The Predators’ Ball (17 page)

In April 1983, Peltz and May (in a two-thirds/one-third partnership) purchased Goldberg's block, 29 percent of Triangle's shares, for about $14 million. Two million was lent to Trafalgar; twelve million was lent to Peltz and May, from Manufacturers Hanover and Bankers Trust. Bankers Trust took the stock as collateral; Manufacturers Hanover took Peltz's and May's signatures and a lien on Peltz's house in Quogue.

Peltz recalled that it took all his powers of persuasion at the bank, and that when he finally walked out of Bill Rykman's office at Manufacturers Hanover with the certified check in hand and met Goldberg, Goldberg told him that he couldn't do the deal after all, because the Triangle board would not approve the change of control. “I literally ran the check under his nose, the spittle started to come out of his mouth, he was dying to put his arms around the money,” Peltz declared. “I said, ‘Let me try, let me talk to the board, let me show them I don't have horns.' ”

But one Triangle insider remembered, “It was a conservative board, and Peltz and May made them
very
nervous. Their image was of some guys who were real operators, trying to do something on a house of cards.” Finally, the board compromised by requiring Goldberg to remain as chairman and chief executive officer for six months.

With Triangle, Peltz and May finally had acquired their long-sought vehicle. They decided to raise $75 million from the sale of junk bonds, underwritten by L. F. Rothschild. According to May, Milken wanted to do only a $35–50 million offering of senior subordinated debt, whereas Rothschild—then pushing hard to compete with Drexel in the junk business—was willing to do the larger amount, as subordinated debt (not senior, and therefore less secured); so they chose Rothschild over Drexel.

In September 1983, Rothschild did a “unit offering”—bonds coupled with warrants, which are securities that are exercisable into common stock and can be stripped off and traded separately. Unlike Milken, who liked this unit form because he could dispense the warrants to his favored, Rothschild apparently did not know what to do with them. “There were about one million one hundred thousand warrants, and no one wanted them,” recalled Peltz. “So
[through Triangle, in 1984] I bought back nine hundred thousand for about five million dollars. Two years later, they were worth ninety million.”

Triangle's banks had been pressuring Peltz to sell off the wire and cable business, in order to raise the cash to pay down the banks' loans. Peltz and May decided instead to fund the business, which has since done well, and they paid off the banks' $30 million loans with the money from the junk offering. The rest, May said, they began investing, mainly with Milken and mainly in junk. Once you're carrying money at 15 percent, nothing but junk will do. Then they went shopping for targets.

In early 1984, Peltz and May became interested in Beverly Hills Savings, and they promptly enlisted Drexel's help in financing its acquisition. A thrift, of course, with its wondrous leverage potential, would have suited Peltz's proclivities. Though it was state-chartered (and therefore much freer to invest in junk bonds than federally chartered thrifts), Beverly Hills Savings at this point had not yet invested in junk. But Thomas Spiegel, just a few blocks down Wilshire Boulevard, was already blazing the junk trail with Columbia Savings and Loan.

Beverly Hills Savings was caught in a struggle for control between its then chief executive, Dennis Fitzpatrick, and Paul Amir (a cousin of Thomas Spiegel), who was waging a proxy fight. Peltz, a potential white knight (that bidder to whom a target turns in order to escape the clutches of another, unfriendly bidder), negotiated a deal with Fitzpatrick in which his expenses for conducting a “due diligence” (inspection of the books) investigation—which came to about $675,000—would be paid by the bank.

But the thrift already had a terrible reputation among many in the financial community. One director of Triangle is said to have told Peltz, when he heard that Peltz was intent on making the acquisition, that he would resign if that occurred. And, according to Peltz and May, it did not take them more than several weeks to see signs of what would become public just one year later, when the Federal Home Loan Bank Board closed Beverly Hills Savings and reopened it as a federally chartered S&L. The Federal Savings and Loan Insurance Corporation then filed a $300 million suit against several of the thrift's former officers and directors, alleging that they had wasted its assets by making questionable loans and real-estate investments, and by investing in junk bonds.

