Envirodyne Industries, Inc.
Envirodyne Industries, Inc.
701 Harger Road
Oak Brook, Illinois 60521
Fax: (708) 571-0959
Sales: $650.21 million (1995)
Stock Exchanges: NASDAQ
SICs: 3081 Unsupported Plastics Film & Sheet
Envirodyne Industries, Inc. is the holding company for three plastics specialty companies: Viskase Corporation; Sandusky Plastics, Inc.; and Clear Shield National, Inc. Viskase is the worldwide leading producer of cellulosic (plastic) casings for the preparation and packaging of processed meat products, especially hot dogs, and a leading manufacturer of heat-shrinkable plastic bags and a variety of specialty plastic films for the packaging and preserving of fresh meat, cheese, and poultry products. Viskase brand names include NOJAX cellulosic casings, Filmco shrink films, and PERFLEX shrinkable bags. Viskase also provides graphic arts services for its clients, providing custom artwork for its bags and films. Headquartered in Chicago, Viskase operates nine manufacturing facilities in the United States, and facilities in France, Puerto Rico, Brazil, Canada, Mexico, England, and Wales. Viskase’s annual sales make up approximately 80 percent of Envirodyne’s total revenues.
Sandusky Plastics, based in Sandusky, Ohio, manufactures thermoformed and injection-molded plastic containers for dairy and delicatessen products, as well as horticultural trays and inserts. The majority of Sandusky sales go to dairy product manufacturers in the form of cottage cheese and yogurt containers and the like. Sandusky also provides custom graphics and printing of its customers’ container purchases. The third Envirodyne subsidiary, Clear Shield National, is a leading U.S. maker of plastic cutlery, custom dining kits, drinking straws, and related plastic products. Clear Shield, based in Wheeling, Illinois, sells primarily to institutional customers such as hospitals and schools, and to major fast-food restaurant chains such as Burger King, McDonald’ s, KFC, Taco Bell, Pizza Hut, and others. Clear Shield also sells its plastic cutlery and other products under the Clear Shield and Carnival brand names to the retail consumer market.
Envirodyne, which emerged from Chapter 11 bankruptcy in December 1993, had revenues totaling $650 million in 1995, for an operating income of $38 million but a net loss of more than $20 million. Until 1995, the company was headed by Donald P. Kelly—of Beatrice Cos. leveraged buyout fame—who served as chairman, chief executive officer, and president. Succeeding Kelly was F. Edward Gustafson. Principal shareholders in the company include Malcom I. and Avram Glazer, through Houston-based Zapata Corp., which controlled 40 percent of Envirodyne stock in mid-1996. Envirodyne has come under increasing threat of a hostile takeover by Zapata.
Founded as an Engineering Consultant in 1969
Envirodyne took the long way into plastics manufacturing. The original focus of the company was, in fact, geared toward high technology industries, in keeping with company founder Ronald K. Linde’s background. Linde held master’s and doctorate degrees in material science from the California Institute of Technology. By 1969, at the age of 29, Linde was the director of physical sciences at the Stanford Research Institute (SRI) in Menlo Park, California. There, Linde worked in such areas as explosion dynamics and the effect of extreme heat and pressure on various materials. But in 1969, with $1,800 in savings, Linde set out to form his own company.
“I ran what was like a subsidiary of a company [at SRI],” Linde told the Chicago Tribune, “I had my own financial statements to worry about and had to know how to generate business.... I looked at starting my own business as a chance to get into the real world.”
Linde seemed to take a backwards movement into his own business. “Unlike most who go into business, I didn’ t start with a bright new idea or an invention,” he told the Chicago Tribune. Instead, Linde determined to start up a technology-based company, although he had not yet decided upon a particular technology, telling Engineering News Record (ENR) only that: “I wanted to go into areas that were fragmented.” Linde’s first step was to establish Envirodyne as a broad-based consulting firm. From that vantage, Linde hoped to identify emerging areas of technology.
Linde’s search for fragmented, low-competition technologies led him to focus the company on the fields of environment and energy. He next set out to acquire companies specializing in these areas. Envirodyne’s initial acquisitions primarily involved small engineering consulting firms involved in projects that included designing wastewater treatment plants, slaughterhouses, and even bakeries. In order to finance these acquisitions, Linde initially attempted to take Envirodyne public in 1970. But the times and the market were not ripe for public offerings from small companies. Linde was forced to take a different route to becoming a public company.
