Brooke Group Ltd.

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Brooke Group Ltd.

100 S.E. Second Street
Miami, Florida 33131
U.S.A.
(305) 579-8000

Public Company
Incorporated:
1980 as Brooke Partners L.P.
Employees: 1,850
Sales: $479.3 million
Stock Exchanges: New York
SICs: 2111 Cigarettes

Brooke Group Ltd. is a holding company for a variety of companies, the most important being the Liggett Group Inc., the successor of the Liggett & Myers Tobacco Company. Liggett produces such branded cigarettes as L&M, Chesterfield, Lark, and Eve, as well as the value-price brand Pyramid.

Brooke Partners L. P. was founded in 1980 by financier Bennett S. LeBow as an investment vehicle. Bennett bought troubled companies that he considered undervalued and attempted to turn them around. LeBow had studied engineering, worked as a computer analyst for the U.S. military, and formed his own computer company in 1967. He took that company, DSI Systems Inc., public in 1969, but then pushed too hard to expand and nearly bankrupted the company. After selling DSI in 1971 he became an advisor to high-tech companies, frequently investing in them as well.

LeBow formed Brooke Partners with the assistance of investment firm Drexel Burnham Lambert Inc., which owned 15 percent. Brooke sold one of its early investments, computer display maker Information Displays Inc., in 1984. In 1985 Brooke bought 54 percent of computer maker MAI Basic Four, which sold software and hardware to small companies in highly specific markets like the hotel business. MAI had been losing money. As it usually did, Brooke quickly sent in its own managers and advisors to cut expenses, pare down the firms staff, and put a new business strategy in place. MAI was soon making money again.

Brooke also bought the microfilm division of Bell & Howell Co. and Brighams Inc., an ice cream business. With its MAI success under its belt and a growing portfolio of companies, Brooke turned to a much bigger target; the Liggett Group, once one of the largest U.S. tobacco companies. At the time it was owned by British firm Metropolitan PLC. Liggett began as a manufacturer of snuff in Belleville, Illinois in 1822. In 1873 John Edmund Liggett, grandson of the firms founder, joined with George S. Myers to form Liggett & Myers, which began producing cigarettes. Ligget eventually produced L&M, Chesterfield, and Lark cigarettes, which were some of the bestknown brands in the industry for several decades.

While the firm remained profitable, it made many mistakes over the years. In the 1950s, with the use of filters becoming widespread on cigarettes, Liggett put its money into Chesterfields, which were not filtered. The decision cost Liggett market share in ensuing years. The company also missed opportunities related to the marketing potential of packaging changes. When crush-proof, flip-top boxes were introduced, for example, Liggett ignored the innovation. Likewise, with the health risks of cigarettes increasingly on the publics mind, competitors introduced low-tar cigarettes in 1967. Liggett did nothing as low-tar cigarettes became increasingly prevalent. Finally, in 1976, Liggett introduced Decade, its first low-tar cigarette, nearly 10 years after the competition.

Meanwhile, Liggett was diversifying. It bought or created brands in the liquor market including Wild Turkey, a prestigious bourbon put out through its Austin, Nichols & Co. subsidiary. The firm also imported table wines and liqueurs like Campari aperitif from Italy. Its Paddington Corp. subsidiary imported J&B Scotch. Liggett also put out Alpo, the bestselling canned dog food in the United States. Due to the decline of Liggetts tobacco profits, Alpo was one of the firms biggest profit makers. By the early 1970s the companys president, Raymond J. Mulligan, had come from the Alpo division and had no background in the cigarette business. Liggett had profits of $80.4 million in 1973 on sales of $586 million.

Sales of Liggetts premium brands of alcohol grew at an annual rate of 20 percent over the next five years. In 1978 the company gave up on international cigarette sales, spinning off its foreign cigarette business to Philip Morris for $108 million. Liggett nearly sold its domestic cigarette business too, but could not quite work out a deal. By 1979 cigarettes had shrunk to 20 percent of Liggetts business, while wine and spirits accounted for 30 percent. The firm held only three percent of the cigarette market. Meanwhile, Alpo continued to grow and the company moved into the growing market for dry dog food. Liggetts Diversified Products Corp. was pumping up sales as well, becoming the largest maker of barbells and other physical fitness equipment.

