New Owners Turn Around ‘Hopeless’ Operations : Cashing In on Corporate Castoffs

Bumble Bee Seafoods. Pacific Stereo. Talon Zipper. Weirton Steel.

Some call them the newly independent companies. To others, they are simply corporate castoffs.

Whatever you call them, their numbers are burgeoning as more and more big companies restructure themselves by shedding assets or spinning off subsidiaries that, in management lingo, “no longer fit corporate objectives.”

Typically, the newly independent companies have limited growth prospects or are in industries thought to be troubled. Many have been shopped around to other companies and drawn little interest.

There are other reasons for the divestiture trend. Ironically, the current wave of mergers is one such reason, since many acquirers sell off pieces of their prey to help pay for the acquisition. And in this age of deconglomeration, some pieces are sold because they are in businesses that are unrelated to the parent.

In most cases, executives of the former subsidiaries--with the help of friendly “leveraged-buyout” artists--pick up the pieces. And despite high levels of debt, the new owners--with some glaring exceptions--have been able to make a go of operations their former corporate parents considered hopeless.

“I can’t think of a single deal where you didn’t see a perceptible improvement in efficiency,” says James Burke, managing director of Merrill Lynch Capital Partners, a packager of leveraged buyouts in which the acquisition target’s assets and cash flow provide backing for loans that finance the purchase.

In some cases, the newly independent companies have done so well that they have been able to sell shares to the public. These include Converse Shoe Co., formerly a unit of Allied Corp., and Gibson Greeting Cards, once part of the sprawling RCA conglomerate.

Merrill Lynch estimates that more than 200 companies have won their independence in the past two years, including 40 companies valued at more than $25 million. Investment bankers say the pace is quickening.

Rampant Entrepreneurship

Burke and other boosters of the newly independent companies credit rampant entrepreneurship for the turnarounds.

“The people who are managing these companies have often put a significant portion of their net worth at risk,” explains Burke. “Their jobs are also at risk. That tends to bring out the best in people.”

Skeptics aren’t convinced. They note that the trend is relatively new and that few of the new independents have had to go through a recession or a period of sustained high interest rates that would test their ability to handle heavy debt loads.

“Leverage is great when things go well, but murder when they don’t,” notes Charles Whiteman, who was brought in as chief executive officer to dismantle Greenwich, Conn.-based Thatcher Glass Corp. after it filed for Chapter 11 proceedings under the federal bankruptcy code.

Thatcher sought court protection from its creditors in December, 1984, three years after Dart & Kraft Inc. sold it for $143 million to a group headed by Thatcher’s management and investment banker Dominick & Dominick.

Hurt by a downturn in the market for glass beverage containers and straining under the weight of $136 million of debt (compared to just $7 million in equity), Thatcher’s case represents the most spectacular failure of a newly independent company.

Dominick & Dominick didn’t return calls seeking comment.

Even though Dart & Kraft unloaded Thatcher three years before its demise, the food and consumer products concern was stuck holding $35 million in unsecured debt. A Dart & Kraft spokesman says the company has fully reserved for the bad debt.

But most of the new independents have fared better than Thatcher Glass. Consider Bumble Bee Seafoods, the nation’s third largest tuna packer after H. J. Heinz’s StarKist and Ralston Purina’s Chicken of the Sea.

Bumble Bee’s management and investment groups put together by Bank of Boston, First Boston Corp. and Sutro & Co. bought the company from Castle & Cooke earlier this year for $60 million in cash and notes.

A perennial money loser for Castle & Cooke, Bumble Bee is now in the black and plans to expand its Puerto Rico tuna packing plant’s capacity by 40%.

“Being independent of a large parent company gives us the added flexibility to be more responsive to the marketplace,” says Patrick W. Rose, Bumble Bee’s 43-year old president.

Although Rose assumed responsibility for Bumble Bee under Castle & Cooke in 1982, he says the parent was slow to institute changes he was pushing for. In Hawaii, for example, where Castle & Cooke is a major land owner, the company was reluctant to shut down an inefficient tuna-packing plant there because it feared offending local politicians who might then deny needed zoning changes for other Castle & Cooke properties.

Castle & Cooke also kept operating unprofitable tuna boats because scrapping them would have required a write-off of assets on the company’s already anemic balance sheet.

Rose says that being his own boss has also freed him to institute more liberal incentive pay plans to motivate subordinates. Independence has also let him cut headquarters staff to 90 from 115, largely because “we are no longer forever providing, presenting and justifying information to our parent.”

Moreover, Bumble Bee’s key managers--now owners--are working harder these days. “There’s a hell of a lot more at stake,” says Rose. “The days and hours that are logged as an owner are understandably greater than those logged as an employee,” he says.

Other newly independent companies survive because employees are willing to take deep pay cuts. That’s the situation at Weirton Steel Corp. in West Virginia, sold to its employees by parent National Steel Co. in 1983.

Agreed to Pay Cut

Faced with the prospect of permanent shutdown, Weirton’s employees agreed to a 20% pay cut and a six-year wage freeze in order to save the mill and their jobs. The result: Weirton has been solidly profitable for the past two years, posting net income in the first nine months of 1985 of $48.6 million.

Zipper maker Talon Inc. is another success story. As a subsidiary of conglomerate Textron Inc. during the 1970s, the once-dominant company saw its market share halved to about 30% after Japanese rival YKK built a highly efficient U.S. plant and slashed prices.

“Textron couldn’t respond quickly enough,” says Steven Zambito, Talon’s vice president for sales. “The garment industry is very hands-on. You have to be very nimble.”

Industry veteran Sidney Merians bought the company in 1981 and slashed costs--and prices--by closing inefficient factories and reducing corporate overhead. Talon has since regained about 10 share points and earlier this year acquired rival zipper maker American Robin Inc.

Garments Made Abroad

Still, Textron was probably right to dispose of Talon. Even though Talon’s market share in the United States is rising, the overall American zipper industry is slowly shrinking in size as more garments are made abroad.

Pacific Stereo is another newly independent company that has turned around since it was sold by its corporate parent in 1983.

Pacific was a consistent money loser for CBS Inc., which once broadly defined itself as an entertainment business and bought such disparate companies as the New York Yankees and Steinway Piano.

As an independent company, it boosted advertising and began emphasizing such other electronic products as television sets and video cassette recorders. Although the company declined comment, industry sources say Pacific is now posting a profit. The chain also has expanded to 88 stores from 79 when it was sold.