The Predators’ Ball (18 page)

Posner made a fortune in real estate in the 1930s and 1940s, led a life of retirement in Miami Beach for about ten years and then, in 1966, began to acquire controlling chunks of small industrial companies. In 1969, through NVF Company, which had sales of only $30 million, he made a bid for Sharon Steel, which had sales of $220 million. This had not been accomplished with cash raised through Milken's junk bonds, of course, but with that era's version—the Chinese paper that Riklis too had used to advantage. Posner offered Sharon stockholders a package of bonds and warrants, and won nearly 90 percent of the stock in what was then one of the fiercest merger battles ever.

For a number of years, Posner's empire did quite well. In 1969, after the major group of eight companies had been acquired, they earned about $10 million on sales of $400 million. By 1975, they earned about $22 million on sales of $600 million. By 1976, moreover, the package of subordinated debentures and warrants that NVF swapped for Sharon shares—in 1969 selling for $25—was worth about $140. By contrast, the packages handed out by Gulf + Western and Litton Industries—other great acquirers via stock swaps at that time—were worth less than the shares for which they had been exchanged. While other conglomerateurs were attracted to companies for their glamorous earnings growth (much of which had evaporated by 1970), Posner, the shrewd old real-estate shopper, bought companies that were asset-rich.

By the midseventies, however, the quintessential Posner traits were already in evidence. He paid himself so well that he was one of the three or four highest-paid executives in the country, though the combined sales of his companies did not exceed $1 billion. His family members were well represented on his company payrolls and boards. And he had signed a consent decree with the SEC for having allegedly misused pension funds from Sharon Steel. All this made his declaration to
Business Week
in 1976 the stuff of satire. “I'm not in this for the money,” Posner protested. “I want to create a good product.”

At Drexel, stories about the eccentric Posner are legion. One investment banker described Posner's Miami Beach offices, located in a somewhat run-down building that used to be a hotel, as “out of a comic opera—overly ornate, with all this weird, schticky
stuff.” The office featured an array of couches, a pool table, a pinball machine, enormous plastic hampers in which the mail was placed, and Posner's desk, which was raised, on a platform—to compensate for Posner's being so short, some associates speculate. Two, sometimes four, guards were present at all times, their guns bulging under their jackets. Posner is reclusive, rarely traveling, seeing few people, carrying out most of his business contacts by phone.

He married his first wife when she was seventeen and he was in his midthirties, and in his late sixties he preferred girls in their teens. His most recent girlfriend was the daughter of a former mistress; several years ago Posner stopped having an affair with the mother (who had become an officer of his various companies) and began an affair with her daughter, then in her teens. According to one banker at Drexel, their affair ended when she turned twenty. “He couldn't talk to her anymore,” quipped this investment banker.

Drexel's David Kay recalled one meeting, more unusual than some others, at the Posner headquarters. Donald Engel was the Drexel investment banker in charge of the Posner account until he resigned from the firm to become a consultant. He has continued to serve as a director on the boards of Posner companies. For years, Posner was Engel's biggest client, and Engel was always shuttling back and forth to Miami. On this morning, he arrived in Posner's office and mentioned that he had just had breakfast with Posner's son Steven. “ ‘You did
what?'
Victor yelled, leaning over his elevated desk. ‘Didn't you know that Steven's children have—' ” Kay broke off, then continued, “some contagious disease, like hepatitis or something, I can't remember exactly. So Victor had his office fumigated. Later that day we had a meeting there. We all had to wear hospital masks, and Donnie wasn't allowed on the floor. He had to sit downstairs and participate through the speaker phone.

“Victor is a living legend,” said Kay, smiling. Kay had had dinner with Posner at Côte Basque in the late sixties, when Kay was at Shearson. With Kay was a stockbroker from Shearson. The stockbroker asked Posner how he had become so successful, and Posner responded by describing his first business venture: As a child he had lived in Baltimore with his parents and seven brothers and sisters, and his father had a newspaper stand. When he was thirteen he demanded that his father give him 50 percent of the interest in the newsstand. His father, pointing out that he couldn't put one son ahead of his wife and all his other sons and daughters, refused. So
the boy opened a stand selling candy and newspapers, across the street from his father's—and in six months, Posner declared, he had the whole family working for him.

