Riordan Freeman Proves a Standout in Buyout Arena
Fresh from having accomplished the friendly buyouts of a handful of grocery chains and industrial concerns, the partners at Riordan, Freeman & Spogli found themselves earlier this year fighting for a different kind of business altogether.
The quarry was JWT Group, parent of the giant J. Walter Thompson advertising agency and the Hill & Knowlton public relations firm. JWT was fighting for its life against Martin S. Sorrell, a British raider who had built his empire atop a business that initially specialized in making supermarket carts.
“We spent five days around the clock with the senior management at JWT,” recalled Bradford M. Freeman, one of the founders of the leveraged buyout firm known familiarly as RFS. “They didn’t want Sorrell to win, because he’d been advised by a lot of ex-JWT people.”
In the event, Freeman recalls, “we matched Sorrell’s original bid (of $45.50 a share, or about $460 million), but he was not to be denied.” Sorrell finally won JWT with a bid of $55.50 a share, or $560 million.
Winning JWT would have been a watershed for RFS, which is spending an investment fund of $125 million to make equity investments in management-led buyouts. For one thing, even at the original bid price, JWT would have been nearly twice as big a deal as any the Los Angeles-based firm had done in its brief four years of life.
RFS has become one of the leading Los Angeles practitioners of the thriving business of leveraged buyouts--many involving supermarkets, including Boys Markets. reduced to its essentials, the leveraged buyout is a maneuver in which a company or an operating unit is taken private or acquired from a parent with the use of borrowed money, against which its assets or cash flow are pledged.
Improves Efficiency
Years later, after the unit’s operations are reorganized and its debt is paid down, the business can be taken public again at great profit for the original investors. The risk is that a company can be saddled with so much leveraged buyout debt that it fails before successfully reorganizing.
Like most leveraged buyout specialists, RFS insists that the management of the acquired company or subsidiary put up some of its own money in the enterprise. (RFS often borrows the money for the managers’ own stake.) The theory is that companies work better when their professional managers have a direct financial stake in the business. Executive-suite extravagances disappear; costs are sliced; potentially profitable innovations get a concerned hearing.
RFS also takes an equity stake in the acquired business, using the $125-million fund it raised from outside investors last year. The remaining equity in the business, sometimes the largest share, is held by the investment bank that finances the transaction and often sold off to its own clients. RFS has dealt extensively with Merrill Lynch, Drexel Burnham Lambert and Kidder, Peabody & Co., among other investment bankers.
In the case of Boys Markets, RFS and members of the supermarket chain’s management bought the firm in April, 1986, for about $83 million. Then, last May, Boys made an initial public offering of its stock, which traded first at about $10 a share but is now above $18.
For RFS, the run at J. Walter Thompson was partially a bid for recognition. Since its founding in 1983, the firm has done eight buyouts and five have been in the supermarket business. So RFS risks being identified exclusively as a specialist in grocery stores. “Now we see every supermarket deal there is,” Freeman said.
That’s not necessarily an unalloyed curse. “There are real benefits to specializing,” Freeman says. “You get to know the industry and you get a real cadre of professionals in the business who can help you out.”
That was useful last year when the firm acquired Piggly Wiggly Southern, a Georgia-based chain of markets. RFS was able to shore up the new unit’s shortcomings by throwing into the breach Peter J. Sodini, an experienced supermarket executive who was chief executive of Boys Markets.
Sodini spent about four months as Piggly Wiggly’s interim vice chairman and chief executive. Piggly Wiggly’s current president is a transfer from another RFS unit, Syracuse, N.Y.-based P&C; Foods, a grocery retailer and distributor.
But the other side of the coin, Freeman said, is “the disadvantage of a perceived industry specialty. . . . We don’t see other deals--or we’re afraid we don’t.”
Plenty of small leveraged buyout firms would like to have the problems of RFS, which was founded by Richard J. Riordan, senior partner at the Los Angeles law firm of Riordan & McKinzie, with Freeman and Ronald P. Spogli. Freeman and Spogli had met at Dean Witter Reynolds, where Freeman was a member of the Dean Witter board and managing director of its Los Angeles corporate finance department, and Spogli was head of West Coast mergers and acquisitions.
‘Sounding Board’
Riordan’s main role was to provide seed capital for the fledgling leveraged buyout firm; he contributed much of the RFS partners’ stake of close to 20% in the $125-million offering, as well as a good portion of the pre-fund capital the firm needed. Those familiar with RFS say Riordan still functions as an important sounding board for Freeman, Spogli and the firm’s other associates. “He’s a resource,” says Stephen A. Koffler, the managing director at Merrill Lynch & Co. who handled the firm’s fund offering.
