35 East 62nd Street
MacAndrews & Forbes Holdings Inc. is the company that holds the assets of Ronald Owen Perelman. Starting in 1978 with a loan of less than $2 million, Perelman assembled a portfolio that, in little more than a decade, made him one of the wealthiest individuals in the country. Perelman used the tools so popular in the 1980s--including hostile takeovers, leveraged buyouts, and junk bonds&mdashø establish and expand his personal empire. He continued dealing at a frenetic pace in the 1990s, most prominently in collecting and then disposing of media companies. In 1998 he held, through MacAndrews & Forbes, substantial interests in a number of operating companies, including Revlon Group Inc., First Nationwide Holdings Inc., and Sunbeam Corporation.
Erecting an Empire: 1978--89
The eldest son of a wealthy Philadelphia businessman, Perelman studied business administration at the University of Pennsylvania's Wharton School before becoming an executive in his father's company, Belmont Industries. Working for this conglomerate proved an ideal training ground for what the younger Perelman would do so well: create personal wealth by purchasing undervalued companies, paying for the acquisitions by selling underperforming segments of these businesses.
Since his father showed no foreseeable desire to retire, Perelman, at the age of 35, resigned his post in 1978 to pursue his career in New York City. He brought with him his first wife's fortune as well as his own considerable savings. Perelman's initial move was to purchase, for $1.9 million borrowed from a bank, a 40 percent interest in Cohen-Hatfield Industries, a jewelry business. He sold all the company's operations except the most profitable one, its wholesale watch distribution division, and, after repaying the purchase price, pocketed a $15 million profit.
Next Perelman purchased, in 1980, MacAndrews & Forbes Co., a firm dating from 1850 that was the world's leading manufacturer of licorice extract, sold principally to the tobacco industry for flavoring in cigarettes. The company also was a bulk chocolate wholesaler. The purchase, for about $45.7 million, was made through Cohen-Hatfield, which was then merged into what became MacAndrews & Forbes Group Inc. A consortium of banks provided $35 million for the acquisition and was repaid with the proceeds from selling high-yield company bonds. Perelman sold the chocolate part of the business in 1986 for about $45 million.
In January 1983 Perelman purchased Technicolor Inc., the company whose photo color process had long been used in motion pictures, for $102 million plus the assumption of $17 million in debt. This acquisition challenged MacAndrews & Forbes's own creditworthiness, but Perelman quickly sold five divisions, reducing the cost of the purchase by $68 million. Aided by the advent of multiplex theaters, Technicolor, like other film processors, soon entered a boom period; in 1988 Perelman sold his controlling interest in the company to Carlton Communications for $780 million. Perelman bought 20 percent of a similar firm, Compact Video Inc., in 1983 for $12.5 million realized from the sale of Technicolor divisions and by the end of 1987 had raised the MacAndrews & Forbes stake in this company to 40 percent.
Perelman's first wife sued for divorce in 1983, claiming part ownership of everything her husband owned. To protect his assets, Perelman announced he would take MacAndrews & Forbes Group private by making it a subsidiary of newly formed MacAndrews & Forbes Holdings Inc. The new company, installed in Perelman's East Side Manhattan townhouse, borrowed against its assets to buy the 66 percent of the shares of MacAndrews & Forbes Group that Perelman did not own. Nine separate shareholder suits were fielded against the plan, but the company became fully his in March 1984.
To finance the assumption of $52.7 million in debt, Perelman turned to Michael Milken, the Drexel Burnham Lambert financier who would soon become famous as Wall Street's junk-bond king. Since angry MacAndrews & Forbes shareholders were unwilling to accept company bonds--even high-yield ones--for their stock, Milken agreed to sell the bonds to Drexel clients for cash that was used to pay off the stockholders. It was a tactic that Perelman and Milken would use over and over again.
MacAndrews & Forbes Holdings quickly took on new debt by purchasing Consolidated Cigar Holdings Ltd., the largest U.S. cigar producer, from Gulf & Western Industries in 1984 for $124 million, only $15 million of it in cash. Also in 1984, Perelman bought a controlling interest in Video Corporation of America, a tape duplication and stage rental firm, for $33.3 million, putting it under the Technicolor banner.
