Riordan Cost as Many Jobs as He Created, Study Finds : Candidate: Business deals made $74 million. He says a broader look at his career would show his true record.

Richard Riordan, the venture capitalist running for mayor of Los Angeles on a track record of creating jobs, had mixed results with his largest business transactions in the go-go 1980s.

But the bottom line on his eight largest corporate deals--all but one a leveraged buyout--is this: Riordan made an estimated overall personal profit of at least $74 million. Workers lost thousands of jobs, but gained thousands more--for a net gain of 14 jobs.

The issue of Riordan’s impact on jobs has been central to the mayor’s race. His opponent, City Councilman Michael Woo, has sought to portray him as a heartless leveraged buyout artist who threw thousands out of work, but Riordan says he is a capitalist with a heart.

The deals The Times examined were the restructuring of Mattel with a massive infusion of cash, and the leveraged buyouts of seven supermarket, printing and trucking companies. Most of the jobs affected were outside California.

Michael Milken, the leading exponent of using high-risk, high-yield junk bonds in leveraged buyouts, had a role in four of Riordan’s deals. Riordan relied on other investment bankers such as Merrill Lynch, Pierce, Fenner & Smith and Kidder Peabody & Co. to finance others.

Economists have conflicting views of the value of leveraged buyouts--corporate acquisitions financed with borrowed money, using a company’s assets or cash flow as collateral.

Some side with Milken, who began the new decade in prison for securities fraud, saying that such buyouts are beneficial because they create higher values for stockholders and make managers, who are typically given ownership shares in the acquired companies, much more efficient.

Others say that the buyouts are harmful because they reshuffle wealth rather than create it and leave companies with such high debt payments that they have trouble weathering economic hard times and have to cut staff.

Riordan said this week that he stopped participating in big leveraged buyouts because he did not like the pressure from fellow investors to cash in fast. “They’re just not my type of transaction,” he said. “I fall in love with companies and I like to live with them.”

But Riordan had a different response to a journalist who asked him in 1988 how he could justify “flipping companies like cards.”

“Greed,” Riordan responded cheerfully, according to business writer L. J. Davis, who wrote an account of Riordan’s buyouts for the magazine L.A. Business. “Eventually, you have to get your money out.”

Riordan added, according to Davis: “I’m taking lessons in learning how to wave to the poor people.”

Now, as he runs for mayor, Riordan says he regrets those comments. “It was a bad attempt at being humorous, though I believe it was taken out of context,” he said in a statement released by his staff Friday. “Even so, it was an inappropriate remark, inconsistent with my commitment to social justice.”

In the eight companies examined here, job losses that occurred can be traced to a variety of causes, ranging from recessions to increased competition to what critics say was too high a debt burden imposed during the acquisitions.

In three cases where workers lost jobs, Riordan lost money too.

He lost more than $2 million in A. J. Bayless Markets, an Arizona market chain that folded--except for a handful of stores--leaving 3,000 people out of work.

He lost $3.9 million in Webcraft Technologies, a specialty printing firm in New Jersey that let 284 workers go while it restructured to cope with business pressures that included high debt.

And he lost $2.5 million from his investment in Sun Carriers, a Pennsylvania-based trucking firm in which 1,000 jobs were lost.

Riordan made money on two companies where workers lost jobs. One was Piggly Wiggly Southern, a Georgia supermarket chain. Riordan’s investment netted him about $900,000, while 1,094 workers lost their jobs.

The other was Mattel, in which he made a profit of at least $20 million, while about 800 Southern California workers lost their jobs.

Some of the companies Riordan acquired in leveraged buyouts were healthy enough to expand despite high debt. Riordan profited from three such companies in which jobs were gained.

By far his largest moneymaker was P & C Foods, a Syracuse, N.Y.-based grocer and food wholesaler, on which he made a profit of $46 million, and workers gained 1,488 jobs.

Riordan made a $9.5-million profit on his investment in Boys Markets, the Los Angeles-based supermarket chain, which created 804 jobs.

And he made $6.1 million on Tops Markets, which expanded its work force by 3,700.

The buyouts were arranged by Riordan Freeman & Spogli, a merchant banking firm that Riordan co-founded in 1983.

Although these multimillion-dollar profits seem noteworthy, Riordan’s associates say he has made a lot more money in other investments. In fact, he says he cannot even remember how many millions he made in the RFS deals.

Asked in a recent deposition if he could give even an “idea of the general level,” he testified:

“No. It’s hard. It would be very hard.”

