The Predators’ Ball (19 page)

Once National Can made its LBO offer, Milken's troops moved into high gear. Leon Black recalled that he and others at the firm made “probably twenty calls” to find someone to top that offer. Black brought it to Carl Icahn and to Henry Kravis, of the leveraged-buyout firm of Kohlberg Kravis Roberts. The Belzbergs and Ronald Perelman gave it a fairly cursory look. Milken sent materials on the company to Sam Zell. Don Engel urged repeatedly that it be given to Peltz, and Peltz began lobbying Milken for it in February.

But, said one of the people involved in this marketing process, “Nelson was Mike's last choice.”

Peltz knew there was competition for the deal (“I was seeing boogeymen in all the closets”) and says he was “dying for it.” May uses the same language. “We were dying for a deal. We'd been sitting on the money for a year and a half [starting with the Rothschild offering]. We knew National Can had developed a strong market position, that it was a strong cash generator. Considine had a great reputation. It was not sexy, but a sound business.”

On March 6, 1983, Peltz flew out to see Milken and “camped out at Drexel for a couple of days.” “I said to Mike, I want this deal, I don't want you to finance it for anyone else, I'm not leaving until you agree.” By the time he left L.A., on March 8, Peltz was convinced that if any Drexel client was going to get the deal, he would be the one.

According to Leon Black, he and others at Drexel had been finding that National Can was a hard sell for three reasons: it was perceived as being in a declining industry; it had had problems in the bottling part of its business; and the management buyout which had to be topped appeared fully priced. Of all the prospective buyers to whom Drexel was shopping the deal, only Icahn showed interest.

On March 7, Icahn crossed the 5 percent line, and through the next week he continued to accumulate National Can stock, at prices ranging from about $37 to $39 a share. On March 15, on his way out to vacation in Colorado, he stopped off to see Frank Considine. “I liked Carl, he struck me as straightforward and honest,” Considine declared later. But Considine was intent on achieving the management-ESOP transaction, and Icahn was talking about an offer that would not be all cash, but cash and paper—which would make it less desirable.

Jeffrey Steiner, who has invested in every deal of Icahn's starting with his raid on Marshall Field in 1982, said that Icahn's interest in National Can was only passing. “Carl looked at it, but he didn't see a white knight coming in, and he didn't want to run the company. Carl wants to buy assets at a discount,” Steiner said. “Nelson, on the other hand, didn't care if he was buying assets at a premium. He just wanted a company, and wanted it to work.”

About Peltz's having said that he believed Drexel was committed to his doing the deal from March 8 on, Black asserted, “Our feeling was, we had to get a deal done, given the pressure of the
deadline on National Can's offer [which would expire at midnight, March 21]. So we were working on a few horses.”

Icahn's intentions were, as always, opaque. “Of all the players out there, Carl is the master of confusing the other side as to whether he really wants to do it or not. He straddles that line better than anyone,” Black said. “Here, I talked to both him and Nelson at the end of that week [before the weekend-long negotiations], and Nelson was the one who really wanted to do the deal. I felt more comfortable that with Nelson it would happen.”

Peltz was chosen by default. As Milken had resisted giving National Can to Peltz, he must have wanted to find
some
deal for him. Milken had raised $100 million for Peltz eight months earlier, and the interest payments (variable rate, starting out at 14.25 percent) had to be met.

Moreover, Peltz had already shown himself as pliant, someone who understood what it took to play the Drexel game. A dues-paying member of the club, he had put up his Drexel-raised cash for each of the new junk-bond-financed takeovers as it came down the pike: $20 million for Phillips, $25 million for Coastal. Indeed, in the next month, even after his own deal had closed and he no longer had over $100 million burning a hole in his pocket, he would still find $35 million to commit to Unocal. And he knew he had to give up equity, both to Milken and Drexel and to those buyers who took the riskiest pieces of his paper. Drexel already owned 12 percent of Triangle from the warrants it had received as part of its earlier financing, and it would cut another 4 percent piece of the pie for itself here.