Perelman next took aim on Pantry Pride Inc., a poorly run retailer whose attraction was tax-loss carryovers totaling at least $330 million that could be used to offset income from profitable MacAndrews & Forbes holdings. A $60 million purchase of preferred stock gave him effective control of this company in June 1985. Within months, all three chains under the corporate umbrella were liquidated, leaving Pantry Pride a corporate shell for Perelman's biggest target yet: Revlon.
Assembling $761 million worth of high-interest bonds underwritten by Milken and a $500 million bank loan, Perelman attempted, through Pantry Pride, a takeover of the world famous cosmetic company, which was also engaged in pharmaceuticals and health and eye care. Revlon's management fought the offer furiously but eventually capitulated, in October 1985. The price was heavy: at least $2.7 billion, when factoring in debt refinancing, income taxes, severance pay, and compensation for lawyers and investment bankers. Pantry Pride disappeared in 1986, becoming Revlon Group, Inc. The following year Perelman took the company private, selling newly issued MacAndrews & Forbes junk bonds through Drexel Burnham Lambert to buy out the other shareholders for $784 million.
While keeping the cosmetics division intact, Perelman already had sold two Revlon divisions for a total of more than $1 billion. In 1987 he sold Revlon's vision care business for $574 million more. Another Revlon division, National Health Laboratories, became a separate public company in 1988. Perelman also beefed up Revlon by purchasing cosmetic lines such as Max Factor in 1987 for a total of $500 million and Betrix, a German firm, for $170 million in 1989. The cigar-smoking magnate sold a division of Consolidated Cigar for $45 million in 1986 and the rest of the company for $128 million in 1988.
His appetite whetted by the Revlon acquisition, Perelman attempted a hostile takeover of The Gillette Company in 1986, offering $4.12 billion for the company. After pocketing a profit of at least $34 million in selling back to management his 16 percent share of its stock (a payoff critics called "greenmail"), Perelman made three more offers for Gillette in 1987, raising his bid to $5.7 billion before giving up in the face of management's continued resistance. Perelman also made unsuccessful bids for TV Services and CPC International, then quit attempting hostile takeovers. Instead he began refinancing his junk-bond debt with lower-cost bank loans. Writing in 1990, syndicated columnist Allan Sloan, a persistent critic, acknowledged, "Perelman ... was smart enough to use junk bond financing to make his fortune and also smart enough to jump off the junk bandwagon before it crashed."
MacAndrews & Forbes Holdings entered a new area in December 1988, when it agreed to invest $315 million (of which only $171 million was its own cash) in five troubled Texas savings and loan association units. The deciding factor for Perelman was a federal government guarantee of $5 billion to cover future losses over the next ten years. The transaction also allowed him to apply the net operating losses (estimated at $900 million to $1.2 billion) of the acquired institutions, which were consolidated as First Gibraltar Bank, to reduce the taxes of any of his profitable businesses. A sixth Texas savings and loan was added in 1990. MacAndrews & Forbes held 80 percent of First Gibraltar in 1991.
Perelman, who had created Andrews Group Inc. from the corporate shell of the former Compact Video, used this private holding company to purchase Marvel Entertainment Group, holder of such comic book titles as Spiderman and The Incredible Hulk, for $82.5 million in January 1989. Not long after, Andrews bought Marvel's parent, film and television producer New World Entertainment Inc., for Andrews Group for between $120 million and $145 million. Andrews, according to Sloan, arguably was being used as a "corporate toxic waste dump for unwanted and overpriced businesses." The company, 57 percent owned by MacAndrews & Forbes Holdings, lost $14.8 million in 1989 and had a negative net worth of $10 million. Three shareholders suits accused him of fraud when, in 1990, he successfully pushed through a buyback plan in which shares were repurchased with junk bonds as payment.
Also in 1989, MacAndrews & Forbes acquired The Coleman Company, Inc., maker of stoves, lanterns, and camping and other recreational equipment, for $545 million. Perelman reduced the debt for this purchase by selling the heating and air-conditioning divisions. By the end of 1990 he had sold everything except Coleman's camping equipment and boat businesses, plus added power tool and recreational vehicle businesses. Between 1993 and late 1995 he bought seven more companies for Coleman.