For this article, Riordan’s profits and losses were estimated conservatively, through public documents and with the assistance of some of his business partners.

Figures for job gains and losses were obtained from public records and the companies involved.

Though he did not dispute The Times’ conclusion that about as many jobs were lost as created, Riordan said a more representative assessment of his career would come from reviewing the track record of all the 100 or so companies in which he has invested.

He maintains this would show thousands more jobs created. However, his campaign has not provided a comprehensive list of the companies.

Here is a breakdown of the biggest deals in which Riordan participated in the 1980s:

MATTEL

Riordan has touted his investment in Mattel because he said he helped the toy company create “thousands of jobs for the citizens of Southern California. I will bring that talent to the city.”

This is clearly an exaggeration because Mattel officials say their company employs only 1,600 people in Southern California--not thousands--and only 800 others in the rest of the United States.

But there is evidence that Riordan did help save the company, which employed 12,500 people worldwide when he left its board of directors at the end of 1991.

Riordan joined Mattel’s board in 1984 as one of the leaders of a group of investors with a financial plan to bail out the firm, which was then insolvent because too much competition in the home video game business had sent that market into a tumble.

Riordan personally put up $7.5 million of $231 million that investors pumped into Mattel in return for 45% ownership of the company.

There were only two larger players in the bailout: Warburg Pincus Capital Partners, an affiliate of a New York-based financial services firm, which invested $37.4 million, and Drexel Burnham Lambert, the investment banking house, whose junk bond operation was under the direction of Milken. Drexel underwrote $110 million in junk bonds for Mattel. But rather than sell the bonds to outside investors, Milken and his close associates purchased most of them for themselves. Along with a hefty block of Mattel stock, the bonds gave Milken and his associates a total investment of $124.5 million.

Milken also played a significant role in three of Riordan’s other biggest deals. But Riordan said he did not meet Milken until years later, when their paths crossed through charitable activities. By then, Riordan said, federal authorities were already investigating the junk bond king, who was eventually sentenced to 10 years in prison for securities fraud and other crimes. His sentence was later reduced to two years.

“I’ve never had any business dealings with Mike Milken (personally),” Riordan said. “I mean, not that I wouldn’t have. I just never did. . . .

“My involvement with Mike Milken has been in a charitable context,” said Riordan, who serves on the board of the Milken Family Foundation.

During his mayoral campaign, Riordan has also used his role in bailing out Mattel as evidence of his managerial savvy, saying that he and a partner, Warburg Pincus, “came in and restructured the company, realigned it so that it went back to what it was best at--toys and particularly Barbie.”

This too appears to be an exaggeration. According to Mattel officials and Securities and Exchange Commission documents, Mattel had decided to concentrate on toys and sell its unprofitable electronics division, along with other non-toy divisions, before Riordan invested in the company in 1984.

As a board member, however, Riordan was partly responsible for the 1987 selection of John Amerman as Mattel’s chief executive. Amerman’s plan was to reduce emphasis on developing new toys to concentrate on proven toys such as Barbie. Amerman said: “Dick was a leader in this regard.”

During Riordan’s tenure on the board, Mattel reduced its worldwide work force by 2,500, with 800 jobs lost in Southern California. But some additional jobs apparently were created elsewhere in the United States, for Mattel reported an overall U.S. work force drop of only 600 during the Riordan years.

Locally, jobs were cut by trimming headquarters staff and closing a factory in Paramount.

In search of cheap labor, Mattel in the 1970s had shifted most of its toy manufacturing to Third World nations. The Paramount factory closing was a continuation of the trend, which analysts say was commonplace in the toy business.

Still, the Paramount closing and the closing of another factory in the City of Industry, which occurred during a brief period when Riordan was off the board, hurt many people. “I thought it wasn’t right what they did to us,” said Juanita Esqueda, who said she worked on Mattel’s City of Industry assembly line and in its warehouse for 20 years, earning $5 to $6 an hour. “They just put us all out.”

A. J. BAYLESS MARKETS

The purchase of these markets in 1984 was the first venture of the Riordan Freeman & Spogli merchant banking firm.

Riordan met Bradley Freeman and Ronald Spogli in the course of another deal. Freeman and Spogli were working at the Dean Witter Reynolds investment house in Los Angeles, where they organized Riordan’s purchase of a container company. He was so pleased with their work that he made them his partners in the corporate takeover firm. He would supply down payment money. They would supply merchant banking expertise.

In their first leveraged buyout, Riordan put up $2 million and a bank put up another $40 million to purchase Bayless, a family-owned chain of about 60 Arizona grocery stores, with 3,400 employees.