All that remained, then, was to negotiate with Posner for his 38 percent block, obtain commitments for the financing, and make the tender offer; by this time, the expiration date of the National Can offer was just four days away. For the past two weeks, however, Posner had been elusive. Peltz tried daily to reach him, unsuccessfully.

Victor Posner had been pursuing another option. The various investment bankers at Drexel who have worked with Posner over the years all agree that Posner traditionally had not been a seller. And he was thought to be especially loath to sell his position in National Can, where he had bided his time in good behavior for so long, and where he—perhaps more than anyone else—saw great value. But Drexel was refusing to finance the transaction, which
must in itself have come as a shock to Posner, a member of Milken's coterie for so long. According to one investment banker who visited Posner in Miami, his phone had a series of buttons for direct lines; the first was to Jefferies, the Los Angeles stock-brokerage firm, and the second was to Milken.

By February 1985, Posner must not have felt that Drexel was his special friend. He is said by one source to have gone to Bear, Stearns for financing and been turned down. First vice-president Paul Yang of E. F. Hutton, who was already working on some matters for Posner, said later that an associate of Posner called him in mid-February, to talk about Hutton's raising money for Posner to do the acquisition of National Can. Yang then spoke with Posner, who said that he felt “Hutton deserved a try.” Yang and Daniel Good, then head of Hutton's M&A division, had visited Posner in Florida in the fall, and they were eager to break into the lucrative junk-bond-financed takeover business.

National Can would have been Good's and Yang's first major junk-bond deal. On February 24, two days after National Can had launched their offer, Yang met with Donald Glaser, Posner's in-house lawyer, in the apartment in the Waldorf Towers that Posner keeps as his New York residence, to discuss his fee structure. “Then we began soliciting from various sources commitments to acquire high-yield paper,” Yang recalled.

On March 11, however, Posner's Evans Products—flagging under a debt load of $540 million—filed for bankruptcy. “With that, we stopped the effort,” said Yang. “The whole thing had taken about two weeks. And shortly after that, Mr. Posner sold his block of National Can [into the Triangle offer].”

That was not done without a great deal of angst on all sides. Peltz and May, their lawyers and a cadre of investment bankers from Drexel spent the weekend of March 16–17 in negotiations with Posner's lawyers from Paul, Weiss and with Donald Glaser. According to several of those present, the structure they arrived at by Sunday night allowed Posner's stake to be bought out, except for about $30 million, for which he would be given preferred stock in the new company and roughly 20 percent of voting control. Peltz and May, through Triangle, would be putting in roughly $65 million, for which they would receive 80 percent of voting control. That $95 million or so from Posner and Triangle would form the equity base, upon which the remaining $365 million of debt would be layered.

But when Glaser called Posner Sunday night, to finalize the deal, Posner vetoed it and suggested to Peltz that they be fifty-fifty partners. “I said, ‘Victor, I love you, but I'm not doing that,' ” Peltz remembered.

May put it more bluntly: “The twenty percent [which Posner would hold] was bad enough, but fifty percent was out of the question. I did not want to be associated with Victor Posner.”

Peltz and May went home, convinced that they had lost the deal. But at about two o'clock the next morning Leon Black called Peltz and asked him to come back, saying that Drexel would raise the $30 million of preferred that would have been Posner's. By mid-morning on that Monday, March 18, Posner had committed all his stock to the transaction at the $41-a-share price, and Milken and his team of salesmen were at work raising the $395 million of commitments from their buyers.

The “commitment letter” was a crucial part of a new structure Drexel had devised. Much as banks give commitment letters for their part in these financings, so Drexel's buyers made their commitments. And whether the deal went through or not, they would receive a “commitment fee” for their trouble. Here it was three quarters of one percent of the amount for which they subscribed.

For its services in raising this money, Drexel was to receive one half of one percent of the $395 million in financing commitments, or about $2 million. In addition, Drexel received an advisory fee of $500,000. Upon consummation of the deal, Drexel received fees ranging from 3.25 percent to 5 percent of the varying pieces of paper totaling $395 million that it placed, less the $2 million it had received for securing the commitments. Also upon consummation, Drexel received a further fee of $2.5 million, plus warrants which if exercised would give the firm 95,000 shares of Triangle stock. All told, its fees came to roughly $25 million. Combined with the warrants Drexel had obtained from its earlier financing, the firm now had warrants for about 16 percent of Triangle stock.