Institutional Investor's May 1989 issue featured Perelman on its cover and called him "the richest man in America," with a personal fortune approaching $5 billion. Forbes ranked him third, estimating his worth at about $3 billion. But Perelman's empire was shaky, according to some writers. Forbes's Gretchen Morgenson estimated in 1990 that the assets of MacAndrews & Forbes Holdings exceeded its debts by only $1.3 billion.
Focus on Media Companies: 1990--95
Perelman enhanced his financial position in 1991 by selling Revlon's Max Factor line and Betrix label to Procter & Gamble Company for $1.14 billion, taking Marvel Entertainment public (and selling about 30 percent of the stock), and selling most of his National Health Laboratories stock. In 1995 National Health Laboratories, in which Perelman still held 24 percent of the stock, was merged with Roche Biomedical, another large clinical laboratory, to become Laboratory Corporation of America.
By mid-1992 Perelman was shopping for more companies. In September of that year he purchased, for Andrews Group, trading card and bubblegum company Fleer Corporation, for $265 million. The following year he purchased 46 percent of Toy Biz, Inc. for $7 million. Also folded into Andrews Group, in 1993, was SCI Television, a bankrupt station owner with $1.3 billion in debt for which Perelman paid $100 million in cash in return for a 54 percent stake. Half-ownership of Genesis Entertainment, a television syndicator, was placed into Andrews Group's New World Entertainment unit.
After MacAndrews & Forbes sold 130 First Gibraltar Bank branches to BankAmerica Corporation for $110 million in 1992, Perelman's profit on his savings and loan transactions may have exceeded $1.2 billion. In 1994 Perelman used nearly $500 million in tax credits to buy California's First Nationwide Bank, the nation's fifth largest savings institution, in a deal valued at $1.1 billion. The transaction was made through Dallas-based First Madison Bank, a savings and loan association founded by Perelman in 1993 with assets left over from the First Gibraltar sale.
Boston Whaler Inc., a boat builder, was sold in 1993 to MacAndrews & Forbes by Reebok International Ltd. for $20 million. Perelman added Coleman divisions and boating brands MasterCraft and Skeeter, plus O'Brian water skis, to this acquisition and created Meridian Sports Holdings as the corporate umbrella for these companies. Also in 1993, Mafco Holdings, Inc., a recently created Perelman company, purchased Consolidated Cigar again, this time for $180 million (of which only $30 million was cash).
New World Entertainment and SCI Television were merged in late 1993 to form New World Communications Group. This merger into a company 54 percent owned by Perelman in mid-1994 and still reporting to Andrews Group allowed New World Entertainment, the television-producing arm, access to the cash generated by the now profitable TV stations. The communications group also included now wholly owned Genesis Entertainment, and Guthy-Renker Corporation, the leading "infomercial producer" in the United States, in which Perelman had bought a minority interest the previous year. Perelman also bought four more TV stations from Great American Communications for $360 million and four from Argyle Television Holdings for $716 million, financing the purchases with the aid of $205 million from a rights offering and $300 million in credits from a group of banks. Since New World now exceeded the legal limit of 12 TV stations, several were sold.
The reorganization of New World included a deal struck with Rupert Murdoch switching nearly all of the New World stations from CBS affiliation to affiliation with Murdoch's Fox Broadcasting Network. Murdoch agreed to invest $500 million in New World in exchange for 20 percent of the stock, to consider New World-produced programming for Fox's lineup, and to form a joint syndication arm with New World to supply both station groups with programming.
Another Perelman holding company, named Mafco Consolidated Group, was formed to acquire Abex, a manufacturer of aerospace and industrial products, in 1994 for about $200 million. Since Abex was selling its brake friction division to Cooper Industries for $207.4 million, Perelman got the company essentially for nothing. It joined Consolidated Cigar and Mafco Worldwide "Flavors" (previously MacAndrews & Forbes Co.) as divisions of Mafco Consolidated Group, which was at least 80-percent owned by Perelman.