Four years later, Riordan told the Arizona Republic that Bayless was “just going dead over a cliff. We want to pay off creditors and just get out, for everybody, the smoothest way possible.”

“That was just an LBO that was doomed from the get-go,” said Michael Carmel, a Phoenix attorney who represented Bayless’ unsecured creditors. “The impression the creditors had was that (Bayless) was just overburdened with debt and the company didn’t have sufficient business to service that debt.”

Creditors got nothing. Riordan lost his money. Only six stores survived. And about 3,000 employees lost their jobs.

Riordan could have thrown good money after bad to try to save the rest of the stores, said Bayless’ chief financial officer, Bob Dillard. But he was “too smart.”

Riordan and Freeman have cast Riordan’s involvement with RFS as that of a passive investor. Dillard agreed. “I regularly attended meetings in L.A. where we made business decisions and Riordan was not there,” Dillard said.

P & C FOODS

This grocery chain, serving Upstate New York and parts of New England, was Riordan’s second investment with Freeman and Spogli and his biggest score.

RFS organized a buyout of the chain for about $15 million down, $80 million in bank loans and $40 million in junk bonds sold by Milken’s group. In addition, Milken’s group supplied a portion of the down payment money.

Riordan personally put up $3.2 million. Freeman and Spogli put up $150,000 apiece.

The acquisition was in 1985.

Three years later, RFS sold the chain for 16 times its initial investment--giving Riordan a profit of $46 million, Freeman said.

P & C, meanwhile, had expanded its work force from 6,401 to 7,889, according to SEC filings.

BOYS MARKETS

During the two years that the Los Angeles-based Boys supermarket chain was in RFS hands, the company added 804 workers, a Boys spokeswoman said.

RFS acquired its controlling interest in Boys in April, 1986, for $6.4 million down on an $82.9-million purchase price.

A year later, RFS sold Boys stock to the public and cleared $1.2 million by redeeming some of its own stock.

A year after that, it sold all Boys’ stock to a private company.

The new company paid about $69 million for shares that had cost RFS about $5 million--netting RFS a profit of about $64 million.

Riordan’s share of the profit, according to his partners, was at least $9.5 million.

SUN CARRIERS

RFS acquired its controlling interest in Sun Carriers in 1986 for $180 million, with $18 million down.

Sun Carriers operated three trucking companies--Milne, serving the West; Jones, serving the South, and St. Johnsbury, the Northeast.

A year after the acquisition, Sun Carriers closed Milne.

Milne employees sued, charging that RFS and the manager it installed had repeatedly told them in a public relations campaign that they would have job security for at least three years, while plotting secretly and from the beginning to dismantle Milne and sell its assets to pay high debt costs.

Riordan and other defendants have denied these charges, but are battling the ex-workers in court with a defense strategy that says unionized workers have no right to sue in such a situation because their remedy lies in collective bargaining. The U.S. Supreme Court has agreed to hear the case.

“I had no involvement whatsoever in the whole Sun Carriers,” Riordan said in an interview. “I was not on the board, I was not involved in the acquisition. And the only thing I remember is after the fact--I heard that Milne had closed after it closed, and that they said they couldn’t compete. . . . I told them: ‘Why didn’t we get together with the unions? You know, because they’re usually very cooperative if they know your problem.’ And they said they had tried to get hold of the union but the union in Washington wasn’t interested because this was too small an operation.”

Debra Bishop of Sacramento, head of the Milne Employees Assn., said there was never an attempt to negotiate concessions from the union.

“My husband went to work on Wednesday and as he was getting ready to leave on a long run, they told him to check out the papers on the table over there. The papers told him the company was going to close in 48 hours.”

About 1,600 workers lost jobs.

“All my people want is our day in court to tell these people you cannot do this to human beings,” she said. “They are not just widgets and cogs.”

During RFS’s tenure, Sun Carriers officials said, other subsidiaries gained or held steady on their number of employees. St. Johnsbury trucking added about 600 workers and Jones stayed the same size.

That made for an overall net loss of 1,000 Sun Carriers jobs.

Riordan lost his $2.5-million investment in the deal.

WEBCRAFT TECHNOLOGIES

RFS Equity Partners bought one-third of Webcraft, a New Jersey-based printer of lottery tickets and magazine inserts, for $290 million--with $18.3 million down.

Under the burden of huge interest costs from the leveraged buyout, the company immediately started losing money.

RFS put in $10.5 million more to try to bail out the company.

The work force was reduced 14%, with 284 jobs eliminated.

