Shortly after Western Union shareholders roundly rejected a complex plan last Friday to refinance the company's massive debt, a hitherto little-known investment partnership called Pacific Asset Holdings appeared on the scene, bringing with it an offer to provide $250 million in financing.
In exchange, Pacific Asset asked for a controlling interest in Western Union for itself and its partner in the venture, MDC Holdings, a real estate developer based in Denver.
The likely upshot of this deal--should it survive passage through a maze of approvals by regulators, creditors and shareholders--would be to combine publicly held Western Union and privately held Pacific Asset Holdings into a single public company embracing Western Union's existing telecommunications and consumer services and Pacific Asset Holdings' financial services operations. Western Union's financial services are limited now to transfering funds through money orders, one of its few remaining profitable businesses.
In the combination, Pacific Asset Holdings would disappear and Western Union would become, in effect, a publicly held merchant bank, making loans and investing in other companies, which is presently the main business of Pacific Asset.
No other details of the proposed Western Union-Pacific Asset combination have been revealed.
Nor have the parties made public any plan to sell such assets as Western Union's voice- and data-transmission networks--operations that have been losing money in the newly competitive long-distance telecommunications market.
Were they to be sold, the rapidly consolidating field of long-distance companies would lose yet another potentially major player.
Western Union last turned a profit in 1982, owes creditors $321 million and last year lost $367.2 million on revenue of $1.08 billion.
The venerable telecommunications firm's would-be rescuer, Pacific Asset Holdings, has been in existence less than nine months. In that time, however, Pacific Asset has developed a capacity to finance acquisitions and investments "considerably in excess" of $1 billion, according to a spokesman for the firm. Nearly a third of the original capital reportedly came from the man who put together the Beverly Hills-based partnership, Gary Winnick, 38.
So far Pacific Asset is known to have made major investments in R. H. Macy & Co. and Beatrice Cos. Last month, it concluded one of the first deals it undertook, helping the management and executives of Republic Health to take the Dallas-based health-management company private, providing $200 million in financing.
Until last December, Winnick was a senior vice president at the investment house of Drexel Burnham Lambert, specializing in high-yielding "junk" bonds at the firm's Los Angeles office. A New Yorker, Winnick began his career in 1972 as a sales trainee with Drexel Burnham & Co. He came to California as a result of its merger in 1977 with Lambert Brussels Witter.
A number of Winnick's Drexel associates have invested, as silent partners, in Pacific Asset Holdings. But it is Winnick, the group's managing general partner, who is "calling the shots," according to the spokesman, who declined to be otherwise identified. "Gary is very much in charge," he said, "but, as you would expect, he certainly talks to his partners."
The limited partners who have contributed unspecified amounts of investment capital are said to include two of the Bass brothers of Fort Worth. Sid, 44, is known to be an investor. He and Lee Bass, 30, generally are the prime movers in stock deals. The four brothers reportedly have a combined worth exceeding $3 billion.
Other limited partners include former Bass associate Richard E. Rainwater, who now heads his own investment firm; Michael Milken, a Drexel Burnham partner who heads the "junk" bond department where Winnick worked; Milken's brother Lowell, who works in the same department, and an unspecified number of other Drexel employees.
Drexel also is serving as Western Union's investment banker. As such, it has been trying to put together a financial package palatable to both shareholders and creditors of the venerable company. However, sensing impending doom for the complex restructuring proposal that Drexel had devised for shareholders to consider at last Friday's special meeting, Drexel turned to publicly held MDC Holding in search of an alternative. MDC, a developer of residential housing and packager of real estate investments, had worked with Drexel on other financing and also was familiar with Winnick's new venture.
It was MDC and not Drexel, sources close to the negotiations insist, that approached Pacific Asset Holdings. "Nobody at Drexel went to Pacific Asset," said one Drexel source.
MDC representatives familiar with Winnick's new investment venture approached him, and virtually round-the-clock negotiations ensued. They culminated late last Friday in Western Union's announcement that a letter of intent had been signed between the three parties.
"The letter contemplates a business combination between Pacific and Western Union involving a $250-million investment by the group in exchange for senior secured debentures, preferred stock and common stock," the brief announcement stated.
It then listed a number of conditions: "Negotiation of a satisfactory settlement with the company's banks, consummation of new exchange offers for outstanding debt and preferred stock of the company and its Western Union Telegraph Co. subsidiary, negotiation and execution of a definitive agreement, receipt of certain regulatory approvals, receipt of an investment banker's opinion that the transaction is fair from a financial point of view, and authorization of shareholders of additional common and preferred shares, and approval of the transaction by shareholders."
The condition that an outside investment banker assess the offer was insisted upon by Drexel because of the private involvement of some of its employees in Pacific Asset Holdings, according to Drexel sources.
But the key to meeting those conditions may hinge on reconciling the differing financial positions of Western Union's 31-bank syndicate, principal holder of its debt, and several groups of major preferred stock and bondholders, which includes Prudential Insurance Co. and Bear, Stearns & Co. These holders balked at the restructuring presented to them on Friday, calculating that it was overly favorable to the banks, which now occupy a less favorable position in case Western Union is forced to liquidate.
"The bankers are very angry," said one insider. "They thought the company should pursue the debt-restructuring plan. But the Pru and other major holders simply said no."
Details of what Western Union creditors and shareholders would get out of the proposed combination with Pacific are still being developed, this source said. But, he added, the final package will somehow have to offer "a substantial diminution of the debt to get it in line with the cash flow of the company and what it can carry, and people will gain large equity positions for participating. . . .
"Bondholders, banks and preferred stockholders will get less debt but more equity that over time can appreciate, leaving them better off," he said.