Why Should White Guys Have All the Fun? (22 page)

“He was very, very aggressive, he really wanted the deal very badly and he did everything that he could to try to make it work,” Oxendine recalls. “I mean, I had to go to a convention in New Orleans—he followed me to the convention to push his deal. I don’t know if he had any business in New Orleans, but he certainly was there.”

Oxendine was eating breakfast inside the restaurant of his hotel with a business associate, when who should walk in and start striding toward their table but Reginald Lewis.

“How’s my proposal going?” Lewis asked. “Is there anything I can do?”

“Lewis was very articulate, very persistent, and very tenacious,” Oxendine remembers.

On the day Oxendine was to go before his board, Lewis traveled down to Washington from Manhattan. He insisted that he be physically
present in the conference room while the board met, against the wishes of Oxendine who requested that Lewis wait outside the room.

As he reviewed each proposal for the board, Oxendine generally had a few supportive words to say. But when he went over Lewis’s loan application, Oxendine was silent. The board picked up on Oxendine’s silence and voted to reject Lewis’s business plan, with only Savage voting in favor. Lewis couldn’t believe what had happened. Savage’s help and Lewis’s lobbying had been for naught. In protest, Savage resigned from Broadcast Capital’s board the same day and he and a smoldering Lewis turned on their heels and headed north for New York.

Lewis continued to plumb his contacts to arrange for financing. His next stop was CVC Capital, a Manhattan MESBIC that specialized in lending money to minorities buying broadcast properties. It was run by Joerg Klebe.

“He was a very tough negotiator,” Klebe says of Lewis. “He wanted things that we weren’t prepared to give to him. We wanted personal guarantees and he was very reluctant to give that to us. But it didn’t seem that he had any other source of financing, so we pretty much got what we wanted.”

Although Klebe harbored some of the same reservations Oxendine had, he pushed the deal through. “Reg wasn’t really an owner-operator, and that kind of deal isn’t going to fly unless you’re an owner-operator,” Klebe says. “I think it was the first deal that Reg really did. I think the deal was more important than the operational side of the thing. Reggie was at no point prepared to manage and operate this station.”

CVC agreed to make Lewis a loan for $150,000, provided that it was secured by the three apartment buildings Lewis and his wife owned on 10th Avenue and some Warner Communications stock Lewis owned.

Lewis also succeeded in tapping a Puerto Rican bank, Banco Popular, for a loan of $275,000. The loan was secured by a personal guarantee from Lewis and by his vacation home at Springy Banks. “I promise that you’ll get every penny back,” Lewis told the bank.

With his financing in place, Lewis went ahead with the purchase of the St. Thomas FM station in July 1982. A portion of the financing was used for the station’s initial working capital.

The purchase of the St. Croix station did not push through, so the St. Thomas station became the first piece of what Lewis optimistically
christened the Caribbean Basin Broadcasting network. The station was renamed WSTT-FM. Lewis appointed a board of directors for the company that included a number of friends, including Ricardo Olivarez, James Obi, a senior executive at Equitable Life Insurance, and an architect from St. Thomas, Robert De Jongh. Meetings were held at the elegant Harvard Club in Manhattan. Unfortunately for Lewis, things began to go awry with his broadcast property almost immediately.

The station operated out of a rat-infested trailer located in the mountainous area of the island, making its signal difficult for most listeners to receive. Its equipment was ramshackle at best and often on the blink. The station spent more time off the air than on, and building a profitable advertising base proved more difficult than the optimistic Lewis had predicted.

WSTT had a husband and wife team that acted as disc jockeys and sales staff. It soon became clear they weren’t up to the task.

Lewis put his brother, Jean, in charge. Fugett actually moved to St. Thomas and at one point became an on-air personality. However, he was put in the middle of an impossible situation where revenue did not cover expenses. The station became a financial black hole for Lewis.

In July 1986, Lewis cut his losses and sold WSTT, putting an end to his dream for a Caribbean radio network. However, he would continue to explore the possibility of purchasing other radio stations.