Freeman attributed the decline to customers cutting back on advertising and increased competition. Because of these outside factors, the debt burden became too heavy, he said.

“Obviously, as the business slowed down, they needed less people to ship less product,” he said.

Speaking generally, Freeman said: “Our view is to build companies. Obviously, not every one has worked out. Our philosophy is that you build value by building companies, not shrinking them.”

In Webcraft’s case, the junk bond debt sold by Milken’s group was repeatedly refinanced and RFS ultimately sold its $28-million investment for a couple of hundred thousand dollars, Freeman said.

Riordan lost $3.9 million.

PIGGLY WIGGLY SOUTHERN

RFS bought a controlling interest in this supermarket chain in central and southern Georgia for $136 million, putting up $9.7 million.

It sold the chain 1 1/2 years later to a rival grocery chain for $15.6 million, leaving Riordan with a personal profit of about $900,000, his associates said.

Nearly 1,100 jobs were lost as the work force was cut by 17%.

Peter Sodini, a Boys executive who briefly served at Piggly Wiggly, said the payroll reduction came as the result of business lost to new discount food stores.

But tumult at Piggly Wiggly under RFS ownership led a Georgia newspaper, the Macon Telegraph, to investigate. The newspaper found that Piggly Wiggly indeed had been a sleepy company with outdated stores and was facing lower-priced competition.

But it also found that sales remained steady while profits plummeted in the year following the buyout because the company had to pay huge interest costs on its leveraged debt.

The newspaper reported that managers of 26 of the 81 stores left, along with many senior executives and other workers, some of whom said they were forced out.

TOPS MARKETS

RFS acquired control of this supermarket chain headquartered in Buffalo, N.Y., in 1987 for $196 million, with $12.4 million down.

Tops was a major success story. Despite a heavy junk bond debt, Tops expanded significantly, creating 3,700 jobs.

RFS sold its interest in the chain in 1991 for a $41.2-million profit. His partners said $6.1 million went to Riordan personally.

After that, Riordan withdrew his name from RFS and said he was getting out of big leveraged buyouts. But he said he still has $5 million pledged to help fund their future deals.

* RELATED STORY: B1

Riordan, Dollars and Jobs

With mayoral candidate Richard Riordan saying that his business investments have created thousands of jobs, and his opponent, City Councilman Michael Woo, charging that Riordan’s investments have cost thousands of jobs, The Times looked at the eight largest corporate transactions Riordan participated in in the 1980s to get an idea of the bottom line. The following shows estimates of how much money Riordan made or lost in each transaction and how many jobs were lost or gained. RIORDAN’S PROFIT AND LOSS:

THE COMPANIES PROFIT LOSS P & C Foods $46 million -- Mattel $20 million -- Boys Markets $9.5 million -- Tops Markets $6.1 million -- Piggly Wiggly $0.9 million -- Webcraft Technologies -- $3.9 million Sun Carriers -- $2.5 million Bayless Markets -- $2 million Total $82.5 million $8.4 million

BOTTOM LINE FOR RIORDAN: (Profits Minus Losses) $74.1 million profit

EMPLOYEES’ PROFIT AND LOSS:

THE COMPANIES JOBS GAINED JOBS LOST Tops Markets 3,700 -- P & C Foods 1,488 -- Boys Markets 804 -- Sun Carriers -- 1,000 Bayless Markets -- 3,000 Piggly Wiggly -- 1,094 Webcraft Technologies -- 284 Mattel -- 600 Total 5,992 5,978

BOTTOM LINE FOR EMPLOYEES: (Jobs Gained Minus Jobs Lost) 14 Jobs Gained

HOW THE BOTTOM LINE WAS CALCULATED

Riordan’s profits and losses were calculated with the assistance of his business partners in Riordan Freeman & Spogli. His profit on Mattel stock purchases and sales was calculated from public documents and verified by Riordan as being “in the ballpark.” Job gains and losses were calculated for the time period that Riordan held his interest in each company. Information on numbers of employees came from the companies involved. In the case of Sun Carriers, the 1,000 jobs-lost figure was derived by combining the 1,600 jobs lost at one subsidiary and the 600 gained at another. In the case of Mattel, the 600 jobs-lost figure represents the difference between the 3,000 U.S. jobs Mattel had when Riordan invested and joined the board of directors, and the 2,400 U.S. jobs Mattel had when he left. Mattel also has many factories in the Third World. If Mattel’s worldwide job reductions were considered for this period, company officials say the figure would be 2,500 jobs lost.