Buy the Core, Sell the Pieces, Erase the Debt

"Perelman’s plan, at least at the start, was to do here what he had done on a much smaller scale in his earlier acquisitions, with Technicolor perhaps the best example: acquire the company with virtually all debt and then sell off the pieces he didn’t want, using the proceeds from their sales to pay down the debt and getting the remaining business virtually for free. Perelman made this plan explicit in his tender-offer document, stating that Pantry Pride believed it might be able to realize up to $1.9 billion—the total of his offer, at the starting $47.50 per-share price—from the sale of substantially all the assets of Revlon, excepting the beauty business. And it was, obviously, necessary to firm up these divestiture prices as much as possible, for Perelman—and, more to the point, Drexel—to know just how much they could afford to bid."

"Perelman chose companies that were strong cash-flow generators and that had problem assets that could be sold off—quickly paying down much of the high-interest debt—leaving the pared-down, profitable core business."

"The deal closed in mid-November, and within two weeks there were reports that Revlon was going to sell its Norcliff Thayer health products and Reheis special chemical businesses to the Beecham Group of Britain for about $400 million, and its ethical-drug division to Rorer for over $600 million. Both deals were announced by the first week of December. Some onlookers were puzzled by the speed with which the Rorer deal, particularly, was done, and by the absence of an auction. Howard Gittis, however, explained, “They had an exclusive. Well, almost an exclusive. We said, ‘If we get the company, and you commit to us now, then we won’t shop the deal.’ ” This agreement should arguably have been disclosed in SEC filings if it was indeed made during the course of the deal. When later asked to comment, Gittis denied that anyone had been given an exclusive. “At that point [in December], the money was just sitting there in the bank, but they couldn’t call [buy back] the bonds for six months,” this buyer said. “So it was completely safe now, good for the S&Ls, and Milken wanted the bonds back.” That suited him, he added, because he wanted to get his money out. And he was eager to be a team player so that Milken would come back to him in the next deal. This is the same kind of movement of the bonds—out of the hands of a high-rolling buyer into those of the more reticent thrifts, insurance companies and pension funds—that took place in Triangle-National Can. Here the high-risk, private buyers were freed to go on to the next megadeal, which in December was GAF-Union Carbide; while the more risk-averse but still hungry players could be fed."

"“Coastal was a big company, with significant assets. It wasn’t so leveraged. Triangle was a company with a fifty-million-dollar net worth. This was the first of the superleveraged buyouts to go through.” The acquisition of National Can cost $465 million. Triangle contributed $70 million as equity, to which another $30 million was added through its sale (underwritten by Drexel) of preferred stock; the debt portion layered above that consisted of $365 million raised with junk bonds by Drexel. And after the deal closed, Drexel raised another $200 million from junk bonds, in order to pay down National Can’s preexisting bank debt. So the total debt of National Can, once the $200 million was added to the preceding $365 million, was $565 million. Five hundred sixty-five million dollars was a towering debt load for $100 million of equity to carry. And Peltz pointed out that even the $70 million from Triangle, at the equity base, came from its earlier offering of junk. “We put the hundred million in the sub [the subsidiary, Triangle Acquisition Corporation, formed for the buyout]. But it was all debt! We called it equity here [at Triangle Acquisition Corporation], but it was debt over here [at Triangle]. Do you understand the leverage in this deal? It was eleven to one!"