Liggett also bought two leading Pepsi Cola bottling companies; one in Fresno, California, and the other in Columbia, South Carolina. Meanwhile, it cut its advertising for cigarettes by 45 percent, causing many industry observers to believe that the company was preparing for the eventual demise of its cigarette business. The following year, however, Liggett introduced generic cigarettes. Considered a risky move because cigarette marketing was so dependant on brand names, it nevertheless proved a successful one. None of its larger rivals produced generic cigarettes, so Liggett captured the market for them.

Also in 1980, Liggett Group was bought by Grand Metropolitan Ltd., the London-based liquor and entertainment company, for $575 million after a long takeover battle. Grand Metropolitan had already owned 9.5 percent of Liggett, and Liggett had imported Grand Mets J&B Scotch. Liggett initially opposed the purchase, and to dissuade Grand Met sold its Austin, Nichols subsidiary, which made the Wild Turkey bourbon Grand Met wanted to own, for $97.5 million.

With Grand Met, Liggett experienced some success with generic cigarettes over the next several years, but by 1984 larger rivals were challenging it. R.J. Reynolds began selling its Doral brand cigarettes at generic prices, for instance, while Brown & Williamson Tobacco Co. brought out a line of generic and private-label cigarettes. Liggetts management had been considering buying the firm from Grand Met for $325 million, but when Liggetts rivals brought out competing generic products, the groups financing fell through.

Liggetts sales and profits plummeted until it was bought by Brooke Partners in 1986 for $137 million. Brooke installed LeBows partner William Weksel as chairman. Not content with its move into tobacco, Brooke bought 53 percent of telecommunications firm Western Union Corp. in 1987. Founded in 1851, Western Union had once been a communications giant. But the advent of the telephone slowly strangled the firm. By the time Brooke assumed control, the telegraph accounted for less than ten percent of Western Unions revenue. It made more money from its teletypewriter services, mailgrams, and money order service.

When the British shipbuilding concern that was building LeBows private yacht went bankrupt, Brooke bought it for less than $5 million. In 1988, moreover, Brooke proposed a buyout of American Brands. When that didnt work, LeBow tried to persuade American Brands to buy the Liggett Group. That effort failed as well. In the meantime, Liggett introduced the Pyramid brand of low-cost cigarettes, which proved to be one of the most successful cigarette introductions of the 1980s. Then, in 1989, Brooke Partners started SkyBox International Inc., a sports trading card company.

In 1990 the Liggett Group changed its name to Brooke Group Ltd. and announced it would emphasize its push to diversify into sports and entertainment products. Liggett already had a small football and basketball card business, and distributed chocolate mints made in Finland. The cards and candy used the same distribution channels used by the cigarette business. At about the same time, William Weksel resigned and LeBow was elected chair. Liggetts 1989 sales of $572.9 million accounted for the lions share of Brooke Partners total sales, but smoking was under increasing legal pressure. So, Liggett changed its name to Brooke Group and split into two subsidiaries; Liggett Group Inc. managed the firms tobacco business, while Impel Marketing Inc. managed the groups other activities. Impel specialized in the sales and marketing needed to broaden sales of sports and entertainment products.

Later in 1990, LeBow restructured his companies. Brooke Group became the parent of Brooke Partners, which was suffering from the heavy debt it acquired as the result of its many leveraged buyouts. As a result, Brooke Group (formerly Liggett Group) became responsible for Brooke Partners $300 million debt. The interest on the bonds paying for Brooke Partners acquisition of MAI and Western Union came to $45 million a year, severely limiting Brooke Groups cash flow. Some investors were outraged. One portfolio manager told the Wall Street Journal that LeBow took an equity investment and turned it into a junk bond. The price of Brooke Groups shares plummeted.

Brooke Group had been managed by a nominally independent company called Brooke Management Inc., which was owned by LeBow and whose sole client was Brooke Group. In 1991 Brooke Group paid Brooke Management $ 10.2 million for services and expenses. LeBow decided to fold Brooke Management into Brooke Group, and in 1992 Brooke Group paid LeBow $12 million for Brooke Management, a firm whose assets comprised the managerial expertise of LeBow and his associates. LeBow had not drawn a salary as president of Brooke Group, but he did after the buyout.

In 1992 Brooke Group took a charge to restructure MAI and SkyBox International, its sports and trading-card subsidiary. SkyBox lost $80 million in 1991. Brooke Group lost $149.6 million in 1991 and $75.8 million in 1992. Furthermore, its English boat yard, renamed Brooke Yachts International Ltd., went under in 1992, leaving Brooke with a $4.8 million writeoff. Liggetts sales were declining, meanwhile, partly because of a decision to place more emphasis on its full-price brands of cigarettes like Chesterfield, Eve, and L&M. Liggetts cigarette market share had sunk to three percent from six percent since its 1986 takeover by Brooke.