Phyllis Schless, an investment banker with Bear, Stearns & Co., represented a client trying to unload six small stations experiencing financial difficulties. In early 1983, Schless was looking for a potential purchaser of the properties. Klebe put her in touch with Lewis, who was very interested in buying the stations, located in Florida, Ohio, and New York. Lewis moved expeditiously to solidify a deal.

“I was impressed with the fact that he seemed to be very knowledgeable, seemed to know what he was doing, and what he could do,” Schless says. “I thought he would be a very good candidate to acquire these stations.”

The transaction was worth about $3 million and Lewis had to come up with $1.5 million. However, the management company owning the stations was not particularly impressed with Lewis. It decided that
Lewis wasn’t good for the remaining $1.5 million needed to purchase the stations, nor was he capable of successfully managing the stations if he ever obtained them. The deal collapsed in July 1983.

The ignominy of Caribbean Basin Broadcasting and Lewis’s failed attempt to buy more radio stations would have discouraged most individuals, but just served to further whet Lewis’s desire to buy and run a successful business.

In August 1983, Schless got a phone call from Lewis in her office. “I have an interesting little situation,” he told Schless. “I’d like you to come over. Why don’t we kick it around?”

Schless came by to see Lewis at 99 Wall Street. His “interesting little situation” was a company by the name of McCall Pattern Company, a 113-year-old maker of home sewing patterns with revenues of $51.9 million. Lewis had just tried and failed to pull off an acquisition valued at $3 million. His reaction was to go after another acquisition more than seven times bigger.

       
Drexel, the Bear, and the $18 Million Race: Closing the McCall Pattern Deal

The year that Reginald Lewis went after McCall, 1983, it seemed that every day brought news of yet another corporate takeover or leveraged buyout being consummated. The huge conglomerates built up in the 1950s and 1960s were now being dismantled and operations that did not fit in with a company’s business emphasis were being unceremoniously sold off to the highest bidder.

Exciting things were happening on Wall Street and Lewis was itching to get into the game.

One day, Lewis chanced upon a
Fortune
magazine article that focused on The McCall Pattern Company, a designer, manufacturer, and marketer of home sewing patterns. McCall’s parent company was Norton Simon Industries, a multibillion dollar conglomerate with its hands in everything from Avis rental cars to Hunt Wesson food products.

In 1983, Norton Simon was acquired in a hostile takeover by Esmark, Inc., another conglomerate that owned among other companies, Swift, a meat and poultry producer, and Playtex, a maker of women’s undergarments. Esmark head Don Kelly was quoted in the
Fortune
article as saying that McCall was one of several Norton Simon companies that didn’t mesh with Esmark’s long-range plans. When Lewis read that, his eyes lit up.

Lewis had represented Norton Simon in 1973 when it sold McCall’s magazine to Capital Cities-ABC. From the due diligence he’d done in that transaction, Lewis had learned quite a bit about the pattern company’s operations. Intrigued by the
Fortune
piece, he put in a call to Tom Lamia. Lamia had served as Lewis’s lawyer in the abortive attempt six years earlier to buy Almet, the California furniture firm.

Lewis told Lamia he was giving some thought to taking a run at McCall and solicited Lamia’s suggestions on how to get the ball rolling. Lewis liked some things about McCall that repelled other potential suitors. For one thing, fewer women were staying at home to sew and the home-sewing market had been declining at a rate of roughly 9 percent each year since 1976, when 171 million home sewing patterns were sold. And McCall, a wholly-owned subsidiary of Norton Simon, had no long-range expansion plans.

Consequently, Lewis could practically envision a giant “Discount” sign hanging around McCall. He would buy the firm on the cheap, light a fire under management, reduce expenses, and increase profitability. Then he’d sell it after a few years. McCall would be Lewis’s toehold the realm of high finance.

On July 29, 1983, Lewis began his campaign in earnest. He created TLC Pattern, Inc. for the purpose of taking over McCall. He also created a Delaware-based holding company, TLC Group, Inc.

In June of 1983, Dave Mahoney CEO of Norton Simon, announced a proposed management buyout of Norton Simon, Inc. My law firm had done some work for NSI in the past and had an excellent relationship with the company. My interest was not merely in the potential effect on my law practice, but also in whether one of the businesses under the NSI umbrella might be for sale if the buyout went through. I pulled out several years’ worth of NSI annual reports and their 10k (an SEC document with detailed financial information on a corporation) and started poring over the various businesses. There were a number of potential acquisition possibilities
.

