Why Should White Guys Have All the Fun? (33 page)

That was the plan, which I was somewhat concerned somebody might latch on to and run with. Beatrice CEO Don Kelly had basically made the decision, “Okay, we should exit the international food business.” I think primarily because he was very concerned about all the minority interests that were in Beatrice International. So Beatrice owned 85 percent of this, 75 percent of that, 60 percent of this. They didn’t always have 100 percent. And some of the minority partners were a real pain in the butt, as I later learned. Many of them were great partners and I’ve gotten along with all of them very well
.

But Don made a decision that the best way to get value was not to break it up but to sell the whole thing. Even though I think KKR had toyed around with the idea of maybe breaking it up, Don wanted to sell it as a package
.

The first time I mentioned Beatrice International to Milken was after the telephone conversation we’d had on the McCall deal. I went out to L.A. for a meeting. Michael went on for about an hour
talking about his vision of the world and why didn’t he and I set up a company called Turnarounds of America. “But Michael,” I said, “McCall was not a turnaround.”

“Well, it doesn’t matter. We can perceive it as a turnaround.” To his credit, at the end of an hour he turned to me and said, “Reg, is there anything I’ve missed, is there anything you want to say to me?”

I said, “Michael, yesterday we bid $950 million to KKR for Beatrice International Foods. Beatrice International has $2.5 billion in sales, $145 million of operating income, and 64 companies in 31 countries. Our plan is simple: Bid the whole thing and simultaneously, with our acquisition, we sell Canada for $200 million, we sell Australia for $75 million, we sell Latin America, maybe for $100 million. So now we’ve pared away about $400 million, and we’ve still got a company with $2 billion in sales and over $100 million of operating capital. But now we’ve only paid $550 million to $600 million
.

Then we decide what we are going to retain, what we are going to keep and go from there. And we’ve lined up Onex, a buyout group up in Toronto led by Gerry Schwartz, to buy Canada. We’ve got Solomon Lew, an Australian businessman who’s very interested in the Australian operations. And we think the Latin American division is attractive and will sell easily.”

Michael said, “How the hell do you know Solomon Lew?” And I just said, “We know everybody,” somewhat distracted by his question. And then he said, “I don’t know the specifics of this deal, but I’ll get somebody in here who does.” Then he turned around and walked out. I could see him whispering in a very excited fashion to a colleague. And all of a sudden Ackerman came in and sat at the head of the table
.

After the meeting, I got on a plane and went back to New York. A day or so later, Michael called me and said, “Has Peter Ackerman been in to see you? He’s in New York—has he been by to see you about this deal?” Up until that point, Drexel hadn’t done anything. Within half an hour, Ackerman was in my office with a Drexel executive named Dean Kehler. They came back and said, “We think you’ve got the best bid.” So then we started organizing the due diligence effort
.

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
.

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.

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.