Farley Northwest Industries, Inc.

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Farley Northwest Industries, Inc.

6300 Sears Tower
Chicago, Illinois 60606
(312) 8767000

Wholly-owned subsidiary of the Farley/Northwest Holding
Incorporated: August 3,1967 as Northwest Industries, Inc.
Employees: 19,000
Sales: $456.1 million

Farley Northwest Industries is a relatively young company when compared to other corporations in America, but middle-aged when compared to the many other conglomerates which were created in the 1960s, when one-product companies started to diversify their operations. Companies which produced a narrow range of products diversified in an attempt to insulate themselves from increasingly unstable competition and erratic demand in the marketplace.

Ben W. Heineman had joined the financially troubled Chicago and North Western Railway company in 1952. He was promoted to president in 1956 and given the mission of returning the railroad to profitability. He made the C&NWs commuter trains the most punctual in the country by demanding strict adherence to schedules and by enforcing discipline. In ten years Heineman brought the C&NW from a $5 million deficit to a $26 million operating profit. He failed, however, in an attempt to create a large midwestern railroad network through a process of mergers, and decided instead to widen the scope of the companys business by purchasing two chemical companies. In 1967 he created Northwest Industries as a subsidiary of the railroad. The following April Northwest was converted into a holding company and parent of the C&NW and its other corporate holdings. That same month Northwest Industries purchased the Philadelphia & Reading corporation, whose assets included Lone Star Steel, Acme Boot, Universal Manufacturing, and Union Underwear.

In 1969 Heineman attempted to acquire the tire manufacturer B.F. Goodrich for Northwest Industries. Goodrich mounted a fierce defense which thwarted the takeover. This caused a temporary crisis of confidence among Northwest shareholders which depressed the companys stock value.

Heineman was also fighting a losing battle to maintain the profitability of the railroad. After several years of unsuccessful attempts to sell the C&NW, Heineman announced an agreement to sell the railroad to its employees for about $415 million plus $19 million in notes payable (book value was approximately $734 million). Under railroad tax rules, however, capital losses were equivalent to operating losses, which meant that the sale could generate a tax credit of over $200 million for Northwest. The C&NW also burdened Northwests balance sheet with $360 million of debt, which discouraged additional infusions of shareholder capital. This, in turn, prevented Northwest from acquiring other more profitable companies. The sale was finalized on June 1, 1972.

Northwest acquired the Buckingham Corporation in May 1971 for $120 million. Buckingham was an importer of wine (Mouton Cadet and Marquisat) and liquor (Cutty Sark and Finlandia vodka). In April 1973 Northwest purchased the General Battery Corporation, a manufacturer of automobile batteries, for about $85 million. In February 1976 the company purchased an 83% share of Microdot Inc., a manufacturer of steel ingot molds and universal-type connecting gears. Remaining shares of Microdot were later purchased, and it was made a wholly owned subsidiary of Northwest at a total cost of $81.5 million. In September the company acquired the BVD underwear label from Rapid American for an undisclosed amount. In November 1977 Northwest purchased a 97.4% stake in the Coca-Cola Bottling Company of Los Angeles (which earlier that year had acquired the Coca-Cola Bottling Company of Mid-America) for $202 million. Despite his record of success during the 1970s, Heineman lost takeover bids for Swift and Home Insurance.

Velsicol, a chemical subsidiary of Northwest Industries, was accused by the Environmental Protection Agency of withholding research information which suggested that two of its pesticide products, Chlordane and Heptachlor, might cause cancer. In an effort to avoid further public relations damage to the company, Northwest entered a plea of no contest to the governments charges. Velsicol was forced to pay additional health settlements stemming from a separate case in which the company mistakenly shipped a flame retardant chemical called polybrominated biphenyl, or PBB, as a livestock feed ingredient.

In June 1981 Northwest sold its Buckingham and Coca-Cola Bottling subsidiaries to Beatrice Foods for $600 million. Northwest received nearly double what it paid for the subsidiaries, and at the same time cleared itself of Buckingham, whose profits declined as consumers began to demand lighter liquors and wines. Lone Star Steel, a Northwest subsidiary which manufactured steel tubing for oil drilling rigs, posed a larger problem. Lone Star was dependent on high oil prices to maintain demand for its products. When oil prices were high, Lone Star was very profitable. But when oil prices stablized and later began to decline in 1981, Lone Star started to lose money and drain profits from Northwest. The companys stock value dropped from $80.50 to $34.75 per share.

In order to raise money, in 1983 the company sold its Microdot subsidiary to a group of investors for $121 million. Despite this, the situation became so serious that Heineman openly entertained the option of selling his company. In 1984 Donald Kelly and Roger Briggs, two executives who lost their jobs at Esmark when the company was acquired by Beatrice, organized an investment group which offered to purchase Northwest Industries for $1.4 billion, or $50 per share. Kelly and Briggs appointed Frederick Rentschler (no relation to Fred Rentschler of United Aircraft) as the new president of Northwest Industries. The arrangement fell through, however, when banks pledged to support the Kelly-Briggs group withdrew.

It was at this time that an energetic young entrepreneur named William Francis Farley appeared. Farley, who has an MBA and a law degree, was owner of the Chicago-based Farley Industries. He made his fortune by building an industrial empire on leveraged buyouts of other companies. Farley offered to purchase each share of Northwest for $42.50 in cash and $7.50 in preferred stock in the new company, in addition to one share of Lone Star Steel, which he intended to spin off as an independent company. Farleys acquisition of Northwest Industries was completed on July 31, 1985, and 71-year-old Ben Heineman, chairman and chief executive officer of Northwest Industries for 29 years, retired.

Farley Industries is a private corporation. By purchasing Northwest Industries, Farley removed the company from public ownership and changed its name to Farley Northwest Industries, Inc. As a subsidiary of the Farley/Northwest Holding Corporation it carried a debt load of $1.2 billion, as compared to $410 million under Ben Heineman. Generally, leveraged buyouts require the acquisitor to borrow heavily from banks in order to finance their takeovers. The debt is then secured by offering the company as collateral. But many analysts agreed that the price paid for Northwest was too high.

Bill Farley may have agreed. Shortly after the takeover he announced his intention to sell a small oil and gas drilling venture for $50 million, the companys 26% stake in Pogo Producing for $90 million, various real estate properties for $30 million, and Universal Manufacturing, an electrical transformer company, for $70 million. (What was actually sold varied somewhat.) The company retained its Union Underwear subsidiary, which markets its products mostly under the names BVD and Fruit of the Loom, as well as Acme Boot, makers of Acme, Dingo, Dan Post, and Lucchese footwear. In addition to the General Battery Corporation, Farley Northwest operates lead smelters in Texas and Pennsylvania and cotton mills in Alabama and North Carolina.

Farley Northwest Industries began generating a modest but respectable profit in its first year. That profit, however, was already set aside for reducing the companys considerable debt. However, Bill Farley doesnt have to worry about disaffected shareholders; since its private the company doesnt have any.