“The amazing thing,” Kay concluded, “is that he told that story with pride.”

Posner began acquiring his 38 percent block of National Can in 1979. After he called the company's chief executive officer, Frank Considine, to tell him that he had bought more than 5 percent of the company's shares, Considine met with Ira Harris of Salomon Brothers and Joe Flom of Skadden, Arps. “Joe said, ‘Sue—but I can't guarantee you'll win,' ” Considine recalled. “Well, I didn't like the idea of suing if I wasn't going to win.”

Posner told Considine that he wanted his position only for investment, and that he thought Considine was doing a good job. And for several years—as Posner was accumulating his stock in the open market at bargain prices—he didn't interfere in the running of the company, and he and Considine got along.

Posner did not ask to go on the board. “He felt comfortable that I wouldn't deceive him—and I never did, until the very end,” said Considine, looking strained. In the end, Considine with his advisers came up with the idea of National Can's management in conjunction with its ESOP (employee stock option plan) doing a leveraged buyout of the company. Had that buyout occurred, it would have left Posner with a sharply devalued minority position. Considine did not tell Posner about this plan in advance, but allowed it to be sprung on him as a surprise.

No two men could be more disparate than this Midwesterner and the Miami wheeler-dealer, and no notion more incongruous than of these two “visiting,” as Considine put it, in Posner's baroque enclave. But, as Considine's erstwhile adviser and close friend Ira Harris says, “Frank Considine takes people at face value, and he took Posner that way. Whatever Posner's track record with others had been, his with Frank was good—and until he did different, Frank wasn't going to cross him.

“Considine is the kind of person,” Harris added, “that if he walked into the room and there was a dollar bill on the floor, he would spend ten minutes trying to find out who had dropped it.”

In late 1983, Posner's passivity ended. The relative prosperity of his companies in the midseventies was gone; once-profitable conglomerates like NVF, DWG and Pennsylvania Engineering were
showing some heavy losses. But while profits plummeted, Posner's salaries escalated. In 1984 he collected $7.6 million from NVF, which lost $146.5 million for the year. National Can, with its steady cash flow, must have become too tempting to resist.

National Can had asked Salomon Brothers, which had traditionally been its investment banker, to underwrite $100 million of senior debt, accompanied by a small amount of warrants. The warrants, exercisable into common stock, were intended as an equity kicker to make the bonds more attractive; they would also have diluted Posner's position slightly. Posner objected, arguing that subordinated debentures would be better. (Senior debt is more secure, since its claims on the assets of the company come before those of the subordinated debt. Also, senior debt generally carries covenants restricting the company's leveraging itself further. Since it carries less risk than subordinated debt, it pays a lower interest rate.)

Posner sent Don Engel out to see Considine. According to Walter Stelzel, National Can's chief financial officer, Engel offered a subordinated-debt package that would have carried a one percent higher interest cost than the senior debt underwritten by Salomon, but would have fewer covenants. “Because of the covenants on the senior debt, we couldn't have leveraged up. But that was OK with us, because we didn't
want
to leverage up,” Stelzel said. “In those days, we didn't know what leverage was.

“We said to Posner, ‘OK, if you're going to start interfering, let's do something different.' And he said [we could] buy him out at fifty-two (the stock was then in the thirties) or do a buyout with [him and] management participation.”

The board decided that the company should pursue the buyout with Posner. Stelzel added that the management at National Can did worry about being in a Posner-controlled company, but that they drew up an agreement with strict operating rules, which would have prohibited too much leverage as well as interference from other Posner companies. By April 1984, the proposed merger agreement between National Can and Posner's NVF was ready: Posner would buy out the shareholders at $40 a share, and NVF would own 80 percent of the newly constituted company, while National Can's management would own 20 percent.