Linde began searching for an already established public company to merge into Envirodyne. He found Pony Meadows Mining Company, an inactive mining concern in Nevada, which traded in the over-the-counter market. That company possessed, apart from two undeveloped silver mine claims, some $160,000 in cash and, more importantly, authorization to capitalize six million shares of common stock. At the time, only about one million of those shares had been issued, trading at prices ranging from $1.33 to $4.70 per share. Linde was able to convince Pony Meadows management and stockholders to merge into Envirodyne.
With these new assets, Linde set about building Envirodyne’s consulting capacity. Over the next several years, Envirodyne acquired six engineering consulting firms covering a range of fields. These purchases were accomplished in large part through stock swaps. Acquisitions took up much of Linde’s time during this period. “For every one of the... companies we acquired, we looked at 50,” Linde told ENR, ”and we at least started negotiations with 100.” Linde’s activity paid off, at least in the stock market, raising Envirodyne’s stock to a high of $16 per share by 1972.
Linde envisaged forming Envirodyne into a manufacturing-engineering conglomerate based on the synergistic model popular through the 1960s. By 1975, Linde was ready to expand the company into manufacturing. Over the next two years, Envirodyne would increase the number of its acquisitions to 18, bringing in a variety of small industrial manufacturers. The majority of these companies were active in production for environmental or energy uses, including manufacturers of air purification equipment and pipe insulation. Another company acquired during this period was Pulsar Instruments, Inc., which manufactured electronic instruments such as noise-level meters. Envirodyne also worked on developing technology, chiefly in sonics technology, using sound waves as a power source.
Linde also began raising capital by selling stock in the company. Avoiding investment banking firms and acting instead as the company’s salesman, Linde managed to generate some $4.5 million in stock sales. Yet Linde would tell Business Week that the company’s early manufacturing efforts were “toe-in-the-water things.” Envirodyne soon sought a faster entry into high technology and, in 1977, Linde prepared a new acquisition that would take the company on a headlong dive into manufacturing. Company revenues reached $24 million in 1976. Net earnings that year, however, were slightly more than $250,000.
The Wisconsin Steel Debacle of 1980
Linde soon brought his deal-making experience to bear on a much larger target: the failing Wisconsin Steel division of International Harvester (IH; later Navistar) in Chicago. Wisconsin Steel, with some $200 million in revenues, was roughly 10 times Envirodyne’s size. Yet Linde discovered that IH was anxious to sell off its Wisconsin Steel division, which had lost more than $30 million over the previous five years. IH was said to want to sell the concern, rather than invest in capital improvements later estimated to require some $100 million. The purchase price for Wisconsin Steel was set at $65 million.
In acquiring Wisconsin Steel, Linde orchestrated his most impressive deal, and one that involved virtually no money—and little risk—from Envirodyne itself. Wisconsin Steel, Linde discovered, had about $40 million in iron ore, steel, and coal inventories. Linde was able to convince Chase Manhattan Bank to make a commodity loan of $50 million against Wisconsin Steel’s inventory. Linde managed to secure the loan in part by arranging a deal with Engelhard Minerals Corp., a metals broker, that had that company agreeing to purchase the Wisconsin Steel inventories from Chase in the event Envirodyne defaulted on the loan. In return, Engelhard was given 10 percent of Wisconsin Steel’s pretax profits for seven years. Engelhard also agreed to act as an agent for Envirodyne’s steel output.
From the Chase loan, IH would receive $15 million cash; the remaining $50 million of the purchase price would be paid off over the next 10 years through 8.5 percent notes. In addition, IH was given the rights to convert $10 million of those notes to Envirodyne stock at a fixed price of $10 per share, which at the time traded at about $3 per share. Finally, IH agreed to purchase about 30 percent of Wisconsin Steel production for the next several years. Envirodyne would use the remaining $35 million of the Chase loan to make capital improvements. Now a $250 million company, Envirodyne moved its headquarters to Chicago. Linde proudly forecasted $1 billion in revenues by the mid 1980s.
The deal catapulted Envirodyne into the manufacturing big time. But from the outset, the Wisconsin Steel acquisition seemed doomed to failure. For one thing, the U.S. steel industry was undergoing its own depression as it faced increasing competition from overseas. Linde was able to turn this to the company’s advantage, applying almost immediately after the acquisition for a $90 million load guarantee from the Economic Development Administration (EDA), which sought to stimulate domestic steel production. Despite being among the first to apply for the EDA loan guarantee, however, Envirodyne struggled to meet EDA loan conditions.
