Black Box Buyout Fails to Work Magic : Technology: The company loses $34 million on sales of $107 million despite layoffs.


In the fall of 1988, when Odyssey Partners led a highly leveraged $334-million buyout of Micom Communications, the plan, predictably enough, was to pare down the Simi Valley high-technology company, selling off divisions to pay back creditors, and making the remaining businesses profitable again.

Less than two years later the company, renamed Black Box, looks like a leveraged buyout that hasn't worked according to plan. One problem is that Black Box suffers from a crushing load of debt. As of March 31 the company's short-term debts were $192 million, and Black Box's liabilities were greater than its assets by $34.2 million.

Another problem is that the company has also been unable to sell its ailing Micom Communications Corp. (MCC) division, which makes devices that allow computers to "speak" to each other.

And even after a painful round of layoffs at MCC--and the sale of some other divisions for $82.4 million--Black Box lost $34 million on sales of $107 million in the year that ended March 31, 1990. One reason for the loss was that Black Box paid out $26.7 million in interest alone.

So Black Box's new strategy is to lower its hefty debts by raising money through a stock and securities offering, then splitting the company in two. The current owners would keep control of the ailing MCC division, while the rest--chiefly the company's healthy Pennsylvania-based Black Box division, which sells a variety of computer devices by mail--would be owned partly by the new stock investors.

The stock and securities offering is supposed to raise $86.3 million and would lower New York-based Odyssey Partners' stake in Black Box from 67% to 16%.

Black Box President Brian D. Young, who is also a general partner of Odyssey Partners, declined to comment on the offerings.

Many leveraged buyout companies don't worry about failing to turn a profit, so long as the cash flow is sufficient to pay off their debts. But last month Black Box missed a $4.6-million principal-and-interest payment to its bank creditors and a $4.5-million interest payment to owners of its junk bonds.

As a result, the banks could demand payment on $80.5 million in loans immediately. But Black Box said it reached an agreement with the banks, led by Manufacturers Hanover Trust Co., under which they will put off action until after the stock and securities offerings.

Next to the huge debt Odyssey took on with its acquisition, Black Box's main problems seem to be at MCC. The division makes "local area network" devices that allow different kinds of computers to share data. Several years ago when MCC tried to broaden its sales by offering a new line of more expensive devices, instead it ended up losing money, and it has not recovered.

After the buyout, MCC laid off more than 400 employees--about 36% of the work force--at MCC, a move the division's chief later called "ugly." But in the year that ended March 31, MCC still had an operating loss of $9.54 million on sales of $74 million. Meanwhile, the mail order Black Box division has fared much better.

The latest stock offering is for 58% ownership of the mail order business and would include about 4.5 million common shares of stock priced at $12 to $14 per share. In addition, Black Box hopes to raise $33 million from selling convertible subordinated debentures.

With the proceeds, Black Box hopes to buy back 91% of the outstanding junk bonds for $72.9 million in cash plus some stock and new debentures. The company also would extend its bank borrowings by paying off one set from the Manufacturers Hanover consortium with a new $80-million loan-and-revolving-credit-line from the Mellon Bank consortium. That would leave Black Box with debts totaling $122 million.

Finally, Black Box would be split in two, with the MCC division essentially retained by Black Box's current owners, while the mail order business is taken public.

Black Box's filings with the Securities and Exchange Commission do not say whether Odyssey Partners, which would still control MCC after the spinoff, would then try to sell MCC.

If the latest stock sale goes through, Odyssey Partners' 16% stake in Black Box would be worth about $16 million. The partnership would also own most of MCC. Black Box's financial problems also mean that the company hasn't yet paid $2.25 million in various fees it owes an affiliate of Odyssey, the New York investment group.

Ironically, one of the few parties to come out ahead in the 1988 leveraged buyout of Micom was investment banker Drexel Burnham Lambert Group, which was paid $5.53 million in fees for its work on the deal.

Drexel Burnham had plenty of problems of its own, though, and filed for bankruptcy protection Feb. 13 after suffering large junk bond losses. The investment banker will also end up with a 7% stake in Black Box after the offering.

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