The other two partners were the deal makers. They began in 1983 with the management buyout for $32 million of TriCoast Container, a unit of the Continental Group. The company was sold about a year and a half later at a profit.
The next year, 1984, saw the first in a long line of supermarket buyouts, this one the $40.2-million buyout of A. J. Bayless Markets of Phoenix. RFS contributed $2 million of the $2.5-million equity investment needed to take the chain private (about 40% of the stock had been controlled by the founder’s family).
Bayless set RFS on the course toward concentrating in the grocery business. For in the next three years RFS acquired four more supermarket chains around the country (including a $200-million buyout of Buffalo, N.Y.-based Tops Markets, which closed this summer).
Freeman and Spogli did spend some time on other industries, making a particularly aggressive bid last year for Sun Carriers, which was being spun off from Sun Co. That deal began in mid-1986 when a consultant to RFS alerted Freeman and Spogli that the trucking concern--now the nation’s fifth largest--was to be spun off by Sun. The problem was that Sun’s plans to divest the carrier as a public company had progressed so far that a preliminary prospectus had already been issued and the offering was set for the following week.
“The red herring (the preliminary prospectus) was on the street, with Sun to get $14 to $17 a share on 10 million shares, minus about 8% in costs,” Freeman recalled. “The new-issue market was in the tank,” he added, meaning that there was some reason to doubt that Sun might have received even that high a price. Freeman RFS approached Sun over the weekend just before the offering date with a bid to take over the carrier for $180 million in cash, including an equity stake for 22 management members.
For a while the talks resembled stopping a freight train that had just built up its head of steam; the Sun Co. management blanched at halting a public offering virtually in mid-chug. Finally the deal was struck when Kidder Peabody, RFS’s adviser on the deal, agreed to put up some $80 million of its own capital as a bridge loan so the parent could have a check in hand.
Sun was just the second of the four deals that made 1986 a banner year for RFS, climaxing in an extraordinarily busy Yuletide, when two buyouts converged: those of Webcraft Technologies, a New Jersey specialty printing firm being spun off by Beatrice, and of Piggly Wiggly.
Deals Come Fast
“We closed the deal for Webcraft on Dec. 23 and for Piggly Wiggly Southern on Dec. 24,” says Freeman. Miming a look of exhaustion, he adds: “Everybody was home Christmas Day.”
The pickup in activity last year took RFS by surprise. The firm expected to need at least four or five years to fully commit the $125 million it had raised through Merrill Lynch & Co. in a private placement. Instead, says Freeman, deals have come so fast that after RFS’s deal for Tops only $60 million is left after only a year.
“The volume of deal flow at the end of last year used up a lot,” Freeman said. If the opportunities continue to arise at such a pace, he said, the firm risks being caught without adequate free capital to participate, placing it at a competitive disadvantage. The result: RFS is already starting plans to raise another fund through Merrill Lynch.
Executives who have worked with RFS say the firm stands out among leveraged buyout firms by its partners’ attention to detail. “They had visited almost every store we had,” said Claude Incaudo, the chief executive of P&C;, recalling the spirited bidding when P&C; was sold off by IC Industries in July, 1985.
(Freeman remarks with a smile that he and his partners don’t make any effort to blend into the merchandise when they scout out a target’s stores: “When three of us walk through a grocery store, it’s obvious we’re not there to do shopping. But we are trying to answer the question: ‘Would I like to shop here?’ ”)
“Of all the LBO groups, they were the most attractive to us in the management,” Incaudo said. “They had done their homework and showed a great knowledge of the business.”
Since the acquisition, Incaudo added, RFS has made good on its commitment to provide capital. “We have four stores under construction now,” he said, “including two being remodeled and two new. We’ve done three other remodelings in the last six months. So we’re going full bore on real estate.”
As for RFS, the activity of last year as well as their run at JWT has opened the door to a wider range of buyout offers and opportunities. That presents its own problems, not the least of which is the temptation to enter inferior deals. It’s a temptation Freeman feels that the firm has so far been able to resist because of its emphasis on finding companies with high-quality management at reasonable prices.
“If you buy a good company at a slight premium, the worst that can happen is you cut your return,” he says. “If you buy a mediocre company, even at a discount, you could lose your whole investment.”