Interestingly, the thrift's portfolio of junk originated—and
spurted to about $300 million, or more than 10 percent of its assets—in 1984, after Peltz and May withdrew from the scene and Paul Amir took over. Peltz and May had been examining the thrift's books with advisers from Drexel, investment bankers Fred McCarthy and David Kay. Donald Engel, the host of the annual Bungalow 8 party at the Predators' Ball, who had known both Peltz and May for many years, went on the thrift's board with Peltz while they considered the acquisition. So Drexel was well aware of the dying S&L's flawed loans, which Peltz describes as “one horror story after another.”

According to the FSLIC suit, the $300 million of junk bonds with which Beverly Hills Savings gorged itself between March 1984 and December 31, 1984 were primarily bought from Drexel. The losses to the thrift from this investment are claimed by FSLIC to exceed $10 million (an amount which was dwarfed, however, by the losses from real-estate investments). One former executive of this thrift claimed, “Milken used Beverly Hills Savings as a dumping ground. And when they got to the end, and really needed to sell for liquidity, all of a sudden he wasn't there.”

The “dumping ground” contention would seem to be supported by allegations made in a suit filed in July 1986 against Drexel and a senior vice-president, James Dahl, by Beverly Hills Savings. Dahl was one of Milken's most favored trader-salesmen, someone who, as a former member of Milken's group put it, “could sell you a third eye.” Dahl would be a defendant along with Drexel in another, more important suit, too, which would be filed in early 1987. Here, the Beverly Hills Savings complaint alleged that Dahl called the thrift in April 1984 and recommended that it buy a half interest (Drexel owned the other half) in a bond from a company called Cell Products. He allegedly said that the bond would be secured by a first-trust deed on the company's manufacturing plant, and moreover that the company was a vital, growing concern, whose stock had quadrupled in the past year. Beverly Hills bought a 50 percent interest in the security for $3.69 million.

Absent from Dahl's pitch, according to the complaint, was the information that Cell Products had lost $6.7 million in the previous two quarters and had missed the April 1 interest payment on the bond. The suit also claimed that, contrary to Dahl's alleged assertion, the bond was not backed by a first-trust deed, but by a claim that was subordinate to an $8 million first-trust deed. And, the suit claimed, that made the Beverly Hills claim worthless, since the Cell
Products site was appraised at a maximum value of $6.4 million. All this became more than academic when Cell Products went into bankruptcy, some months after Beverly Hills Savings bought the bond. Now Beverly Hills Savings was suing Drexel for more than $6 million in damages.

So while Peltz passed on Beverly Hills Savings as too moribund, it appears that Milken found in that very morbidity the thrift's usefulness. Peltz, meanwhile, was continuing to scour the landscape for a more desirable target. And though he had yet to find one, he decided to raise more cash. According to one source, he explored the possibility of another underwriting with L. F. Rothschild, which had raised the $75 million for him in September '83, but he was told that it wasn't feasible. The junk salesman there had already called in all his chips on the first deal, and less than a year had passed.

So, in July 1984, Milken underwrote $100 million of junk bonds for Triangle “for possible future acquisitions and other general corporate purposes.” The fee was steep: Drexel demanded warrants to purchase 240,000 shares of common stock, about 12 percent of the company. The firm also was guaranteed the placement of its designee on Triangle's board. Donald Engel, who in 1984 resigned from Drexel but continued as a consultant to the firm, joined the board for Drexel.

This $100 million was one of the early “blind pools” that Milken would raise in order to build “war chests” for his players. Just one year later, in the summer of 1985, Ronald Perelman would be launched into the hostile arena with a $750 million blind pool—although there would be some question as to how “blind” that pool really was (or whether investors were told that the target, already chosen, was Revlon). And in the summer of 1986 Milken would raise for Wickes, run by Sanford Sigoloff, a blind pool of $1.2 billion—the biggest ever.

But in July 1984 raising $100 million for nothing more than an acquisitive urge was still novel. Asked whether he had hesitated to raise $100 million for who-knows-what, Peltz eyed his questioner incredulously. “If I could have raised four hundred million, I would have raised four hundred million! I did what I could. Now I had about a hundred thirty-five million in cash, and I had to be taken seriously. In those days,” he said with a chuckle, “that was a lot of money.”

