Why Should White Guys Have All the Fun? (32 page)

“You ought to do it, as contrasted with being out there alone,” Lewis said during one meeting, using a tack aimed at Christophe’s sense of logic. “You will immediately have a foundation and we can build the upside. You bring a tremendous strength to what I am doing and I’m very excited about the prospects. I’ve reached out to several key operatives and it’s unanimous—everybody would be delighted. I can commit to you now. You do not have to commit to me until later.”

Christophe joined TLC Group on June 18, 1987, with the title of senior vice president, a six-figure salary, and a guaranteed bonus. Plus, he was to have an equity stake in each acquisition of TLC Group—at the discretion of the chairman.

During the initial phases of the Beatrice acquisition, Christophe was Lewis’s right hand man, much the same role Tom Lamia had played during the purchase of McCall. Christophe had replaced Lamia because Lamia had failed to come through when Lewis needed him. In addition to being talented, anyone who was a key Lewis operative was periodically subjected to loyalty litmus tests. Anyone who flunked ran a serious risk of being placed “in the doghouse” or in “deep freeze,” two favorite Lewis terms for people he was on the outs with. Extreme cryogenics had been applied to Lewis’s relationship with Tom Lamia when the wheels first started turning on the Beatrice deal.

In the early part of June 1987, Lewis had telephoned Lamia in Washington and asked if Lamia could be in Chicago the next day. Lamia declined, citing scheduled meetings with clients. “He always called me the night before and was always pissed when I couldn’t be somewhere he
wanted,” Lamia says. About a week later, Lewis called Lamia again, asking him to be in Beverly Hills the next day for talks with Drexel. Lamia begged off again because of previous commitments. “I think he was really upset at that point,” Lamia remembers. “I was not a team player or something.”

Lewis made a mental note to himself that Lamia would watch the Beatrice acquisition unfold from the sidelines. Lamia was benched, relegated to the most frigid of deep freezes. Lamia’s knowledge of Beatrice would have to come from a newspaper or from television, because he was now persona non grata. Period. In place of Lamia, Lewis chose his former law firm, Paul, Weiss, to provide him with legal counsel.

Whereas Lamia had twice flunked Lewis’s loyalty tests, another member of Lewis’s acquisition team from the McCall days, Phyllis Schless, passed with flying colors. Around the same time that Lamia got his second call from Lewis, Schless was in Cape Cod on the second day of a much-needed vacation when the telephone rang at 8 in the morning. It was Lewis. “I didn’t mean to disturb you, but I need you down here by one o’clock for a meeting,” Lewis intoned. Schless cut short her vacation and was on the next flight to Manhattan. “The short notice is just part of the game,” she says philosophically. “Things are moving very quickly and you need stuff done in those transactions.”

On the 24th of June, Salomon Bros. vice president Graham Cunningham picked up the telephone and called the offices of TLC Group at 99 Wall Street. Salomon was handling the sale of Beatrice for KKR. “We have received from your group an offer to buy Beatrice International for $950 million,” Cunningham said. “We have a small problem—nobody knows who the hell you are!”

Cunningham came over half an hour later to meet with Lewis and Christophe. Cunningham was brought up to speed on the TLC Group and what it had accomplished: specifically, Lewis’s acquisition and sale of McCall. The 90-to-1
New York Times
article was already proving to be worth its weight in gold: Lewis used it to help further Cunningham’s education.

I went to the office and had the Beatrice material duplicated. I called Carl Brody, (a former Norton Simon executive who Lewis called the “best tax man in New York”) and asked for some preliminary work on taxes. John Sheehy came down to the office and we
kicked around a bunch of his ideas. Bids were due shortly, actually within days. And there was to be no on-site due diligence. I reasoned we had to analyze and bid as if it were a tender offer. This was an important insight
.

We called Bankers Trust and Pete Offerman said, “Reg, for this one you have to talk to my boss directly,” and he set up a meeting. Bankers Trust Company was working with another bidder—for $500,000 they would set up another team. No thanks. We talked to Equitable, but with the wrong people and got pablum. No matter. The card I intended to play was Milken, but not right away. John kept bugging me, “Reg, have you called Mike?”

