Fuqua Industries, Inc.
Fuqua Industries, Inc.
Fuqua Industries is a conglomerate with a history of acquiring, reorganizing and then selling companies. This may seem like an unstable or risky way to conduct a multimillion dollar business, but Fuqua Industries has grown steadily since its inception in 1965. One of the keys to Fuqua’s success is that it concentrates on those operations that can hold susbstantial shares of their respective markets. The three most profitable divisions of Fuqua Industries are also the oldest: Snapper brand lawn and garden equipment, Colorcraft wholesale photofinishing, and a network of sporting goods manufacturers. These have been the operating base of Fuqua since 1967.
Fuqua is a thriving corporation because of an innovative management team at the highest executive level. John Brooks Fuqua, the founder and current chairman, astutely identifies profitable financial ventures. Lawrence P. Klamon, the president since 1981, proved himself when he engineered a reconstruction of Fuqua Industries in the early 1980’s. Fuqua has previously acquired companies rather aggressively, gauging success almost wholly by annual sales and profits, less so by the coherence of industries or Fuqua’s reputation on Wall Street. In the past decade, however, John Brooks Fuqua and Klamon have chosen to invest conservatively in new manufacturing operations, but also to take some risks with a number of sophisticated financial maneuvers.
Raised by his grandparents on a tobacco farm in central Virginia, John Brooks decided early that he did not want to become a farmer. At 14 he ordered a 25-cent pamphlet on operating a ham radio and soon taught himself enough about radio to earn an operators license. After his graduation from high school, he began working for the U.S. Merchant Marines as a radio operator. At 19 John Brooks landed the job of chief engineer at a broadcasting station in South Carolina. During this period, he borrowed books by mail from Duke University on banking, finance and management. He read about business avidly in lieu of going to college. One of the first things he learned from these books was that a successful businessman should know how to use other people’s money. Practicing these lessons over and over again, John Brooks bought land, established credit with local banks, borrowed money for construction, and then sold the whole property for a profit.
John Brooks’ tenure as a radio station engineer was short-lived. He quickly made up his mind to either own or manage his own station. After evaluating the market in several southern cities, he settled on Augusta, Georgia. With three investors to finance the venture, John Brooks became part owner and manager of the new station, and soon made an initial investment of $250,000 in equipment, expanding the operation into television broadcasting. John Brooks took this station public many years later with Fuqua Industries and finally sold what grew to become a network of stations for $30 million in 1981.
Becoming increasingly skillful at turning assets into profits, John Brooks found an opportunity to test his theory that “buying profits would be faster and less risky than growing profits.” He discovered that the owner of a Royal Crown Cola bottling plant had accumulated excess profits and neither paid them out in dividends nor reinvested in the company. Under the current law, such profits would be subject to gross penalty taxes. Persuading the owner that it was in the company’s interest, John Brooks purchased the plant with the owner’s excess profits. When John Brooks sold the plant three years later, he was already testing other markets. A wholesale baker company and a multimillion dollar auto financing business were sold when he developed political ambitions.
In 1957 John Brooks Fuqua was elected to the Georgia State Legislature. He served as chairman of the Senate Banking and Financing Committee and the House Banking Committee, and from 1962–66 he was chairman of the state Democratic Party. Though he loved politics and recommends that every businessman take a greater interest in government, John Brooks’s real ambition was to build a successful conglomerate. Fuqua Industries was founded at this time with the purchase of Natco Corporation for $3 million.
Natco, a brick and tile manufacturer, was the smallest company on the New York Stock Exchange. Despite a downward trend in profits, Natco had a 75 year legacy with solid assets, no debts and a book value double the market value. It served Fuqua Industries primarily as a vehicle for going public; John Brooks served Natco by turning it back into a very profitable company in three years. Although it was sold quickly, Natco launched Fuqua Industries into a period of acquiring interests in a miscellany of industries, including lawn and garden equipment, photofinishing, sporting goods, yachting equipment, trucking, broadcasting, mobile homes, and movie theaters.
Fuqua’s stock remained highly valued until 1970 when the recession and increasing market pressure on conglomerates forced stock prices to decline. From 1969–74, Fuqua stock dropped from $41 to $3 a share. John Brooks realized that the conglomerate needed to write off or sell unprofitable companies to reduce Fuqua’s debt-to-equity ratio. Fuqua trimmed $70 million in sales from it total revenue by selling the large boat manufacturing division, a host of movie theaters, and some fringe sporting goods companies, taking a $20 million write-off and losing $16 million. Fortunately, the cash inflow of $45 million from the sale of many companies, plus the sale of $60 million in debentures and stock, enabled Fuqua to pay off much of its short-term bank debt and refinance the remainder into long-term debt.
