Heavy Borrowing, Smart Timing May Turn $6 Million Into $500 Million

<i> The Washington Post</i>

On Wall Street, it may well be remembered as the Deal of the Century.

Through heavy borrowing, smart timing and perhaps a bit of luck, three partnerships, including current and former officials of the investment firm Drexel Burnham Lambert, are on the verge of turning a $6-million chemical industry investment into nearly $500 million in just three months.

Even by the giddy standards of the 1980s, a decade when savvy investors led by Drexel have reaped huge rewards by rapidly buying and selling companies, the deal for Rexene Corp.--which manufactures chemical products in Odessa, Tex.--stands apart.

By borrowing heavily to buy Rexene after October’s stock market collapse and then preparing to sell stock in the company to the public amid feverish chemical industry demand, the investors, including Drexel junk bond chief Michael Milken, have made themselves the envy of Wall Street financiers.


Industry Turnaround

“It makes good reading and lots of jealousy,” said Curtis R. Welling, managing director of First Boston Corp., the investment firm handling the sale of Rexene shares to the public.

“This is what is great about capitalism in America,” said a soon-to-be wealthier William J. Gilliam, chairman of Rexene and an investor in the deal. “It’s a hell of a turnaround in three months.”

Behind this extraordinary sequence of transactions are several key elements of 1980s finance, including last year’s stock market collapse, the heavy use of debt to buy companies, the sharp industry turnaround that has made chemical companies the darlings of Wall Street of late and Drexel.

While the Securities and Exchange Commission recently authorized the filing of securities fraud charges against Drexel and Milken for some aggressive deals in which the firm has played a role, there is no evidence to suggest any impropriety in connection with Rexene. Drexel, which is also the target of a related criminal probe, has said repeatedly it knows of no wrongdoing by anyone at the firm.

The story of how Drexel employees and their partners are turning Rexene’s mundane polypropylene and polyethylene businesses into mind-boggling profits begins in 1983, the year in which Burlington Northern acquired El Paso Natural Gas. Burlington had no interest in retaining El Paso’s chemical subsidiary because the company, along with many other chemical firms in a cyclical industry, was losing money.

On Dec. 31, 1983, Burlington sold the chemical subsidiary for $230 million to a management group that included Bill Noel, a former El Paso executive who came out of retirement to become the company’s chairman. The El Paso subsidiary was purchased by Rexene Corp., a company formed by Noel and others to make the acquisition.


In 1987, after Noel died from cancer, the management-owners of Rexene decided they wanted to sell the business, and hired the Wall Street firm of Goldman, Sachs & Co. to find a buyer.

Although Rexene manufactured and marketed polyetheylene, polypropolene, styrene and other products that are key ingredients in food packaging, automotive components and disposable cups, Goldman had a tough time finding a buyer interested all of the company’s operations. Sources said several chemical companies were interested in buying parts of the business, but Rexene’s owners wanted to sell the entire company to someone who would keep it intact.

An employee in Drexel’s corporate finance department in New York suggested Rexene as an acquisition candidate to William Gilliam, head of a private New York investment firm. Just before the Dow Jones industrial average plunged 508 points last Oct. 19, Gilliam’s firm agreed to buy Rexene for $456 million in cash.

But after the stock market collapsed, a major New York bank that had promised to loan Gilliam the cash got nervous and backed out.

Enter Drexel Burnham Lambert, a firm known for aggressive, innovative finance. Gilliam said Drexel alone was willing to help line up debt financing so he could complete the Rexene acquisition.

“They delivered before the end of December,” Gilliam said. “Had they not delivered, we could not have done the deal.”


Drexel used its financial muscle to take control of Rexene. After Drexel temporarily loaned $200 million of the firm’s capital and arranged for loans of an additional $200 million, two Drexel employee partnerships, Biscayne Capital and Manchester Investments, and another firm affiliated with Drexel became majority owners of Rexene.

Gilliam’s firm--Gilliam, Joseph, Littlejohn & Levy--became Drexel’s minority partner. The ties between Drexel and Gilliam strengthened earlier this year, when former Drexel executive Paul Levy joined Gilliam’s firm.

Drexel and Gilliam completed the $456-million acquisition of Rexene on April 13. They put up only $6 million in equity, or cash investment; the rest was borrowed money, secured by the assets and expectations of future profits from Rexene.

Gilliam said the relatively small sum put up by the investors, and a major turnaround in the price of chemical products, combined to create the opportunity for astounding financial returns. As insiders, the $6-million investment gave Drexel and Gilliam control of 24 million Rexene shares, at a cost of only 25 cents each. Through First Boston, Rexene expects to sell an additional 6 million of its shares to the public at a price of about $20 each later this summer.

At the expected $20 offering price, the 24 million shares, purchased by Drexel partnerships and Gilliam’s firm for just $6 million, would be worth about $480 million. In addition, Drexel and Gilliam’s firm have earned millions of dollars in fees for handling the transactions and expect to earn additional financial advisory fees from Rexene in the future.

Improving Operations

“God bless America,” Gilliam said.

Rexene has been approved for trading on the New York Stock Exchange. Shares may not be sold to the public, however, until the SEC completes its review of a prospectus describing the offering.


The approximately $120 million in proceeds from the sale of Rexene shares to the public would be used to reduce the debt on Rexene’s balance sheet. Amid soaring chemical prices, much of the remaining debt is expected to be eliminated through cash generated by the company’s rapidly improving operations.

To help First Boston market the deal to investors, Gilliam and Drexel may not sell their Rexene shares for two years without First Boston’s permission.

Deals like Rexene are an attractive form of compensation for Drexel employees. While some Drexel employee partnerships came under congressional scrutiny earlier this year, none of those appeared to offer returns as lucrative as Rexene.

“These are investment partnerships where employees put up their own capital,” Drexel spokesman Steve Andreder explained. “Not all of them are obviously successful.”