New Players : Raebarn Corp. Joins Profitable Game of Leveraged Buyouts

The names Frederick Ulrich, Mark Allison and Barry Rodgers hardly belong in the same league with those of Jerome Kohlberg Jr., Henry Kravis and George Roberts.

Kohlberg, Kravis and Roberts, after all, started a New York investment firm in the 1970s that has become the General Motors of leveraged buyouts, the popular financial transaction that involves borrowing large sums of money to buy a business, betting that the operations can be restructured and resold later at a huge profit. The three are now among the nation’s wealthiest individuals, each worth upwards of $330 million.

Last month, Kohlberg Kravis Roberts & Co. made headlines by offering a staggering $20 billion to buy out stockholders in tobacco and food giant RJR Nabisco in what would be the biggest corporate buyout in history.

Off to a Good Start

Ulrich, a former investment banker, Allison, a lawyer with a real estate background, and Rodgers, a veteran aerospace executive, have pooled their talents and have jumped into the leveraged buyout derby through their Sherman Oaks-based company, Raebarn Corp. They’ve gotten off to a good start. In the last year, they have raised about $300 million to arrange buyouts of four companies, with some of the money coming from reclusive Texas billionaire Robert Bass.

Ulrich jokes that Raebarn stands for something like “really amazing bunch of boys are now rich.” But how much the trio will make is hard to guess because any profits won’t be realized for another 4 to 6 years until they sell the companies they’ve taken over.

Indeed, Ulrich said, Raebarn is still having to persuade some investment bankers to do business with it because it has yet to see an LBO transaction all the way through to the big payday, when an operation is sold a again.

“Investment bankers want to know you can go the full 100 yards and cross the goal line. We’re at the 50-yard line,” Ulrich said.

Thus far, Raebarn has invested in low-tech manufacturing businesses, because they worry that high-tech companies are too volatile and require large research and development expenses. Raebarn’s purchases include two businesses from Lear Siegler, one in aerospace and the other a recreational vehicle and boat company; a Pitney Bowes subsidiary in Omaha that prints business forms, and Alvey, a St. Louis maker of wooden pallets used in factories to stack products.

Raebarn has moved quickly in the LBO business because there is a huge amount of money--some experts estimate as much as $200 billion--available from pension funds and wealthy investors eager to invest in potentially lucrative LBO deals.

Raebarn is believed to be one of the fastest growing LBO firms in the Los Angeles area, which has so far been relatively inactive in arranging major buyouts because, unlike New York, it has not been much of a center for investment banking.

The “leverage” in the phrase leveraged buyout means that most of the money to buy out owners is borrowed, with debt often making up as much as 90% of the purchase price. Typically, money comes from banks, bonds sold to investors such as pension funds, or wealthy investors, who often become partners.

In theory, the debt is paid down using cash generated by a company’s operations or by selling unwanted assets that can be pruned from the company. The goal is to increase the company’s value by turning it into a lean, profitable operation that can be resold at a huge profit to another company or to the public via a stock offering.

Formed in 1986

Raebarn was started in 1986, after Ulrich and Allison were introduced by a mutual friend. Ulrich, 45, is a West Point graduate who served as a captain in Vietnam, later getting his master’s degree in business administration from Harvard Business School. He worked as an investment banker, arranging financing in the public and private markets with the Wall Street firms Morgan Stanley and Warburg Paribas Becker.

Allison, 35, a polo-playing, Oxford-educated lawyer from Great Britain, moved to Los Angeles in 1984 to get into commercial real estate developments. Raebarn was initially his company--with the name stemming from various names in his family.

Ulrich and Allison’s first task was finding a company to buy. They looked into buying fast-food franchises, including a group of Wendy’s hamburger franchises in Oregon or 25 Church’s Fried Chicken franchises in the Washington, D.C., area. But a downturn in that business helped scuttle those plans. “To be honest, I didn’t think my strength was running a chain of chicken stores,” Ulrich said.

Their break came in late 1987, when a major New York leveraged buyout firm, Forstmann Little & Co., put up for sale a group of three aerospace subsidiaries of Lear Siegler, a Santa Monica firm it bought in 1987. Raebarn, of course, was an unlikely suitor, having no track record.

But the operations would need a new chief executive to run them. So Ulrich and Allison recruited Rodgers, 50, a former Lear Siegler vice president, and brought him in as a partner, promising that he would run the aerospace operations. Having reassured Forstmann Little and investors that Raebarn could provide a leader, Raebarn was able to raise the necessary $97 million to buy the three operations in October, 1987. Ulrich, Allison and Rodgers renamed the firms BFM Aerospace Corp., using the first initials in each of their names and the combined companies have annual sales of about $110 million.

The lure of LBOs is that Ulrich, Allison and Rodgers essentially put up very little of their own money, yet can effectively control a business. For example, Raebarn invested only $300,000 toward the $93 million used to buy Data Documents, the former Pitney Bowes subsidiary that makes business forms and has annual sales of $180 million. For its $300,000 investment, Raeburn now owns 12% of Data Documents.

‘Blind Auction’ Process

The deal illustrates how Raebarn’s packages are put together. Pitney Bowes decided to sell the subsidiary, so earlier this year, its financial advisers sent out data about the company to select investors in a process known as a “controlled auction.”

Raebarn bought the firm in February, 1988, using a $59-million loan from Wells Fargo. Another $33 million in bonds and preferred stock was issued to Teachers Insurance and Annuity Assn. of America, a major institutional investor in New York. In addition to Raebarn’s money, another $400,000 came from Data Documents’ managers, who agreed to stay on and run the company, and some individual investors from Dean Witter.

The plan is to fine-tune the company and, in 4 to 6 years, to sell it at a profit. The first step is to sell the company’s Belgium operation and boost efforts in areas of the United States where Data Documents does not sell its products. So the company has bought a financially troubled company in the Pacific Northwest that was in the same business.

Seven of Data Documents’ holdover managers own 16% of the company. Walter J. Kearns, president and chief executive, said it has provided a big incentive to do well.

“It’s a significant difference when you own a piece of something. It makes the job more enjoyable because you know whatever you do is good for you and good for the business,” Kearns said.

Taking a Gamble

But LBOs are not foolproof. Raeburn and other LBO firms are essentially betting that the economy will remain sound. If the economy turns down dramatically, those holding equity in the acquired companies, such as Raebarn, would be last in line to claim assets if a company failed. First rights would go to the banks.

In the Data Documents deal, interest on the bank loans totals about $10 million a year. Ulrich said that is more than covered by the cash generated from the company’s. Even though the Wells Fargo loan has an interest rate cap, the interest rate fluctuates with the prime rate, and it could always shoot up.

Despite the risks, LBOs have so far proved to be highly lucrative deals. Returns for investors of 30% to 50% annually are common. For the LBO firms, profits can be spectacular, sometimes 10 to 50 times the money invested.

Ulrich is hesitant to predict how much Raebarn could make, because there are so many factors that could influence how much the companies will be worth when they are sold. But he acknowledges that if everything goes well, the profit could be tens of millions.

That’s quite a step for a company that only a year ago was operating out of partner Allison’s Hollywood Hills home. Earlier this year, Raebarn’s offices were moved to the fifth floor of a high-rise building near Ventura and Sepulveda boulevards. For a company whose name is becoming better known in the field, Raebarn doesn’t show it. Its building is being refurbished so Raebarn’s name and suite number doesn’t appear outside of its office.

Rather, the name is printed on an envelope taped to the door.