The Predators’ Ball (33 page)

The other defector from the corporate establishment, which Revlon executives and advisers also lobbied unavailingly, was Chemical Bank. It had made a commitment to provide approximately $500 million of what was then (at $47.50 a share) a $1.95 billion offer, on a well-secured, “last-in, first-out” basis. Unlike Citibank and Bankers Trust, which were known for their willingness to lend to hostile deals, Chemical had rarely done so, and never for a junk-bond, bust-up raid. Also, its policy was to refuse to lend to a hostile acquirer of a client. Chemical had loaned to some Revlon companies in Europe.

Rohatyn, who says he was “amazed” at Chemical's participation,
called Michael Blumenthal, then chairman of the Burroughs Corporation and a director of Chemical; Bergerac called Walter Shipley, Chemical's chairman. Rohatyn recalled, “A number of Chemical directors—Andy Sigler of Business Roundtable probably the most vociferous—were very unhappy about the policy issue. But once the chief executive officer had made a decision, it was difficult to override—and there would have been legal liabilities. But there was lots of turmoil.”

“Revlon made some headway in persuading them to back out,” added Andrew Brownstein, a partner at Wachtell, Lipton who worked closely with Lipton on this deal, “but the odds were long. Had the bank backed out, we believed it would have been a serious blow to them [Pantry Pride]—first, because Drexel charges more for the money they lend than the bank would, and, second, because it lent credibility for Drexel's investors, to be able to say that a bank was getting up one quarter of the money.”

After threatening suit (and even sending to bank officials a draft of the complaint), Revlon finally did sue Chemical, along with Pantry Pride and MacAndrews and Forbes, in federal district court in Delaware, about one week after Perelman had announced his intention to launch a hostile tender at $47.50 per share, on August 19. Not named in the Revlon suit was Drexel—a decision Lipton made because of his prior representation of Drexel in its internecine battle with its Belgian shareholders in 1984.

The Revlon suit marked one of the rare instances in a hostile deal in which a bank was joined as a defendant. Revlon charged, first, that Chemical was a “bidder” for Revlon and had failed to make the disclosures required of one, and, second, that the bank was in violation of the margin rules—rules set by the Federal Reserve which govern loans made on stock purchases.

The claims of margin violation, made against both Chemical Bank and Pantry Pride, were “potential show-stoppers,” said Michael Mitchell, a Skadden, Arps partner who was one of the litigators on the Pantry Pride team. Essentially, Revlon was arguing that the loans made to Pantry Pride should be subject to the margin rules set by the Federal Reserve, because Pantry Pride's junk-bond offerings and its Chemical loan were all “indirectly secured” by Revlon stock. The “maximum loan value” of any margin stock is 50 percent of the current market value of that stock. And, Revlon was arguing, Pantry Pride's loans taken together—for $2.1 billion—far exceeded
the maximum loan value of Revlon stock, with its current market value of $1.95 billion. The only other time in the junk-bond wars that a target had raised this margin-violation argument was in the Unocal battle against T. Boone Pickens, where it was raised not in the courts but with the Federal Reserve; Unocal and Pickens settled, however, before the Fed considered Unocal's petition.

The rest of the Revlon lawsuit centered on alleged disclosure violations by Pantry Pride and attempted to strike at the inner workings of Milken's machine. Revlon charged that when Pantry Pride did its $750 million “blind pool” public offering in early July, Perelman and Drexel in fact had known that the money was in substantial part to be used for the Revlon bid but had not disclosed that in the offering prospectus. However, Revlon alleged, Drexel and Pantry Pride were not wholly chary with this information—disclosing to certain prospective bond buyers pro-forma Revlon–Pantry Pride financial statements, to convince them that the debt could be repaid.

Moreover, Revlon charged that the prospectus failed to disclose that some $200 million of the $750 million that was raised was not for Pantry Pride's needs but for Drexel's, to enable it to sell off some of its junk-bond inventory.