Don Kelly of Esmark announced his interest in NSI and put in a bid superior to Dave Mahoney’s. Anderson Clayton and KKR were
also nosing around, I studied Don’s bid and concluded that it was a great deal for Don and for Esmark. The jewel of NSI was Hunt Wesson, but there were other valuable properties like Avis and Somerset Imports, which had Johnny Walker scotch, Glass Containers Co., and lots more. There was also $40 million to $50 million of holding company overhead that could be eliminated and good cash on the balance sheet. There was plenty of debt, but much of it was off-balance-sheet and related to Avis. Don Kelly was masterful in his approach, and in July he took NSI for Esmark
.

I remember calling Cam Trowbridge, longtime general counsel of NSI and a friend and a client, shortly after the deal was announced, We had lunch a few days later at the Boardroom, a luncheon club on Park Avenue, a favorite NSI watering hole. Cam, always pleasant, thanked me for offering my help during the hectic past few weeks and said that things had moved so fast that he hadn’t had an opportunity to get me involved. I said I’d imagined as much and fully understood, I then made the faux pas of remarking that “I thought Esmark was not paying enough.”

Cam gave me a benign look that suggested I was nuts. “Reg, they are paying a billion dollars. Before this deal, the market cap was about $600 million.” I let the matter drop with something like, “Well, I always felt NSI was a great company even at that price.”

We then turned to other topics. I told Cam that I needed a change from practicing law and was interested in buyouts. I asked him which management teams within NSI did he especially like, and so forth. Around dessert, I mentioned McCall Pattern Co. and sought his views about its management. Cam gave them high marks across the board but said the market for home sewing was going down and not likely to improve
.

I asked him who I should call if a group I represented might be interested in taking a crack at buying it. Cam said the Esmark people would, of course, call the shots. But Bob Walter, who was Dave Mahoney’s finance man, was staying around through the transition and would be a good place to start. Cam knew that I knew Bob and suggested I give Bob a call, and he said he would let Bob know of my interest. We parted in a warm and friendly manner, as usual
.

I called Bob Walter that afternoon. Bob took the call right away and said that Cam had just called and mentioned my possible
interest in McCall’s. Bob said Esmark would probably want to sell it, and he would pass along our group’s interest to the Esmark people. He also said McCall would report to Joel Smilow, who ran International Playtex for Esmark. Bob said he would get back to me
.

A few weeks passed and I’d heard nothing. I called Bob a few times, but could not get through. During that two or three weeks, I gathered as much information as I could on McCall. I put together a small summary of financial data and, most important, read everything on Simplicity, which was a direct competitor of McCall’s and a public company controlled by Charles Hurwitz, the Houston investor and deal man
.

The more I looked into Simplicity and McCall, the more I liked the business. It had very high profit margins, value-added products, brand names, and excellent distribution—and it generated significant cash
.

At the same time, I was also working on a deal involving six radio stations. It had been brought to me by Phyllis Schless, who was then at Bear, Stearns. Even though our radio deal didn’t go through, I was very impressed with Phyllis’s approach, which was to try and keep things on track. I showed Phyllis my assessment of the McCall situation, told her of my earlier conversations with Bob Walter, and said I thought it was time to go directly to Esmark. Would she arrange a meeting
?

Phyllis put in a call to Joel Smilow who was the head of Esmark’s Playtex division and responsible for McCall. Yes, they would entertain offers and were willing to meet. Within hours after the meeting had been set up, Bob Walter called and was beautifully candid. He said management was trying to put something together at McCall Pattern but they’d had enough time and that he had let Smilow know of my group’s interest. I asked Bob if he would let the Esmark people know of my prior favorable dealings with NSI. Bob said he would, but not to worry about all that. He wished me luck and said, “Reg, they want to sell it.” I quickly asked if he knew of any other interest in McCall, and Bob said, “I don’t know of any. Most people don’t like its prospects.”