The Predators’ Ball (16 page)

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 through 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.' ”

N
OWHERE 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.

Friends of Peltz recall his hard times in the early eighties, but say that Peltz somehow managed to maintain the trappings of wealth. “He always had a big, fancy home and an expensive car,” recalls one old friend, “even when he was all but broke.”

Then, in late 1982, Peltz seized upon the idea of acquiring a controlling block of Triangle Industries, the vending-machine, wire and cable company, from New Jersey businessman Arthur Goldberg. What Triangle had that was most interesting to Peltz was cash flow—not a great deal, but some. Cash flow is a company's earnings plus bookkeeping charges that don't involve current cash outlays—for
example, charges for depreciation, amortization and depletion, which reduce net income without taking cash out of the till. “I learned that from the grocery business,” Peltz declared. “What matters is what is in the cash register at the end of the day.”

This is a homely-sounding precept, but one that would effectively function as the first commandment for the raiders of the eighties. Earnings might be unimpressive (and therefore the stock price low) but if there is a great deal of depreciation, for example, then cash flow can be high. And it is cash flow, in its ability to service debt by making interest payments, that makes a highly leveraged acquisition viable. In his original issuance of junk bonds, Milken had recognized the importance of cash flow, more than earnings, in assessing whether the leveraged companies he was underwriting would be able to meet their debt payments. Now that he had moved from $25 million offerings to multibillion-dollar deals, the calculation was not so different—just bigger.

Peltz understood that if he was to have a vehicle for acquisitions, that vehicle would have to have cash flow sufficient to make the interest payments on its debt. Trafalgar had almost no cash flow. And no one—including the hungry Milken—would raise any junk-bond financing for him until he had a company with some kind of cash flow.

Goldberg, however, believed that Peltz did not have the wherewithal to be a buyer. Peltz appealed for assistance to Jeffrey Steiner, whom he had met about five years earlier through Schneider, Sassower and Goren. Steiner had easy entree to Goldberg because he was partners in a scrap business with Goldberg's brother-in-law. He also had the financial muscle that Peltz lacked.

Born in Turkey and raised in Austria, Steiner had made a great deal of money as an oil trader in Europe and the Middle East, and then, in 1981, he decided to get out of oil trading and into “the takeover business.” He set up an arbitrage operation in New York and kept homes in Paris and London as well. Through his European connections, Steiner was able to raise huge sums of money overnight. When Peltz appealed to him for his help with Goldberg, Steiner had just raised $20 million in twenty-four hours for Carl Icahn in Icahn's bid for Marshall Field.

Steiner and Goldberg met for breakfast at the Plaza one Sunday morning in early 1983, to discuss Triangle. While they had breakfast Peltz waited outside. Steiner said that he might be interested in
investing in the deal himself, and he could in any case raise financing for Peltz in Europe. Although Steiner then dropped out (he was in the midst of a divorce and was distracted from the deal), he had opened the door for Peltz.