This put Fuqua on a sound financial foundation, despite a continuing burden of debt. The reorganization soon provided Fuqua with the opportunity to test a new investment strategy that emerged when John Brooks sought to buy a widely recognized, multinational company that already held a substantial share of its market. His eye was on Avis Corporation, whose stock had been put up for sale by International Telephone and Telegraph in 1977. John Brooks was outbid by Norton Simon Inc., but his thwarted attempt to acquire this billion dollar company energized the Fuqua staff. Identifying another conglomerate called National Industries that was losing money due to poor management, John Brooks deferred to his staff. “My young tigers wanted to turn National around and be heroes,” he said. “I’m not that interested in climbing mountains any more. But they run the company. I try to give them the tools to do it.”
Fuqua purchased National Industries in early 1978, paying a 55% premium over the stock price but still acquiring it for a total sum substantially under book value. Fuqua paid $60 million for National, only half of it in cash and the rest in Fuqua stock and debentures. Since the company had $45 million in cash assets, John Brooks claims that he “bought them with their own cash.”
National comprised a motley assortment of companies —some profitable, some not. Its primary interests were in oil distribution, a farm equipment retail chain, a dairy industry, and an East coast soft drink company. Immediately after acquisition, Fuqua sold the unprofitable companies. For the companies Fuqua retained, management personnel and strategy was reviewed and, in some cases, changed. Finally, Fuqua trimmed operating costs by $1 million by consolidating National’s disparate insurance plans and bank financing under the Fuqua system. This centralization of resources also cut National’s overall expenses in tax, legal, accounting, and public relations departments.
Within 18 months after merging, three National subsidiaries were sold for $66 million in cash, more than what Fuqua had paid for the entire holding company. National turned out to be a highly profitable investment, as well as a good financial exercise in divestiture. By 1978 Fuqua’s earnings had jumped by 82%, exceeding $2 billion in sales by 1980.
Stock prices were still much lower, however, than what the corporation was worth. This prompted Fuqua’s senior vice president of Finance and Administration, Lawrence P. Klamon, to present John Brooks with a proposal to shrink the corporation to one-third its size. The reason for such a drastic divestment, Klamon maintained, was intuition as much as a response to Fuqua’s decline on Wall Street. The corporation’s diversity threatened its reputation, and the quality of its investments were not consistent: some companies operated within unstable industries, some had constitutionally low profit margins, others had assets valued much higher than their earnings substantiated.
John Brooks agreed to the proposal in 1980 and Fuqua sold its trucking company and three television stations. Lano Corporation, a petroleum distributor, and Hawthorne Mellody were sold in 1981. The remaining movie theaters and the Tractor Supply Corporation, operating a store retail chain, was sold by the close of 1983. None of the operations was unprofitable, but Klamon reasoned that they did not fit Fuqua’s new strategy of investing in high-profit, high-quality manufactured products under stable market conditions. Hence the trucking and petroleum companies, while proving themselves to be the greatest contributors to Fuqua’s revenue at one point, operated in highly unstable markets. Trucking deregulation was imminent, which would adversely affect profits. Retail operations were inconsistent with Fuqua’s aim to invest in manufacturing. The dairy industry’s profit margins were too low, while the television stations were too highly valued—they were sold for roughly 20 times earnings. The divestiture was successul; Fuqua’s sales had shrunk from over $2 billion to $732 million and stock prices quickly recovered.
During this restructuring phase, John Brooks contemplated going private. After consulting a private investment firm, Forstmann Little, Fuqua proposed a buyout of all outstanding stock at $20 a share, five dollars over the market price. Less than two weeks after the offer, Forstmann Little itself staged a takeover attempt by persuading four top executives to present a proposal to the board of directors offering $25 a share to all stockholders. John Brooks promptly fired the four executives, and although the board rejected the Forstmann Little proposal, the higher bid made Fuqua’s offer to buy out at $20 per share impossible. John Brooks abandoned plans to go private but tendered an offer to purchase 20% of the oustanding stock, partly to prevent any future takeover attempts. Surprisingly, Fuqua’s offer attracted over twice the number of shares John Brooks had anticipated buying. By 1981 Fuqua had acquired 72% of all outstanding stock at a total cost of $186 million.
