Fresh from having accomplished the friendly buyouts of a handful of grocery chains and industrial concerns, the partners at Riordan, Freeman & Spogli found themselves earlier this year fighting for a different kind of business altogether.
The quarry was JWT Group, parent of the giant J. Walter Thompson advertising agency and the Hill & Knowlton public relations firm. JWT was fighting for its life against Martin S. Sorrell, a British raider who had built his empire atop a business that initially specialized in making supermarket carts.
"We spent five days around the clock with the senior management at JWT," recalled Bradford M. Freeman, one of the founders of the leveraged buyout firm known familiarly as RFS. "They didn't want Sorrell to win, because he'd been advised by a lot of ex-JWT people."
In the event, Freeman recalls, "we matched Sorrell's original bid (of $45.50 a share, or about $460 million), but he was not to be denied." Sorrell finally won JWT with a bid of $55.50 a share, or $560 million.
Winning JWT would have been a watershed for RFS, which is spending an investment fund of $125 million to make equity investments in management-led buyouts. For one thing, even at the original bid price, JWT would have been nearly twice as big a deal as any the Los Angeles-based firm had done in its brief four years of life.
RFS has become one of the leading Los Angeles practitioners of the thriving business of leveraged buyouts--many involving supermarkets, including Boys Markets. reduced to its essentials, the leveraged buyout is a maneuver in which a company or an operating unit is taken private or acquired from a parent with the use of borrowed money, against which its assets or cash flow are pledged.
Years later, after the unit's operations are reorganized and its debt is paid down, the business can be taken public again at great profit for the original investors. The risk is that a company can be saddled with so much leveraged buyout debt that it fails before successfully reorganizing.
Like most leveraged buyout specialists, RFS insists that the management of the acquired company or subsidiary put up some of its own money in the enterprise. (RFS often borrows the money for the managers' own stake.) The theory is that companies work better when their professional managers have a direct financial stake in the business. Executive-suite extravagances disappear; costs are sliced; potentially profitable innovations get a concerned hearing.
RFS also takes an equity stake in the acquired business, using the $125-million fund it raised from outside investors last year. The remaining equity in the business, sometimes the largest share, is held by the investment bank that finances the transaction and often sold off to its own clients. RFS has dealt extensively with Merrill Lynch, Drexel Burnham Lambert and Kidder, Peabody & Co., among other investment bankers.
In the case of Boys Markets, RFS and members of the supermarket chain's management bought the firm in April, 1986, for about $83 million. Then, last May, Boys made an initial public offering of its stock, which traded first at about $10 a share but is now above $18.
For RFS, the run at J. Walter Thompson was partially a bid for recognition. Since its founding in 1983, the firm has done eight buyouts and five have been in the supermarket business. So RFS risks being identified exclusively as a specialist in grocery stores. "Now we see every supermarket deal there is," Freeman said.
That's not necessarily an unalloyed curse. "There are real benefits to specializing," Freeman says. "You get to know the industry and you get a real cadre of professionals in the business who can help you out."
That was useful last year when the firm acquired Piggly Wiggly Southern, a Georgia-based chain of markets. RFS was able to shore up the new unit's shortcomings by throwing into the breach Peter J. Sodini, an experienced supermarket executive who was chief executive of Boys Markets.
Sodini spent about four months as Piggly Wiggly's interim vice chairman and chief executive. Piggly Wiggly's current president is a transfer from another RFS unit, Syracuse, N.Y.-based P&C Foods, a grocery retailer and distributor.
But the other side of the coin, Freeman said, is "the disadvantage of a perceived industry specialty. . . . We don't see other deals--or we're afraid we don't."
Plenty of small leveraged buyout firms would like to have the problems of RFS, which was founded by Richard J. Riordan, senior partner at the Los Angeles law firm of Riordan & McKinzie, with Freeman and Ronald P. Spogli. Freeman and Spogli had met at Dean Witter Reynolds, where Freeman was a member of the Dean Witter board and managing director of its Los Angeles corporate finance department, and Spogli was head of West Coast mergers and acquisitions.