This financing was done as a private placement (with rights to register as public securities later), rather than in the public debt markets. In the last year or so, Drexel had turned increasingly to private placements, especially in the leveraged buyouts. And for the hostile deals, especially, they would now become the weapon of choice. Registering public securities with the SEC at the outset would have made the process too slow and cumbersome.

There were, however, some disadvantages to doing these as
private placements. It narrowed the market of buyers; most mutual funds, for example, buy only public securities. And it was generally more expensive for the issuer, because the buyers demanded a higher yield to compensate them for a lack of liquidity, since privately placed bonds are not supposed to be freely traded. Moreover, since these placements
are
private, buyers can demand individualized rewards—such as a given number of warrants to accompany a certain amount of securities. While this kind of demand and free-form allotment was not advantageous from the issuer's standpoint, it was perfect for Milken's system of repayment of favors, and rewards.

This was the third time in two months that Milken's troops in Beverly Hills had been thus mobilized—having just raised $1.5 billion in commitments for Phillips and $600 million for Coastal. “The way it works,” explained Drexel's John Sorte, who worked on Phillips and would soon work on Unocal, “is that the salesmen call up and ask people if they're interested, and in which kind of paper—the senior notes, or what. And if they are, the book is delivered to them the same day. Then they call back, and if they're interested the allocations are made and the commitment letters sent out by Telecopier.

“In Unocal, for example [in mid-April 1985, three weeks after National Can], we raised $3 billion in commitments from a Monday to a Friday. There were six Telecopier machines, and commitments from 140 institutions. The machines got all backed up, papers were lost in space. The mechanics of these things are a nightmare. It's like running an army.

“We use our own people, not messenger services, because we really can't rely on anyone else,” Sorte continues. “So we put the secretaries in limousines, and send them off to get these things signed.”

Compared to the challenges of Phillips and Unocal, National Can's $365 million seems like child's play. But according to Drexel's Mary Lou Malanowski it was not an easy sell. “This was one of the first hostile deals, and it required a lot of marketing to get people interested in playing,” Malanowski said. “We had no real numbers on the company, because we weren't inside. And usually when we raise money the buyers care a lot about the management, they want to meet them. Here there was no time. And Nelson and Peter had no track record, just this little company, which was peanuts.”

Still, it was all done in just under thirty-six hours. The riskiest piece that Drexel had to raise was the $30 million of preferred that was to have been Posner's. In these buyouts, the riskier pieces of paper are generally accompanied by equity kickers, so that the investors have the chance of sharing in the upside in return for their risk-taking. Coastal's takeover of ANR had been an exception, since Oscar Wyatt had been unwilling to give any equity; Milken and his colleagues at Drexel had been so eager to bring one of these takeover bids to consummation that they had acceded to his terms.

For Peltz, however, there were no such allowances. The $30 million of preferred was accompanied by warrants to purchase 19.9 percent of National Can. And the lenders who committed to buy it, $15 million apiece, were Carl Lindner's American Financial and Charles Knapp's Trafalgar Holdings Ltd.

After Knapp was fired from the Financial Corporation of America, the once-high-flying California thrift which under his control nearly became insolvent, Milken had attempted to raise $1 billion for Knapp in his new private partnership, Trafalgar Holdings. Why anyone should have wanted to invest with Knapp, given his track record, is not clear, and apparently Milken's would-be lenders felt that way, too, because the $1 billion did not get raised. (Knapp denies that Milken attempted to raise the money.) What Knapp ultimately did, according to one friend, was create a fund in which investors placed, say, $140,000 to reserve the right to come into the first six deals he offered them, with the proviso that if they came into none they would suffer a 50 percent penalty, of $70,000. “It was nothing—just window dressing,” said this friend. According to one investor, however, Knapp told him that he had the $1 billion on hand. In other words, it was the Air Fund come to life in its original, unadulterated form.