Fuqua has since concentrated on its commitment to shareholders to increase the value of its holdings, not the size of the company, by adopting a more conservative approach to new acquisitions and investments. By those standards an eligible company should already hold a substantial share of its market and have a long history or familiar brand name products. Fuqua prefers to invest in products or services that cater to individual consumers, avoiding businesses that are capital intensive, require competitive pricing (e.g., construction), or are dependent on a high level of technical expertise or sophistication. Companies which have established efficient and cost-effective manufacturing plants in or outside of the United States are also favorable Fuqua targets.
Hostile takeovers never played a large role in Fuqua’s acquisition strategy; approval of the new company’s management is a prerequisite for all Fuqua mergers. “You have to have a feeling that things will mesh,” Klamon maintains. “Intuition plays an important role in the overall picture.” So with most newly acquired companies, John Brooks and Klamon have no intention of changing business policy or personnel. To demonstrate this, during the first few months following a merger, Fuqua does not initiate communication with the newly acquired company’s executives.
During the years 1980–84, profits from longstanding investments tripled. Fuqua’s three main divisions have never been unprofitable, but during this period the corporation’s financial base and stock prices quadrupled. Snapper (lawn and garden equipment) grew from a company with nearly $10 million in yearly sales in 1967 to $260 million in sales nearly 20 years later. Still headed by the company’s original founder, Snapper maintains professional loyalty to its dealers and service centers and refuses to sell through discount or mass merchandisers. As a result, the company carves out a larger share of the market for quality lawn and garden equipment each year. Colorcraft’s photofinishing revenues grew from $3 million to over $300 million in a 20 year span. The company continues to grow as it acquires other smaller operations such as Colorfoto Inc., Drewry Photocolor and Berkey Photo Inc. The sporting goods division has wide-ranging interests in camping equipment, boat trailers and various athletic supplies, including exclusive contracts with professional sports teams.
Fuqua’s investments since restructuring, however, have not been invariably successful. With the profitability of its three main divisions secure, Fuqua invested heavily in American Seating Company, acquiring it wholly by 1983. Fuqua intended to build it up into another consistent contributor to annual sales. However, prior to the company’s sale in early 1987, John Brooks admitted that the venture was a mistake because the company was so badly managed.
In 1986 Fuqua entered the financial services field by acquiring the Georgia Federal Bank. This seems to be an area of business that suits Fuqua and will probably take the place of American Seating as the fourth primary division.
Although annual sales of Fuqua have not increased substantially since the restructuring in the early 1980’s, stock prices have remained high—between $25 and $35 per share. Yet Fuqua Industries remains a paradoxical corporation. While it concentrates most of its resources on financially and managerially accountable profitmakers, Fuqua’s most important resource, John Brooks himself, is carving out a new way to earn a profit.
Early in 1983 Fuqua purchased a controlling interest in Triton Group Ltd., a floundering real estate investment trust. Though it was never wholly owned by Fuqua and sold in 1986, John Brooks directed Triton into two highly profitable acquisitions, including Simplicity Pattern, maker of home sewing patterns, and Republic Corporation, a metal products enterprise. Fuqua’s interest in Triton Group was its eligibility for tax loss carry forwards (amounting to $200 million) that could shelter the company’s future profits for a limited period of time, freeing cash to repay debts and make new acquisitions. Concerning this kind of investment strategy John Brooks has said that, “Investing in bankrupt companies is a very sophisticated game. There are still not too many players in that area.”
Although John Brooks hinted at retirement in the late 1970’s, he currently appears to be as committed as ever to working at the office. Admitting that he has never developed leisure interests outside of reading other companies’ balance sheets, John Brooks seems to realize that even in retirement he would be pursuing business ventures.
Ajay Enterprises Corp.; Aliso Management, Inc.; American Seating Co.; Colorcraft Corp.; Fuqua Homes, Inc.; Fuqua SHL, Inc.; Fuqua World Trade Corp.; Georgia Federal Banks, FSB; Hutch Sporting Goods, Inc.; Nelson Recreation Products, Inc.; Weather-Rite, Inc.; Willow Hosiery Co., Inc.
The Story of Fuqua Industries Inc. by J.B. Fuqua, New York, Newcomen Society, 1973.