The cash buyout would cost $410 million. Drexel was to raise the mezzanine financing through the sale of about $155 million of junk bonds, which would come beneath the $255 million of senior
debt lent by Manufacturers Hanover. According to Drexel's Leon Black, he and others at the firm held meetings to structure the deal, in the summer and early fall of 1984.

“We would have done it then, but Posner kept procrastinating,” Black said. “And by the late fall he started having real difficulties, with Evans [Products] and Sharon [Steel], and the banks were getting more and more nervous about the interlocking pyramid of his empire. By November or December, we'd decided that we didn't want another big slug of his private paper out, leveraging him further, making him more illiquid.”

Drexel's concern was not disinterested. Drexel had not issued any paper in the two Posner companies that were in the most trouble—Evans and Sharon Steel. But Drexel was already working on one of Sharon Steel's famous 3(a)9 swaps (unregistered exchange offers), in an effort to avert Chapter 11.

Moreover, since 1982 the firm
had
floated nearly a half-billion dollars for various companies of Posner's, in three private placements (of securities that are not publicly registered and therefore can be issued more quickly and require less disclosure) and two public deals. One of them, issued for DWG back in 1982—$50 million of zero-coupon bonds (which are sold at a discount and pay no interest until the annual accreted interest is paid at maturity)—had a short maturity, due in 1986.

Among the heaviest buyers of Posner's paper, furthermore, were members of Milken's select coterie, those he most protected. In one $25 million issue for a Posner company in 1982, for example, according to a November 1984 article in
Forbes
magazine, Fred Carr (First Executive) and Carl Lindner (American Financial) bought the entire issue. Defaults by Posner could cause a strain on some of Milken's most important client relationships.

Drexel's most recent financing for Posner had been a $206 million private placement for his acquisition of Royal Crown, in June 1984. Stephen Weinroth noted, agreeing with Leon Black, “We had a growing conviction, in the fall of 1984, that we shouldn't be financing anything Victor did. We'd done Royal Crown, and already we were having misgivings. It has worked out OK, but only OK. It probably would have been better if someone else had done it.”

According to National Can's tender-offer document, however, Posner continued to tell Considine, through December, that both Drexel and Manufacturers Hanover had committed to do their respective
financings—though as the offer states, when Considine contacted both Milken and the bank, neither confirmed that their commitments were in place. Finally, at the end of January—after having enjoyed what had amounted to a one-year option on the company—Posner told Considine that he had decided that the transaction as proposed was too leveraged and he preferred to either (a) remain a 38 percent stockholder and obtain control of the board, (b) acquire 51 percent and obtain control of the board or (c) be bought out at $60 per share. Furthermore, he told Considine, after obtaining control he planned to cause National Can to acquire for cash the retail building-materials group of Evans Products, which was on the verge of bankruptcy.

Considine said later, “Victor is too proud—he would never say that he couldn't do the transaction. He always, to the end, said he could. He needed the money—but you'd never know that. One of Victor's sayings was, ‘I don't care, whatever happens, it's not going to change my style of living.' He would always say that, in a friendly way—kidding but also serious.”

On his buyout price of $60 a share, Considine added, Posner was “absolutely rigid.” “The stock was selling at thirty-four dollars. We couldn't possibly have done it—there would have been shareholder suits. I told Victor that. He would say, ‘Never mind. Some strike lawyer out there will always sue. Never mind the lawsuits.' ”

So Considine and his advisers came up with their leveraged-buyout plan, in which the company and an ESOP comprised of two thousand salaried workers would purchase 51 percent of the company's shares for $40 a share, using mainly borrowed cash. And at the time of the offer, in late February 1985, National Can's board issued preferred stock with four million votes to the ESOP, virtually eliminating any chance NVF would have had of mounting a successful proxy fight. At the buyout's completion, the ESOP would have had 50.1 percent of the company's voting rights.