade moved down into the netherworld of junk.
ONE YEAR AFTER the “blue team” had had its high-spirited bash at Le Club, Perelman was still on the move. In October 1986 he had made a run at CPC International, the food-processing company, and had then sold his stake to Salomon Brothers for a profit of $41 million (in a trade which a Wall Street Journal “Heard on the Street” column suggested was prearranged, artificially inflated, and, if so, Perelman’s first—albeit disguised—greenmailing).
By early November, Perelman had accumulated 15 percent of the stock of Transworld Corporation, a restaurant, hotels and food-service conglomerate. Transworld then decided to liquidate, but Perelman got the option of buying its prize, Hilton International Company, for $1 billion. That option aside, in one month he had achieved on his $223 million Transworld investment a paper profit of $55 million. On November 14, he offered $4.1 billion in cash—with Drexel’s “highly confident” endorsement—for the Gillette Company, the razor-blade manufacturer.
Perelman was thriving as a predator. But whether the Revlon acquisition, which had raised him from an obscure, small-time entrepreneur to a corporate mogul, would in fact turn out to be the world-class company that he envisioned was less clear. He had purchased Revlon shares for about $1.8 billion, assumed debt of roughly $1 billion, and had expenses and carrying costs that brought his total acquisition cost to about $3 billion. He had sold several of the health-care businesses for a total of roughly $1.4 billion. He had kept National Health Labs and Vision Care, whose value at the time of the acquisition (though it has since gone up) was probably about $1.2 billion. Therefore, Perelman had not acquired the cosmetics business for free, as he had initially planned—but for roughly $400 million. And Revlon’s contract to sell the cosmetics business to Adler and Shaykin—for a price that Perelman puts at $780 million, not $900 million—ended in litigation that cost Perelman $23.7 million to settle. (By year-end 1987, Perelman would augment the cosmetics business—making it the world’s largest—by buying Max Factor, Charles of the Ritz and Germaine Monteil for more than $500 million. According to Revlon, operating profits for 1987 would double what they had been in 1985.)
Drapkin, who announced in October ’86 that he was leaving Skadden, Arps, where he had been earning well over $1 million a year, to join Perelman as a vice-chairman of Revlon Group (Revlon was merged into Pantry Pride, which then changed its name to Revlon Group, Inc.), predicted at that time that “Ronnie is going to turn cosmetics around. I doubt very much that he’ll ever sell Revlon. I think he sees it as the cornerstone of an empire.”
Others are less rhapsodic. “It will be a tough struggle, very tough,” says one established figure in the industry. “Too much damage has
been done. I don’t know any cosmetics image that has ever been resurrected.” Many questioned the wisdom of Perelman’s having brought Sol Levine, a protégé of Charles Revson and former consultant, whom Bergerac had let go, back into the company as its president. Bergerac had let Levine go because he considered him wanting.
Bergerac, as was to be expected, is foremost among the doom-sayers. He is convinced that Perelman was seduced by the glamour of the beauty business, and that it will be his undoing. “Cosmetics was worth five hundred million at best,” he declared. “But instead of taking the nine hundred million for it from Adler and Shaykin, he got good to average prices for selling the health-care businesses, which were running like a clock, generating enormous profits. So he got rid of the good and kept the bad.”
That would be at odds with what Perelman had managed to do in most of his earlier, smaller acquisitions—but the cosmetics business was in itself a break with Perelman’s past targets. Drexel’s Abecassis admitted, “Revlon does have a fickle aspect to it that Ronnie’s other acquisitions didn’t have. They didn’t have to depend on sophisticated selling. In Revlon, you’re selling dreams—so it’s a different story.
“He’s done some things at Revlon—cutting expenses, consolidating. But it’s certainly not done yet—not by any means. And the measures he’s taken aren’t going to improve the business in the long run.”