Perelman testified that while he had been looking at Revlon, among other corporations, as a possible acquisition since as early as February or March 1985, he did not decide on it until about the second week in August. In an interview, Howard Gittis pointed to their interest in July in another acquisition, a Florida thrift, as evidence that they had not yet decided on Revlon. That thrift, however, would have cost only $50 million, hardly enough to warrant $750 million in the junk-bond offering, and hardly a substitute for the Revlon acquisition. Indeed, Fred Sullivan said that “one [acquisition] had nothing to do with the other—the S&L was a money-leverage deal, a way to get cheap capital.”

One Revlon source said that he was told by “two top executives of two investment-banking firms” that the Revlon-Pantry Pride pro formas had been shown to prospective junk-bond buyers. But when the Wachtell, Lipton litigators took the depositions of more than twenty of these buyers—many of them loyal members of the inner circle, like Fred Carr, Nelson Peltz and Samuel Belzberg—they found none who testified that he had been told that the target was Revlon.

Rohatyn remains “convinced that the Wachtell lawyers just got stonewalled, and that there
was
a disclosure violation. Perelman came to Bergerac in June and said he wanted to take over Revlon, He said he was about to go out and raise about $400 million. He went out and raised the $750 million and came back for the company. It doesn't take a genius to figure out what was happening.”

One whose deposition was not taken was Ralph Papitto, the tough-talking chairman of Nortek, a mini-conglomerate based in Providence, Rhode Island. Papitto, who describes himself as “one of Drexel's top-level clients,” said that Milken has raised $600 million for him since 1983, and that he, in turn, has invested in Drexel's megadeals. In GAF's bid for Union Carbide, for example, Papitto said, he committed to buy $50 million of bonds—and had to make that decision in twenty-four hours. “I call this a renaissance,” Papitto declared. “In the old days of J. P. Morgan, it would have taken four months, at least, to raise that kind of money, and you would have had reams of paper. But it's really not that complicated. We do it with just a term sheet. We're all pretty savvy. And it's one hundred thousand percent trust. Knowing Mike, if he tells me something's good, I tend to believe in it.”

In June 1985, Drexel raised $300 million for Nortek, for acquisition or other corporate purposes. Papitto said he had only planned to raise $150 million. “But it was so
easy.
It was sold in two days. They forced us,” he said with a laugh, “to two hundred million, then two hundred fifty million, then three hundred million. They wanted us to go to five hundred million, but I said no.” It was a far cry from the early days, when Milken used to raise $25 million or $50 million for a company that wanted to expand and couldn't get that kind of bank financing. Now it was more a matter of Milken saying to his customers, “Here, want three hundred million?” and their replying, “Sure, why not?”

While Papitto did not know exactly what he would do with that money, Milken was not at a loss for ideas. In July, Papitto bought $10 million of preferred stock in Pantry Pride's “blind pool” public offering. “You buy people in this business—Perelman's a pretty savvy guy,” says Papitto. “And Pantry Pride had that big tax-loss carryforward.”

Did he know the money was for Revlon? “Orally, they tell you things,” Papitto replied. “They say it's Revlon. They don't say in writing what they're going to do with the money, but orally.”

Revlon's claim that Pantry Pride and Drexel failed to disclose that at least $200 million of the $750 million offering was for Drexel's needs was an attempt to highlight the Drexel daisy chain: Drexel raises money for one client, such as Nortek, which then buys the Pantry Pride offering, and Pantry Pride then buys the securities of other clients, and so forth. If the issuer understands at the time of his offering that he will pay the piper by buying other junk bonds, this ought to be disclosed in the prospectus. To Revlon's allegation, Perelman's response was simply that after getting the money he had decided to invest some of the proceeds from the offering—about $350 million, in fact—in other Drexel-underwritten junk bonds, in order to make up his carrying cost, of about 14.5 percent.

According to Gittis, they had told many investment-banking firms that they were in the market for junk bonds, but only Drexel had available the quantity that they wanted. “We started hearing that others were trying to buy them from Drexel, to sell to us.” Gittis also points out that they brought in an “independent consultant” to recommend to them which bonds to buy.

That consultant was Mark Shenkman, one of Milken's first recruits into this market. Shenkman had recently left his job at First Investors and was about to start Shenkman Capital Management—in which one of Drexel's managing directors, the London-based Albert Fuss, would own 24 percent. Not surprisingly, Shenkman recommended Drexel bonds—original issues for other deals, he says, though he declines to name them. “We talked to Merrill Lynch and Salomon,” Shenkman said, “but they didn't have the size. I told them we needed bonds in quantities of ten million dollars, fifteen million, twenty million. They—Salomon, for example—wanted to sell us oil paper [debt issued by oil companies], and we didn't want that.”

