Pinkerton’s Buyer Sues Seller Over Financial Disclosure

Nearly two years ago when Thomas W. Wathen bought Pinkerton’s, the famous security-guard company, for $100 million, he made it sound like he’d acquired the New York Yankees of the security business. But now Wathen alleges that he was thrown a curve and was duped into paying about $20 million too much.

Wathen bought Pinkerton’s through his solely owned security-guard company, California Plant Protection in Van Nuys, in January, 1988, and adopted Pinkerton’s as the merged company’s name. He purchased Pinkerton’s from American Brands, a consumer products and financial services giant based in Old Greenwich, Conn.

Pinkerton’s sued American Brands in state Superior Court in Los Angeles alleging among other things that American Brands misrepresented the financial condition of the “old” Pinkerton’s before the sale, and failed to disclose pending lawsuits, contract disputes and delinquent insurance payments involving Pinkerton’s.

Overall, “the true value of old Pinkerton’s at the closing date was substantially less than promised . . . in the sales agreement,” Pinkerton’s suit claimed, adding that the alleged mistakes damaged the company in the amount of $20 million.

Wathen wants American Brands to reimburse his company for those costs, and he’s seeking an additional $20 million in punitive damages.

American Brands spokesman Roger Baker said his company earlier held talks with Pinkerton’s about the sale “and we concluded that we did not have liability under the contract.” He declined to elaborate.

The extra costs that Pinkerton’s claims to have incurred are expenses that Wathen could do without. He bought Pinkerton’s through a leveraged buyout, in which he borrowed most of the money by pledging Pinkerton’s assets as collateral.

Wathen must make sure Pinkerton’s, with expected sales of about $610 million this year, generates enough earnings to pay down the $82 million of bank debt that the company still owes within the next four years. In 1988, a cash squeeze at Pinkerton’s forced the company to borrow an additional $20 million.

But Lloyd Greif, executive vice president of Sutro & Co. and who served as Wathen’s investment banker in the deal, predicted Pinkerton’s this year will “clearly cover the debt service and have profits to spare.”

Greif declined to estimate Pinkerton’s earnings this year because it is privately held. However, he asserted that Pinkerton’s is earning between four and six cents per dollar of sales before taxes and interest, about double the security industry’s average profit margin.

Wathen, who was unavailable for comment, has tried to bolster Pinkerton’s profitability by not competing in certain security jobs, and he has closed 120 of Pinkerton’s 260 offices, and eliminated 31% of the company’s 2,500 administrative staff, Greif said.

In its lawsuit, Pinkerton’s alleged that American Brands misstated several facts in compiling a balance sheet for the old Pinkerton’s in preparation of its sale.

For example, an analysis by Wathen’s company after the merger showed that the old Pinkerton’s had cash of $1.51 million on deposit shortly before the sale, instead of the $1.83 million reported by American Brands, the suit alleged. Pinkerton’s reserves for paying taxes were placed at $14.7 million by American Brands; Wathen’s suit said they should have totaled $19.3 million.

The “new” Pinkerton’s also alleged that American Brands claimed Pinkerton’s trademarks and trade names were in “full force and effect” in the company’s worldwide markets, yet Pinkerton’s found out later that they had not been registered in the United Kingdom, so that “its trademark and trade name in the United Kingdom have been jeopardized.”

The suit also alleged that American Brands failed to disclose three lawsuits against Pinkerton’s where the company’s potential liability might exceed $50,000 each.

Finally, the suit noted that the merger agreement also called for Wathen to get three gold watches that once belonged to Allan Pinkerton, a Scotsman who founded the company in 1850, and other company artifacts. But the suit alleges that only two of the watches were delivered to Wathen.