Abecassis believes that Revlon could benefit from Perelman’s full attention, but the peripatetic Perelman does not see it that way. “His attitude is, he came in, he cleaned it up, he’s ready to go on to the next,” Abecassis added. “It worked with flavors [MacAndrews], it worked with Technicolor, but here it’s different. I told him this, just the other day. He said, ‘What am I supposed to do, sit here and look at the business every day?’
“Ronnie is a deal person,” Abecassis concluded. “He wants to do deals.”
Given that, it is not surprising that Perelman changed the plan he and Milken had agreed upon—that he would sell off the pieces of Revlon and pay down most, if not all, of the junk acquisition debt. Instead, Perelman refinanced those notes. According to one member of the UAC (Underwriting Assistance Committee), some of its members thought that Perelman should pay down the debt, but they were overruled by others.
As for Milken’s view on Perelman’s keeping the cash, Abecassis said, “Mike is a trader. He has the view, you go in and out. And he’s a hungry guy. So he doesn’t say, ‘Stop.’ Also, he trusts Ronnie.”
According to Abecassis, if the Transworld deal had gone through, Perelman would have had to give up (to Drexel, which would probably have distributed some to bond buyers) 30 percent of the equity. “Ronnie doesn’t want to give any equity—but if he doesn’t, there’s no deal. In Revlon, he gave Drexel warrants in Pantry Pride, and it was not that much equity. That was really a way of paying our fee. We fought. We told Ronnie next time he would have to give equity.”
By fall ’86, Perelman was still dependent on Drexel for the multibillion-dollar deals he craved. In Transworld, which would have been a $2.5 billion deal, Perelman had no other recourse, Abecassis insisted. “You may not be able to sell assets, you need long-term money. And the banks won’t do it. I went to a meeting yesterday. They [the bank] are nervous about $400 million—when we have $1.9 billion below them [subordinated to the bank’s senior, secured debt].”
While it was not yet clear whether Perelman would succeed in resurrecting Revlon, its acquisition had certainly done wonders for his social climbing. Almost everyone who knows Perelman has a story to tell about his eagerness for that ascent (which dates back to his Philadelphia days, when he was rebuffed by that city’s social elite) and for the company of the famous. He had on the payroll of Technicolor a “consultant” named Dennis Stein—known for his brief engagement to Elizabeth Taylor—who, as one associate says, is “a high-class gofer.” Stein’s apparent function, this associate says, was to introduce Perelman to celebrities (though with Taylor’s departure it became less viable).
A few months after taking over Revlon, Perelman hired a well-connected editor from Town & Country magazine, Nancy Gardiner, to be his social secretary. And he brought Ann Getty onto the Revlon board (“Ronnie is determined to have a glitzy board,” commented another of his associates). As reported by Spy magazine, Jacqueline Onassis, Halston, Caroline Herrara and Calvin Klein have been to the Perelmans’ East Sixty-third Street town house for parties. And Perelman would become the honorary chairman at one of the most socially acceptable and literati-filled benefits of the year, for the New York Public Library.
Referring to all the gossip about Perelman’s eagerness to gain entree to the rarefied social realm, Bergerac says, with an acid chuckle, “Teddy Forstmann had the best line of all: ‘This has got to be the highest price ever paid in the history of this country to get a good table at a New York restaurant.”
IN SEPTEMBER ’86, in the opulent Revlon offices where he and “the Drexels” had arrived as hated interlopers and dropped ashes on Bergerac’s Persian rugs, Perelman now seemed at home. He and Drapkin had liked calling attention to Bergerac’s excesses, particularly the Boeing 727 outfitted with a gun rack for his safaris, and the Revlon offices in Paris which Perelman described as a “castle.” Now the company leased its corporate jet from a Perelman aircraft-leasing company. And now that the “castle” was his Paris headquarters, Perelman had decided not to sell it, after all. He was having the New York offices redecorated. And James, Bergerac’s butler, was now serving Perelman.
