First Brands Corporation
First Brands Corporation
Danbury, Connecticut 06813-1911
Fax: (203) 731-2518
Sales: $989 million
Stock Exchanges: New York Philadelphia, Midwest, Pacific
SICs: 2673 Plastics Foil & Coated Paper Bags; 2899 Chemicals & Chemical Preparations; 2869 Industrial Organic Chemicals NEC
First Brands is a leading consumer products company with operations based on a number of major brands: STP oil, Glad and Glad-Lock plastic wrap and bags, Prestone antifreeze, Simoniz car waxes, polishes, and cleaners, and Scoop Away and Ever Clean cat litter products. A product of a leveraged buy-out, the company was organized in 1986. Unlike many other products of the leveraged-buy-out mania that existed during the 1980s, the company’s brands were not collected from hostile raids.
First Brands may trace its ultimate origin to an accidental gas leak at a Union Carbide plant in Bhopal, India, on December 3, 1984. The disaster produced a cloud of poison gas that claimed 2,000 lives and injured 200,000 people. Union Carbide, one of the world’s largest chemical products companies, was at the time a hugely successful firm. Through a decades-long process of careful acquisitions and mergers, it had branched into many different types of operations. In fact, it was so diversified that various divisions had lost their focus and had begun to stumble in the market.
The company reached this bloated state during the 1970s and early 1980s, when chairmen F. Perry Wilson and William Sneath blindly pursued industrial expansion. With every new line of business, Carbide grew larger, but proportionally less profitable. By 1984, the company was ready for a restructuring.
The disaster in Bhopal was the critical event that caused Union Carbide to make painful decisions about its future. Several divisions were particularly weak and non-strategic, including plastics, metals, and carbon products. By shedding these peripheral operations, Union Carbide would realize an immediate and badly needed financial windfall. The company would emerge a smaller, but more profitable enterprise that could more easily concentrate on its core operations.
The Bhopal incident caused a flood of lawsuits charging negligence and wrongful death. The government of India, eager for retribution, pressed its claims with great vigor; it even temporarily jailed Union Carbide’s chairman when he arrived at Bhopal to personally inspect the damage. The mounting liabilities forced Union Carbide to commence its reorganization immediately and liquidate underperforming assets to raise cash for legal settlements. Within a year the company took more than $1 billion in write-offs and dumped 4,000 salaried jobs. Analysts predicted the demise of Union Carbide, either by liquidation or hostile takeover.
In 1986, amidst this chaos, Union Carbide did become a target of a hostile takeover. Samuel Heyman and Harold Simmons, who had earlier battled each other for control of G.A.F., shared control of that company, and now, in a rare instance of agreement, decided to use G.A.F. to launch a bid for Union Carbide.
Weakened by Bhopal, Carbide was forced into defensive action. The company had two consumer products divisions—Eveready Batteries and Home and Automotive Products; while Eveready was sold to Ralston Purina, the Home and Automotive Products division was bought by Alfred E. Dudley and 23 other managers in Carbide’s consumer products area. They raised $9.52 million (enough to purchase an 11.9 percent share), and collected an additional $70.5 million from First Boston, Manufacturers Hanover, and Metropolitan Life. For the balance, $760 of debt was raised from banks, shareholders, and a public high-yield bond issue.
The group, organized as the First Brands Corporation, took control of Union Carbide’s STP business, its Glad and Glad-Lock line of plastic bags, Prestone antifreeze, and Simoniz waxes. The deal, concluded in mid-1986, also included product lines and factories in Asia, Canada, and Europe. First Brands entered 1987 as a new corporation with $76.6 million in capital and an astonishing $674 million of debt. With debt at 8.8 times equity, even the slightest mishap could plunge the company into bankruptcy and liquidation.
The company’s first action was to cut the work force by 9.4 percent. Second, First Brands established its headquarters at a more conservative office building near the airport in Danbury, Connecticut—a far cry from the posh suites once occupied across town at Union Carbide. To first reduce its expansive acquisition financing, First Brands had sold its Glad Bag manufacturing equipment for $ 168 million, and leased it back under a less costly arrangement.