Yet the EDA loan was sorely needed: chief among Wisconsin Steel’s problems was its aging equipment. Breakdowns and production bottlenecks had reduced its output to less than 75 percent of production capacity. Much of its equipment, such as the essential blast furnaces, were described as being years beyond their operating life. New environmental control laws enacted by the federal and Illinois governments also required Envirodyne to pour more than $20 million into immediate pollution control improvements, depriving Wisconsin Steel of much-needed capital improvements. Breakdowns were costing the company as much as $22 million per year; unable to meet shipments, the company saw many of its customers turning elsewhere for their steel needs.
Even with all these problems, Envirodyne almost managed to turn Wisconsin Steel around. Despite continued losses totaling close to $20 million in 1978 alone, sales rose 22 percent in 1978, and productivity was heightened, with man-hours per ton dropping from 14 to 10. The company was also gaining new customers, adding some 200—for a 50 percent rise—in two years, and increasing its share of the high-alloy steel market to 4.4 percent from 3.8 percent. And in November 1979, the EDA finally granted Envirodyne the loan guarantee it needed.
It was too late, however. By then, Wisconsin Steel’s blast furnaces were described as “literally falling apart.” Both IH and Chase provided emergency loans to Envirodyne. But just as the EDA loan was approved, new disaster struck in the form of a strike by IH workers. The strike ended IH purchases, which by then accounted for about 40 percent of Wisconsin Steel’s output. Envirodyne’s lenders, arranged under the EDA guarantee, balked at providing capital. Then in March 1980, IH foreclosed on its notes, and told Chase that it would no longer secure the bank’s emergency loans. In response, Chase bounced paychecks to Wisconsin Steel workers. Envirodyne, protected from the Wisconsin Steel failure, was nonetheless out of the steel business. The following year its revenues dropped to $4.5 million. Its stock, too, had dropped, to the neighborhood of 12 cents per share.
Reengineered for the Eighties
“It was like starting over again after Wisconsin Steel,” Linde would tell the Chicago Tribune, ”but we’ ve come back stronger. “Indeed, Linde took Envirodyne in a new direction in 1982, with the purchase of Clear Shield Inc. That purchase, which boosted Envirodyne’s revenues to $35 million in 1983, was accomplished in part by selling 1.5 million common shares to Clear Shield’s parent, Artra Group Inc. Artra would gain an additional 2.5 million shares four years later for a discounted price of $3.25 per share as a “finder’s fee” for helping arranged Envirodyne’s next, and most successful, acquisition. This was the plastics and film division of Union Carbide—then reeling under its Bhopal, India disaster—renamed Viskase after Envirodyne’s $215 million cash and notes purchase in February 1986. Viskase’s revenues had been $275 million in 1985.
By then, Linde finally seemed to have found the industry he had always been looking for: in December 1986, Envirodyne paid $34 million to acquire Filmco Industries (later merged into Viskase), expanding Envirodyne’s reach into the food-packaging materials market. These acquisitions—and a fire at a chief Viskase competitor’s plant—helped boost Envirodyne’s revenues more than 525 percent, to $316 million. Net income boomed to $16.3 million. The following year, sales reached $475.7 million, gaining Envirodyne a position on the Fortune 500 (at number 493).
Linde had just enough time to complete the last of Envirodyne’s major plastics acquisitions, making a 1988 purchase of Sandusky Plastics for $22.6 million in cash and retirement of about $3.5 million in debt. But Envirodyne faced new troubles: its performance had made it a ripe takeover target. Meanwhile, Artra, with nearly a 30 percent share of Envirodyne, was posting losses and looking to sell its Envirodyne stock. By 1989, a potential buyer loomed: Donald P. Kelly, former chairman of the Beatrice Cos., working together with Salomon Bros. Inc. as Emerald Corp., offered $38 per share, worth more than $800 million. In exchange for its Envirodyne stock, Artra received $75 million in cash and an additional $50 million in notes. Artra was also given a 27.5 percent share in Emerald Corp. The new owners took the company private and proceeded to run Envirodyne into bankruptcy.