Over the next six months, Peltz and May made a number of
overtures, but nothing worked. After arbitrageur Ivan Boesky made his run at Scott and Fetzer (maker of Kirby vacuum cleaners,
World Book
encyclopedias, and other consumer products) and was rebuffed, Peltz made his approach—and was also rebuffed. (The company was ultimately acquired in a friendly deal by Berkshire Hathaway, whose controlling shareholder and chairman is Warren Buffett.)

Triangle then accumulated a position slightly over 5 percent in Great Lakes International, a dredging company, but its CEO was also not interested in doing a friendly deal with Peltz and May. And given Drexel's fees, Peltz says, the downside in a hostile offer would have been too steep. Peltz was irritated. It did not help to receive a note from Arthur Goldberg, who had greenmailed Great Lakes some months earlier, saying, “I'm glad to see you're following in my footsteps.” (Less than a year later, Great Lakes would be acquired in a friendly deal by Sam Zell, the Chicago real estate magnate who is another Drexel player.)

While Peltz was priming himself for a leap, he also was severing a relationship with Gerald Guterman, a New York developer. The loans for $12 million to NPM (Peltz and May) from Manufacturers Hanover and Bankers Trust had been conditioned on their being reduced by $3 million ($1.5 million to each bank) in a short period of time. Peltz and May, therefore, had to sell some of the Triangle stock to another investor and pay down that portion of the bank loan. That investor was Guterman, who had been a friend of Peltz and had been involved in other deals with him.

In June 1983, Guterman purchased roughly $3 million of Triangle stock from NPM and acquired a position that was roughly one third of NPM's. About six months later, after accumulating more stock in open-market purchases, Guterman said he wanted to go on the Triangle board. Peltz demurred. Guterman became convinced that Peltz wanted to freeze him out.

Two bankers at Drexel say they advised Peltz that Guterman would be a liability if Peltz were to attempt a hostile deal. Guterman had a Selective Service conviction dating back to the early sixties: he had spent some time in jail, then served and received an honorable discharge.

In the fall of 1984, Guterman began to accumulate more Triangle stock. By mid-November, he stated in his 13D, a filing which must be made with the SEC within ten days of one's acquiring 5
percent or more of a public company's stock, that he was considering waging a contest for control. He also stated that he intended to communicate with other stockholders about his concern that Triangle management was “engaging in self-dealing transactions and other acts of corporate mismanagement.” Then, suddenly, the matter was settled, and Guterman sold his stock back to the company at the market price.

Guterman remains fiercely bitter, convinced that Peltz knew he was about to be launched by Milken and didn't want to share the bonanza. He told friends that he had helped Peltz when he was down and out, put up money for him when Peltz wanted to invest in Guterman's real-estate deals, paid off interest on notes Peltz had at banks when Peltz had no cash. Then Peltz found in Milken the ultimate deep pocket and had no more use for him, Guterman complained.

Peltz and May insist that had Guterman not insisted upon joining the board and begun his aggressive stock accumulation, they would have let him remain a shareholder. Instead, they say, he became the victim of his own poor judgment. “Gerry left thirty-five million dollars on the table,” May declared, calculating the profit Guterman would have made on his Triangle stock had he held it through 1986.

“I settled the deal with Guterman the day before Thanksgiving [1984],” Peltz recalled, “and then I went out to L.A. for a meeting with Michael, six
A.M
. that Sunday morning, Thanksgiving weekend. It was costing nine million dollars to buy Guterman out, and Michael wanted to be sure about the balance sheet. We issued some preferred. And that's when Michael said that he didn't think Victor [Posner] was going to do the National Can deal, he was thinking about a backstop for him—and I should take a look at it.”

V
ICTOR
P
OSNER
had long been a much-valued Drexel client. In the midseventies he had joined Milken's early group of satisfied customers who bought the bonds of fallen angels that Milken recommended when they were at twenty or thirty cents on the dollar, and then made killings when they rose. By the early eighties he was on the short list of people—including Fred Carr, Tom Spiegel, Carl Lindner, Meshulam Riklis and Saul Steinberg—whose companies were busily buying one another's Drexel-issued paper. And he would also participate, along with Steinberg, Spiegel, Steve Wynn,
Ivan Boesky, Ronald Perelman, the Belzbergs and others, in one of Milken's lucrative investment partnerships, Reliance L.P.