In a move that required considerably more creativity, the company set out to improve the value of its brands. With the help of an excellent research and development department, First Brands began shoring up its STP and Glad products. More than 30 product variations were introduced, including Glad bags with handles, Son of a Gun protectant, STP fuel additives, a new Prestone formula, and recyclable garbage bags; by far, their most successful new product was Glad-Lock Zipper Bags with its “Yellow and Blue Make Green” interlocking closure system.
First Brands began a massive effort to increase sales because greater cash flow would enable it to more quickly pay down its debt. With the acquisition of its brands, the company inherited a highly efficient distribution system. This network was well suited for expansion and was targeted for supplying new retail outlets.
First Brands’ automotive products had been available primarily in automotive and discount stores. The largest outlet for Glad wrap and bags was grocery stores. But a new, more powerful retail phenomenon came into being during the late 1980s: warehouse outlets. Retailers such as Pace, Sam’s Wholesale Club, and Price Club had established huge numbers of large stores that carried a limited number of products in great quantities. Consumers who were willing to purchase products in large containers or by the case were afforded impressive savings. Most of the discount over retail prices was absorbed by the retailer, who was selling in great volume with very little overhead.
First Brands cultivated important new supply arrangements with these warehouse stores. Its distribution network was required only to ship the product in great quantities with little or no responsibility for point-of-purchase displays, promotional material, or other marketing devices. Prestone, Glad bags, STP products, and others were sold, literally, by the truckload at these stores. In addition, small investments in advertising provided a highly significant stimulus to sales because warehouse store customers were often purchasing First Brands products in large quantities.
A large chemical plant explosion and increasing demand for ethylene glycol from non-antifreeze manufacturers resulted in spiraling prices. As a result, antifreeze prices—and profit margins—skyrocketed. Under normal circumstances, Prestone accounted for less than 20 percent of First Brands’ sales. Now, however, the brand was up to 27 percent of sales and 30 percent of total earnings.
The danger was that sudden oversupply or the cooling of the economy could produce an antifreeze glut that would slash earnings. Still holding a large debt load, First Brands was hopeful that the tight market would continue. By early 1990, supplies of ethylene glycol gently began to stabilize, and antifreeze prices took a safe, measured decline.
Looking to continue lowering its costs and also expand its fast-growing Glad-Lock product, First Brands took a major step in early 1992. The company announced plans to expand Glad bag manufacturing capacity and relocate certain product operations from a Connecticut plant to Virginia, where costs and taxes were lower. In the process, the company trimmed a further 325 jobs, bringing its total work force down to about 3,350. The company still maintained Glad plants in Georgia and Arkansas.
In February of 1989, to raise additional cash and rid itself of an unprofitable operation, First Brands sold its European operations (including operations in France and Germany and a distributor in Spain) to Dow Brands for a gain of $27 million. A year earlier, First brands had made its first acquisition, Himolene, Inc., a commercial can liner manufacturer and marketer. These efforts enabled First Brands to post an impressive turnaround: in 1987 the company lost $7 million on sales of $837 million, but only two years later, it registered a profit of $61 million on sales of $1.2 billion.
With the company having passed its crisis, First Brands’ institutional investors who controlled ownership felt the time was right to realize a profit on the leveraged buy-out, and sold a 30 percent share of the company to the public. Metropolitan Life and First Boston proposed selling their then 48 percent interest in First Brands in late 1990. On this news, the company’s share price climbed from $19 to $28, implying that First Brands was worth $600 million. But, unable to locate an interested acquirer at that price, Met Life and First Boston later cancelled the offer.
First Brands suffered a small setback in 1991 when the Federal Trade Commission charged that the company made false claims about the degradability of Glad bags. In fact, the bags, when exposed to the elements, did break down and were suitable for composting. However, the government charged that the bags did not decompose properly when buried in landfills. Under a consent decree, First Brands agreed to end broad claims that Glad bags were degradable. The incident had no impact on First Brands’ growth.
The company’s astonishing success with reviving its brands produced the higher cash flows it wanted. In the case of Prestone, the brand had achieved its maximum share in the market, and very high unit sales expenditures could not be recouped with declining margins. But with the economy slowing down and glycol prices dropping, the antifreeze market took a precipitous drop.