Business Week in 1995 calculated that Perelman had bought, since 1978, 44 companies, creating a highly leveraged empire with a net value of $4.93 billion. According to this magazine, the use of separate holding companies limited the overall enterprise's legal liability in issuing debt, because the debt was secured by the operating companies. The enterprise at the apex of Perelman's pyramided assets was Mafco Holdings, according to Business Week and a biography of Perelman, but MacAndrews & Forbes, according to the Wall Street Journal and Barron's. The operating companies, according to Perelman's critics, were being milked systematically for the benefit of the holding companies. While Perelman was said to pay his top executives well--each reportedly earning $10 million a year--they were receiving no equity, leaving Perelman in total control.
Still Buying and Selling: 1996--98
After years of floundering, Revlon Inc.'s operating income, in 1995, finally exceeded the interest payments on its debts. This enabled Perelman to take the company public in 1996, raising $180 million by selling 15 percent of the shares. New World, on the other hand, was losing money and close to $1 billion in debt. In 1996 Perelman arranged to sell his 37 percent stake in the enterprise to Murdoch's News Corporation for about $2.48 billion in stock and the assumption of $590 million in New World debt. (He had previously sold two stations to NBC for $425 million.) Also in 1996, First Nationwide Holdings Inc. purchased California Federal Bank for $1.2 billion, enabling First Nationwide to create the country's fourth largest savings and loan association, with 242 branches in California, Florida, and Texas. In addition, Perelman sold Mafco Consolidated's licorice and flavorings business for $180 million. Consolidated Cigar went public in that year, but Mafco Consolidated retained 65 percent of the shares.
Perelman's reputation as a manager suffered serious damage from the end of 1996 bankruptcy of Marvel Entertainment. Swelled by lucrative licensing deals, the company's stock was trading at $35 a share at the end of 1993, raising Perelman's stake to a value of $2.8 billion on an original cash investment of $10.5 million. In 1995, however, Marvel went into a nosedive, and the following year it lost $464.4 million. Perelman's attempt to refinance the company was frustrated by its bondholders, notably rival entrepreneur Carl Icahn, who rejected the reorganization plan, which called for the creditors to take a substantial loss. Perelman then walked away from his investment (which included a 26 percent stake in Toy Biz), allowing it to fall into bankruptcy. Icahn, who won court approval to take it over, in turn lost control of the company and joined the angry Marvel shareholders and bondholders who were suing Perelman.
According to Barron's, Perelman's Revlon Worldwide holding company had, in May 1997, almost $2 billion in long-term debt and negative stockholders' equity of almost $1 billion. Nevertheless, Perelman had raised $900 million in February to refinance Revlon debt coming due, and in May he raised $470 million in loans for Coleman. Other debt payments were reported to have been pushed back beyond 2000, leaving Perelman with more than $1 billion available for another acquisition. Revlon, California Federal, and Consolidated Cigar were said to have generated more than $600 million in profits in 1996 yet apparently paid little or nothing in federal tax due to what Barron's writer Jacqueline Doherty called "skillful use of holding companies and tax laws."
Mafco Holdings announced in December 1997 that it was acquiring about 72 percent of Panavision Inc., the leading manufacturer and supplier of cameras to the film industry, for about $610 million. Two months later, Perelman's California Federal Bank agreed to purchase Golden State Bancorp Inc. for stock and warrants valued at as much as $2.8 billion. The combined firm, now the nation's third largest thrift institution, would be known as Golden State Bancorp but operate under the name California Federal Bank, with Perelman holding a stake of 30 to 33 percent.
In March 1998 Perelman sold his 82 percent share of Coleman to Sunbeam Corporation for stock valued at $590 million to $643 million, plus $160 million in cash. To protect his 14 percent investment in the troubled appliance manufacturer, whose stock value dropped 80 percent on news that it might have overstated its 1997 sales, he took over management of the company in June. By mid-August, Perelman's stock was worth only $72 million. Sunbeam owed creditors about $2.2 billion, including $500 million to one of Perelman's holding companies.
The Marvel and Sunbeam fiascos clearly took a toll on Perelman's fortune. In Forbes's October 1998 ranking of the richest Americans, he dropped out of the top 10, with an estimated $6 billion, compared to $6.5 billion in the October 1997 listing, when he was ranked in eighth place. Before the year was out, Perelman again sold Consolidated Cigar, this time for $531 million, almost three times what he paid in 1993. The buyer was a French company, Selta S.A.