Shenkman said Perelman and Gittis wanted new issues, as opposed to bonds in the secondary market, because the new issues would have greater liquidity. Pantry Pride bought ten to twelve different issues, with interest rates close to that on Pantry Pride's bonds, in blocks of roughly $15–20 million (bigger and therefore riskier than Shenkman recommended). These were sold when the Revlon deal went through.

Pantry Pride had filed with the SEC for only $350 million, back in June. But after Perelman and Gittis went on their road show, also in June, visiting ten cities in as many days, there was much greater
demand. “Ronnie was in Paris, and Milken kept calling me and saying he could sell four hundred fifty million dollars, then five hundred fifty million, then six hundred fifty million,” Gittis recalled, echoing Pappito. “Finally, at seven hundred fifty million, we decided to stop.”

By 1985, it was increasingly more usual than not for Drexel clients to take down much more than what they initially filed for—and, by deduction, much more than they had thought they needed. Shenkman asserted, “Drexel, more than anybody else, always files for less than they think they're going to do. It's a trick of the trade. First, it shows the company how great they are. And, second, the buyers think the company must be in really great shape, to have so many more orders.”

Shenkman added that, as a buyer, he does not like it when an issue doubles in size over its filing figure. “Then there are no new buyers afterward, if you want to get out. And the fact that it can double doesn't mean that the deal is great—it's just because there is so much money burning holes in people's pockets.”

By mid-September, all of Revlon's claims in the federal litigation had failed (and the locus of significant court action in this battle would move to the Delaware state courts). Revlon's lawyers were unable to find any evidence that prospective bond buyers had been told the target was Revlon. Despite the fact that Pantry Pride in discovery produced documents that showed they were analyzing the Revlon acquisition—code-named Nicole, for Donald Drapkin's eighteen-month-old—from at least April, and that in late June there was a memo on the Nicole deal that stated, “Purchase price, $47.50 per share,” the district court judge found credible Pantry Pride's position that no decision had been made on Revlon until early August. On the alleged margin violations, the court essentially deferred to the Federal Reserve, which would in fact take some action some months later—when the Pantry Pride–Revlon drama was history.

Another allegation which Revlon made in its complaint, that Pantry Pride and Drexel had selectively tipped certain arbitrageurs before the offer became public, so as to move large amounts of the company's stock into the hands of those arbs—who would then “warehouse” it for them—was also never proven. In the last five trading days before the Pantry Pride offer, an average of 1,258,800 shares of Revlon common stock per day traded hands, as compared
to 283,760 per day in the preceding five trading days. As Wachtell's Brownstein said, “The whole shareholder base of the company had changed before anything had happened publicly.”

R
EVLON
'
S ADVISERS
, however, never banked on the federal litigation to defeat Perelman. Nor did they view the poison pill, an anti-takeover device instituted just before Pantry Pride first announced its hostile tender, as more than a buyer of time. It was with their major corporate maneuver that they expected to stop Pantry Pride in its tracks: an offer to exchange ten million common shares for a package of notes and preferred stock valued at $57.50, thus exchanging about one quarter of the company's equity for debt.

After the buyback was announced on August 26, Bergerac reportedly summoned a group of company executives into the large conference room opposite his office on the thirty-ninth floor of the General Motors Building and, gesturing to a sword that hung on the wall, according to a member of the Pantry Pride team, declared jubilantly, “We have just cut off Perelman's balls and nailed them to the wall.”

This battle was laced with tales of such machismo. Perelman recalled that, just prior to Revlon's announcing the buyback, Rifkind had set up a meeting between him, Bergerac and Liman in Rifkind's office. “They saw the meeting as my looking for a graceful way to exit. I saw it as their looking for a graceful way to go along. I'll never forget it. Bergerac looked at me and said, ‘I am not afraid of this. I am a big-game hunter. I sit there and a tiger charges me and when it gets to ten feet from me I shoot it between the eyes.'