“No, John, not yet. When? Not now. Let’s do the work first, TLC style. Do the work.” It was a good message to my troops. In July 1987, we bid $950 million. I had a feeling we were high bidder. Why? Because Dick Beattie had said, “Reg, you’re low, way low.” At 19 times very suspect earnings, you could not be “way low.” Anyway, now the question was not just more work, but just as important, credibility. My troops asked, “How are we going to get this done?” Get what done, the bid or close the deal? The two things were different. For the bid, we needed to show the capacity to raise $1 billion. To close, we would need less—one half to one third of that amount, if we stuck to our strategy
.

Now for the first problem, which was an easy one. We needed credibility and no person has more credibility than Mike Milken
.

Lewis had spoken to Milken on the day the sale of McCall had been announced in the press.

I had actually engineered the call to Milken a little bit. I think I called Bruce Brown—then a key research guy at Drexel and close to Mike—after the deal had been announced in the newspaper. I can’t remember whether that was before or after the 90-to-1 story in the
New York Times.
I had made it my business to stay in touch with Bruce. He congratulated me: “Reg, great deal on McCall. Wow, run it through again—how much did you make?” I played it real warm, but I was also a little matter of fact. “Yes, Bruce, the returns are handsome, a lot of effort went into producing them, a lot of work, believe me.”

“I know, Reg, I know. Michael was just saying the same thing at our morning meeting.” I said to Bruce, “By the way, say hello to Michael.” He said, “Say hello to him yourself,” and he went off the line for a second and yelled out at the trading floor, “Mike, I’ve got Reg Lewis on line three.” The word came back, “See if you can get him to hold for a minute.” Bruce came back on the line and said, “If you could hold on for a minute, Michael wants to say hi.” And I said, “Sure.”

This call was critical at this point because TLC Group had decided to go for Beatrice International, and my people were bugging me to death about, “Aren’t you going to go out and see Milken?” I wanted to wait and get him to invite me out without knowing about the Beatrice International deal. My theory on that was, let’s let the full glory of the McCall pop sink in before I hit him with Beatrice International
.

So Michael came on the phone in his usual style and said, “Great job, Reg—could you take me through this again? How much did you put up and what are you getting?” And I took him through it quickly
.

“I bought McCall Pattern in February, 1984 for twenty-two five—nineteen million from the bank, two point five from the seller, and I put up a million dollars in equity. Recapped in December 1986 for nineteen and got sixty-five million on the sale. And we’re keeping the real estate, which is probably worth another six to ten. So we make it to be about ninety million all on a million.”

“That’s great, Reg, just great. And how much do you own?”

“Eighty-one point seven percent.”

“And who’s the buyer?”

“A British public company with sound plans for McCall.”

“Great. When will it close?”

“It’s closed, Michael.”

“Great! Well Reg, you’ve done one helluva job. Do you think you could come out and visit with me?”

“Well, Mike, I don’t have anything pending right now.”

“That doesn’t matter. Why don’t you just come out. Let’s talk. Maybe we’ll figure out how to give you a bigger bat to swing with.”

“Well, that’s what I was interested in, Michael.”

“Well, you made $75 million.” He then talked a little bit about taxes
.

I said, “Well Mike, you’ve got to pay your taxes.”

“Did you consider a tax-free deal?”

“I wanted the cash.”

“Well, maybe we can figure out the next time how to hold on to a little more of your wealth. But I think, Reg, that it’s now time for you to get serious. How about Wednesday, 9
A.M.
?”

“Okay, Mike, I’ll be there.”

When I hung up the phone, I said, “Get serious?!” I called my wife, and I said, “Get this, I just talked to Milken. And do you know what he said? When I told him I just made $75 million, he said, ‘Well, Reg, now it’s time to get SERIOUS.’ Can you believe it?—I just made $75 million in cash and he says its time to get serious. Unbelievable—what’s unbelievable is I don’t think he was kidding. Holy shit, this guy is unreal.”