Bankrupt and Revitalized in the 1990s
Emerald financed the leveraged buyout through bank debt and subordinated debt, leading Envirodyne into 1990—and the worldwide recession—with more than $800 million in long-term debt. By 1991, the company was struggling to repay its senior debt, about $275 million. Revenues had reached $544 million in 1990, but the company’s losses were mounting, rising from $15 million in 1990 to $31 million in 1991. The rising price of oil—a necessary component in the company’s plastic products—prior to the outbreak of the Gulf War added severely to the company’s losses. At the same time, traces of highly toxic benzene were found in one of Viskase’s products, forcing the company to shut down production and chasing away many of the subsidiary customers. Added to the company’s financial problems was a pending $33 million tax bill.
Despite these problems, Kelly continued collecting nearly $1.2 million per year between them in management fees, another $1.7 million per year for Envirodyne’s use of his corporate jet. Kelly and two partners also paid themselves $800,000 each in annual salaries. In addition, Salomon Bros, collected more than $33 million in various fees between 1989 and 1991. Envirodyne attempted to pay down some of its debt by entering into a $171.5 million sale-leaseback arrangement with GE Capital Corp., involving four Envirodyne subsidiary plants. But unable to pay its debt, Envirodyne filed for Chapter 11 protection in January 1993.
Reorganized and Public in the Mid 1990s
The company remained in bankruptcy for less than a year, however. In November 1993, the company surprised its creditors with an aggressive reorganization plan, which, among other elements, allowed Kelly to remain at the head of the company and to continue, through his DP Kelly partnership, to collect management fees worth more than $4 million over two years. Kelly would also come out of the reorganization with about the same percentage of Envirodyne stock he had held before the bankruptcy. Envirodyne managed to convince a majority of bondholders to accept the reorganization, and the company emerged from bankruptcy on December 31 of the same year.
Five days later, the company once again went public. Kelly retired from the company in 1995.
Once out of bankruptcy, Envirodyne continued to face a difficult climb back to profitability. The baseball strike of 1994 cut into hot dog sales—and, correspondingly, Viskase revenues—leading Envirodyne to a net loss of $3.6 million on $599 million in revenues. And in 1996, Viskase, which continued to contribute the largest share of Envirodyne revenues, faced new competition with the re-entry of Viscofan, of Spain, into the U.S. market. That company had been banned from the United States after being charged with stealing Envirodyne trade secrets in the mid 1980s. Envirodyne’s losses continued into 1995, reaching $21.5 million on revenues of $650 million. By mid 1996, the company faced a new takeover threat, led by Zapata Corp., a natural gas company founded by former president George Bush. Zapata had gathered some 31 percent of Envirodyne by 1995; in July 1996, Zapata upped its stake to 40 percent, prompting Envirodyne to institute a shareholder’s rights plan to thwart Zapata’s possible takeover.
Clear Shield National, Inc.; Sandusky Plastics, Inc.; Viskase Corporation.
“Acquisition-Hungry Envirodyne Leaps into Steel,” Business Week, September 12, 1977, p. 96.
Bukro, Casey, “After Bankruptcy Battle, a Repackaged Envirodyne Again Eyes Growth,” Chicago Tribune, February 28, 1994, Bus. Sec. p. 5.
Cleaver, Joanne, “Envirodyne’s Wrapping Up Plastic-Covering Market,” Crain’s Chicago Business, June 1, 1987.
“Consultant Expands Via Steel Mill Purchase,” Engineering News Record, November 30, 1978, p. 30.
“Envirodyne’s Digestion Difficulty,” Business Week, August 6, 1979, p. 34.
Keefe, Lisa M., “Kelly’s Envirodyne LBO Bleeding,” Crain’s Chicago Business, September 9, 1991, p. 1.
Lashinsky, Adam, “While Envirodyne Sinks, Kelly Gets His Fees,” Crain’s Chicago Business, January 25, 1993, p. 3.
McAfee, Andrew, “Savvy Acquisition Set to Boost Envirodyne,” Crain’s Chicago Business, May 26, 1986, p. 4.
Sherrod, Pamela, “Envirodyne Moves Past Steel Failure,” Chicago Tribune, June 28, 1987, Bus. Sec. p. 1.
Snyder, David, “Learning the Hard Way about When to Hang It Up,” Crain’s Chicago Business, March 7, 1994, p. 13.
—M. L. Cohen