Liggett named Edward Horrigan chairman and CEO in 1993. Horrigan, the former chairman of R.J. Reynolds Tobacco, said that Liggett would look again to the overseas market, try to hold market share of its branded cigarettes, and try to expand the market share of its discount cigarettes. At the same time, Philip Morris and RJR were announcing discounts on their leading brands, thus putting pressure on the discount cigarette market. Liggett restructured its headquarters and manufacturing operations in 1993. In 1994 it reduced its sales force by 150, using 300 part time sales people instead. It also cut employee benefits.

In 1993 Western Union (renamed New Valley) entered Chapter 11 bankruptcy. One of its last remaining profit makers, its telex business, had gone sour as fax technology made it obsolete. Brooke fought with New Valleys debt holders to keep control of New Valleys one remaining profitable business; money transfer. With its U.S. operations in turmoil, Brooke sought to invest in the former Soviet Union. One venture, a joint-venture with the Ducat tobacco company in Moscow, took years to produce a cigarette because of disagreements with the Russian government and other problems.

Fed up with the companys problems, a group of shareholders filed suit against LeBow and four other Brooke officers alleging that they had enriched themselves at the expense of the company, which had been stripped of assets. Soon after, the Wall Street Journal published an intensely critical article about Brooke Group in which it claimed that LeBow has increasingly used the company as a kind of personal bank. The shareholder suit was settled in 1994 after LeBow repaid much of the $20 million that the lawsuit alleged he owed the company. The settlement linked LeBows future salary to company performance, and required approval by outside directors of any transaction of more than $100,000 between Brooke Group and LeBow.

Despite Horrigans efforts, the cigarette market share of Liggett continued to decline, falling to 2.3 percent of the U.S. market in 1994; Liggett held .9 percent of the branded market and 5.4 percent of the discount market. Liggett also sold 750 million cigarettes in the Middle East and Eastern Europe, and produced over 300 combinations of brands, lengths, styles and packages. Overall, Brooke had profits of $110.1 million in 1994 on sales of $479.3 million.

In November 1994, New Valley was forced to sell its money transfer services as part of its Chapter 11 bankruptcy reorganization. After it emerged from bankruptcy in 1995. it bought a 28.2 percent interest in Brazilian airplane manufacturer Empresa Brasileira de Aeronáutica, S.A., for $12.8 million. In March 1995, Brooke sold its remaining 15 percent stake in SkyBox International. The firm also purchased 6.4 percent of the ShowBiz Pizza Time chain, and Ladenburg Thalmann, a 119-year-old New York securities firm that cost it $26.8 million.

By mid-1995 Brooke had improved enough for Business Week to conclude that LeBow was finally paying attention to beefing up Brookes quarterly performance and bottom-line results.

Principal Subsidiaries

New Valley Corp.; BGLS Inc.; Liggett Group Inc.; Impel Marketing Inc.

Further Reading

Atlas, Riva, Blowing Smoke, Forbes, March 29, 1993, p. 60.

Cohen, Laurie P., Ready Credit: Head of Brooke Group Draws on Its Coffers to Tune of Millions, Wall Street Journal, July 30, 1993, pp. A1. A4.

Liggetts New Recipe, Financial World, February 1, 1980. pp. 48-49.

Cole. Robert J., Grand Met Raises Bid for Liggett, New York Times, May 15, 1980, p. D1.

Fineh. Peter, Bennett LeBow: Up from Bottom-Fishing, Business Week, December 12, 1988, pp. 108. 110.

Gloede. William. L&M Smokes Out Generic Competition. Advertising Age. August 13, 1984. pp. 4, 58.

Kansas, Dave, Brooke Group to Settle Shareholder Suit Over Dealings with Chairman LeBow, Wall Street Journal, March 18, 1994.

L&M Smokes Out Generic Competition. Advertising Age, August 13, 1984.

Lowenstein. Roger. Why Some Holders of Tobacco Firm May Feel Burned. Wall Street Journal, November 30, 1990.

Ramirez, Anthony, Liggett to Change Its Focus with Shift from Cigarettes. New York Times, June 22, 1990. pp. D1-D2.

Stevenson, Richard W., Grand Metropolitan Sells Liggett to an Investor. New York Times, October 29. 1986.

Scott M. Lewis

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