I didn’t know at the time, of course, that in 1987 Mike made $550 million in salary and bonuses
.

I can’t put my finger on exactly when Milken realized what I had done with McCall, but I think it was a series of things. Drexel had said, “One, you’ll never get this deal done (McCall Pattern).” We got the deal done. “Two, you won’t get a sale-leaseback done on that basis.” We got the sale-leaseback done. “Three, the high yield bond market will never accept an issue from McCall.” We got a high yield issue done. “Four, the business is dying—you’ll be lucky if you could hold earnings.” We doubled earnings. Five, we did a recap in December of 1986 that resulted in $19 million on a $1 million common base
.

I think certainly by then, by the time of the recap, Michael was convinced that I was doing something very right. I think he was favorably disposed toward me then, and I think I did a good job of convincing some of the people around him that I was really driving the McCall strategic thrust and that the deal was going to be successful. And Jean Wong and Bruce Brown and Bob Davidow of Drexel were people I stayed in touch with. They sent me a lot of prospectuses of other deals that were getting done and so forth
.

And Jean, in particular—at various internal meetings that Drexel had—would bring up our name and Michael would say, “Yeah, how is the situation doing?” or whatever. That’s the impression I got. But
of course the big change came as we continued to talk throughout that process and I’d send him material and so forth. We had occasional meetings and I told him what we were trying to do and what the result was, and we doubled the earnings from $6 million, $7 million, up to $13 million—$14 million. And he was very, very interested in that. Very intrigued by it
.

And then, of course, the big payday on the sale was the crowning glory, so to speak
.

“Reg was a person with a legal background who understood capital structure and finance and could run a business,” Milken said. “It’s like playing a piano—it sounds one way if you can play with your right hand, but it sounds totally different if you can play with both hands at the same time. Very few people have the ability to play the right side, which is the financial side, and the left side, which is operating those assets. Reg came to the table, with the sale of McCall, proving that he could play the piano with both hands. So I said, ‘Hey Reg, let’s get ready. It’s time to take the show to Broadway.’”

A number of the guys on the Drexel team played instrumental roles in the Beatrice acquisition, but ultimately that’s because of Mike Milken. I was very impressed with the quality of their personalities—Jean Wong, Bruce Brown, Bob Davidow, Joe Hutch. And later on, Leon Black, of course. And Dean Kehler. And then I got to know Drexel Chairman Fred Joseph. One of the things that I learned is that even if there’s one fundamental decision maker, the climate around that decision maker is extremely important. And so I tried to create a good impression on the people surrounding Michael. That’s perfectly natural, because he was going to call the shots
.

I definitely had to stay close to Mike. I am convinced that no one else, within Drexel—including Fred Joseph—would have backed us up in the way that they did in the Beatrice International deal without Milken. It took Michael’s insight to stay the course with us, even if things got tough. And that I’m absolutely convinced of
.

What people really didn’t understand about the deal is that Michael really didn’t commit to a billion dollars, even though that’s what Drexel pledged to do. We got a written commitment because
Henry Kravis (KKR) insisted on it. What Michael really did was he gave us credibility. Kravis wasn’t even going to let us in the auction unless he knew that we had backing
.

Michael tells a great story about this. He was visiting Kravis and Henry said, “Michael, on this Reg Lewis—I know he’s made a lot of money on the McCall deal, but he has no credibility with me on a billion-dollar deal.” And Milken said, “Well Henry, he’s got credibility with me.” I love that story
.

The fact is, if our basic plan on Beatrice International didn’t work, the most Drexel would have had to raise was $500 million. Essentially, the plan was simple. We would bid the entire deal, but between contract and closing we would take advantage of the fact that there had been an auction. Not only for the whole company, but for different pieces of the company. And we would effectuate sales during the period of contract closing, while we had nothing at risk. We would then use those proceeds to reduce our debt, effectively selling assets at a higher multiple than we were buying them. That would enable us to reduce our leverage, making what looked like a $1 billion deal really a $400 million or $500 million deal. Then we would focus on a core group of operations, which we would then refinance and grow
.