Moreover, while Bergerac’s $35 million parachute had elicited from Perelman and Drapkin a mutual outrage befitting two sign-bearers of the corporate revolution, the terms of Drapkin’s employment would be far richer than any that Bergerac ever enjoyed. (It is true that Perelman would take the company private in the spring of 1987, so Drapkin would not take his king’s-ransom out of public shareholders’ money; but his employment agreement went into effect when Revlon Group was still a public company, and after taking the company private in the spring of ’87 Perelman would owe public bondholders roughly $3.7 billion. The debt-to-equity ratio of MacAndrews and Forbes, at the top of the Perelman pyramid, would be 18:1.)
In his six-year employment agreement with MacAndrews and Forbes Holdings (which comes just under Perelman in the corporate chart of the Perelman empire, with all the other companies under it), Drapkin would receive $2 million as an inducement to enter into this employment agreement, which guaranteed him a salary that would escalate from $2,500,000 in 1987 to $4,192,650 by 1992. In addition, he would receive a bonus of $1 million each year. He would further be entitled to 20 percent of net trading profits in investment partnerships that would be formed. A separate five-year employment agreement with Revlon would guarantee Drapkin $1,150,000 each year. Thus Drapkin was to start his employment at Revlon—this paradigm of the new cost-cutting corporate age—with a guaranteed take by March 1988 of $6.7 million, which with Perelman-type trading profits factored in could easily range into the tens of millions. Nor would Drapkin be the sole beneficiary of such profligacy. Bruce Slovin and Howard Gittis would also be guaranteed many millions.
When this reporter came to interview him, Perelman assumed his interview posture. He was wearing his uniform navy cardigan sweater. He sank low into his chair, removed his tasseled Gucci loafers, put his navy-stockinged feet up on the coffee table, and worked his cigar. The posture was casual but the man was not. He continually ground his molars. He seemed to be straining to project a pleasant image—but what kept appearing from underneath, pentimento-like, was a mix of impatience, vulgarity and boiling temper that was anything but pleasant.
He raged at his secretary for taking six steps toward him to hand him a piece of paper after he had ordered her to summon Drapkin—something which required her to walk in the opposite direction. Associates say that he yells constantly at everyone who works with him—Gittis, Slovin, Drapkin, Drexel investment bankers. No one except for Milken, they say, is exempt. One associate r
emarked, “It really is pretty bad. The excuse is he can’t control it.”
When Drapkin arrived, Perelman addressed his erstwhile Revlon opponents’ perception that by the end he was unstoppable, that if they had raised the bid to $59 he would have gone to $60. “There was no point where we were committed emotionally beyond financial reason,” he declared. “Look at our record—in Richardson, for example: we have stopped where it made no sense to go forward.”
What about the fact that he had by that time raised $750 million—with high carrying charges? “It was reinvested,” Perelman said shortly. “Right now I’m sitting on a cash hoard of $1.5 billion. I have a negative carry of about one point. I am willing to do that because tomorrow morning, without making a phone call, I could do eighty percent of the transactions that are available.”
Asked when he conceived of the megaleap he made with Revlon, Perelman replied that it was “a process of bites.” No, he did not have this trajectory in mind when he started out in 1978 to buy the jewelry company, Cohen-Hatfield. “Go back to 1978: even if we’d defined it, we couldn’t have funded it,” said Perelman, who refers to himself in the first person plural. “This could not have been done without Drexel.”
As to the changes he has made thus far, Perelman said he had hired Richard Avedon to photograph high-fashion models for a new ad campaign and had cut through the excessive bureaucracy that plagued the company, eliminating numerous levels of review. All the bureaucracy, he added, stemmed from Bergerac. “He did not run this company.”
“It’s easier to shoot little birds than to run a company,” interpolated Drapkin, referring to Bergerac’s yearly shooting holidays in Scotland.
“He put in layers of form rather than substance,” Perelman went on. “Books this high”—gesturing above his head—“from each division. Four times a year, he’d budget and rebudget. He brought that practice from ITT. Geneen used that effectively. But Bergerac pulled out the form without the substance.”