In an effort to use its antifreeze production capacity in light of a soft multi-year market condition, First Brands sought out a completely different type of customer. In addition to marketing Prestone antifreeze to consumers, the company pursued large retailers with an offer to manufacture their private label antifreeze. First Brands now manufactures antifreeze for almost all major antifreeze retailers, including Wal-Mart and K Mart. However, this places the discount store brands in direct competition with Prestone, a premium brand.
Economically, this has no negative effect on profits from antifreeze production. Because the store brands are in a different category from Prestone, they do not dilute its well-established quality equity. As long as Prestone maintains an optimal market share, it is rational for First Brands to manufacture—and realize a profit from—competing brands. In the process, it also keeps First Brands’ antifreeze operation working at capacity.
First Brands also has expanded its private label business in the plastic wraps and bags division. Like Prestone, the company’s flagship Glad brand achieved market leadership, but a small amount of excess production capacity remained. These plastic products are labeled with the names of regional store chains and sold in a variety of outlets.
Having made substantial progress in eliminating its long term debt—from 90 percent of capital in 1986 to 53 percent in 1993—First Brands began a new type of effort to expand its portfolio of products. In addition to creating further extensions of existing brands, the company made its second acquisition. First Brands purchased A&M Pet Products for $50 million in 1992. A&M, a manufacturer of premium clumpable cat litter products, received the same treatment as First Brands’ other products. The new brand was put into additional distribution, again using warehouse stores and other major channels, and backed with good promotion.
It is possible that First Brands could repeat this “brand growing” strategy for an even wider variety of products. As long as it can maintain its focus on established consumer products—and avoid non-strategic operations it doesn’t understand as well—First Brands may be poised for strong growth. The elimination of non-core businesses has become the new trend in American business. While diversification affords insulation from erratic business cycles, it also diverts a company’s focus from the mission of its core businesses. For the same reasons that Union Carbide was forced to dispense of its consumer products businesses to concentrate on chemical operations, First Brands has avoided moving into areas outside its core business. This is the company’s greatest strength; it does only what it can do very well.
First Brands is well respected for its marketing capabilities. Perhaps not yet on a par with giants such as Procter & Gamble, the company is clearly in the same league. In order to graduate to Procter & Gamble status, First Brands will likely have to boost its research and development organization, or make more acquisitions.
In its first six years of operation, First Brands has actually invented few completely new products. This is a result of low expenditures on R&D, which amount to about one percent of the company’s sales. But while its future growth may depend on research and acquisitions, First Brands is not exceptionally well prepared to act; the brands it owns were developed under ownership of Union Carbide or acquired, and it still is heavily leveraged. There have been bright spots, though, with the company’s invention of an antifreeze recycling process that eliminates the need for disposal, and its highly publicized blue bag recycling program that reduces costs for municipalities.
Nonetheless, it is possible that bold efforts to invent products or make acquisitions are not yet advisable for First Brands. The company continues to carry a substantial, but decreasing debt burden and is owned in large part by a few large financial institutions. For the time being, the company must remain focused on maintaining high cash flow. But for its efforts, First Brands has been cited as a model leveraged-buy-out and a company to watch.
A&M Pet Products; First Brands Asia Ltd. (Hong Kong); First Brands (Canada) Corporation; First Brands Philippines, Inc.; First Brands Puerto Rico, Inc.; STP (Europe) Limited; Himolene, Inc.; Prestone Technology Systems, Inc.; STP Consumer Services, Inc.
Byrnes, Nanette, “All Grown Up with Someplace to Go,” Financial World, March 2, 1993.
“Dow Chemical Agrees to Buy First Brands’ European Business,” Wall Street Journal, February 8, 1989, p. C17.
Frank, Allan Dodds, “Shark Bait?,” Forbes, November 18, 1985, pp. 114–19.
Meier, Barry, “Carbide Stock Is Rising to Pre-Disaster Levels on Hopes for Quick Pact on Bhopal Claims,” Wall Street Journal, July 1, 1985, p 35.
Roberts, Johnnie L., “First Brands Pulled from Sales Block by Major Investors,” Wall Street Journal, October 31, 1990, p. A6.
Saddler, Jeanne, “First Brands Settles FTC Case on Claims about Trash Bags,” Wall Street Journal, October 10, 1991, p. B6.
Vogel, Todd, and Leah J. Nathans, “First Brands: Anatomy of an LBO that Worked,” Business Week, December 4, 1989, p. 104.