Incorporated: 1967 as SSI Computer Corp.
Sales: $1.68 billion
Stock Exchanges: New York
SICs: 5065 Electronic Parts & Equipment, Nee; 5063 Electrical Apparatus & Equipment, Wiring Supplies & Construction Materials; 7359 Equipment Rental & Leasing; 3678 Electronic Connectors; 4741 Rental of Railroad Cars; 4011 Railroads, Line-Haul Operating; 4111 Local & Suburban Transit; 4789 Transportation Services, Nee; 1629 Heavy Construction, Nee
Itel Corporation is a diversified transportation and logistics company. Its principal business operations are divided between the following subsidiaries: Anixter Distribution and ANTEC are leading U.S. suppliers of wiring system products for voice, data, and video communications as well as for the transmission of electrical power; Itel Container is the world’s largest inter-modal container lessor; and Itel Rail Corp. is a leading lessor and manager of railcars in the United States and a manager of several shortline railroads and rail car maintenance facilities. Anticipating growth potential in data networking and cable industry, Itel shifted primary emphasis to its Anixter and ANTEC units in the early 1990s. The company also made minority investments in other enterprises ranging from energy to real estate.
Itel was founded in 1967 by San Francisco businessmen Peter Redfield and Gary Friedman, primarily as a leasing company for computer systems. With $72,000 of their own capital, the partners raised $10 million in equity from Fireman’s Fund Insurance Company. They hired a staff of aggressive young businesspersons to develop innovative, intricate, and often risky financial mechanisms. Itel set industry records by achieving $1 billion in revenues in its first 12 years.
Such growth was largely attributable to the computer leasing business. After investing $90 million in IBM System/360 computers, Itel leased the systems, with accessories, at highly competitive prices made possible by careful financial planning. Itel found equity investors willing to put up 20 percent of the cost of a computer in exchange for depreciation and investment tax credits. Lenders covered the other 80 percent. In the end, the lessee paid the lenders and equity investors for the cost of the machine—at rates below those available directly from IBM— while Itel earned a fee and interest in the residual value of the computer. By 1979, Itel had written $1.7 billion in leases on IBM-compatible equipment, second only to IBM itself.
In addition to computer leasing in the 1970s, Itel experienced rapid growth in a variety of other financial services. Itel Air, for example, leased and sold aircraft to realize a pretax profit of $13 million in its second year of operation. Itel Capital was formed to extend leases on less expensive equipment ranging from machine tools to boilers and minicomputers. Highlighting the company’s penchant for innovative leasing deals, a security analyst speculated in an October 8, 1979 article for Fortune magazine: “They would have started making portable toilets if the cost were a least $1 million each and they were leasable.”
The company also began extensive investment in railcar and intermodal container leasing, starting with the 1968 acquisition of SSI Container Corp. Other related expansion included the June 1970 formation of SSI Trailer Corp.; the February 1973 organization of SSI Navigation, Inc.; the November 1973 acquisition of M.J.B. Management Corp. and subsidiary Transportation Management Services, Inc.; and the May 1975 formation of SSI Rail Corp. to lease freight cars into the U.S. Rail System.
Further growth occurred in the area of transportation services, primarily rail transportation. In July 1977, Itel acquired McCloud River Railroad Co., a short-line railroad in California, and its Wisconsin division, the Ahnapee and Eastern Railroad Co. In November 1978, Green Bay & Western R.R. Co. was also acquired.
Itel’s rapid growth translated into an unusually flamboyant corporate style. The fact that revenues had grown at a compound annual rate of 48 percent from 1972 to 1979 manifested itself in everything from plush offices embellished with Persian rugs and objects d’art to sporty company cars. Company drinking fountains featured Perrier water, and January annual meetings were lavish: a seven-day Caribbean cruise, costing the company $1.5 million, was arranged for 1977, while the following year, 1,200 employees were flown to Acapulco. Salaries were also generous; young managers typically received salaries of $100,000 in addition to attractive stock plans. Compensation for Peter Redfield, president and CEO, surpassed $600,000.
Such opulence came into strong relief against a backdrop of financial difficulties beginning in the mid-1970s. In 1976, when IBM introduced its System/370, the value of Itel’s substantial inventory of System/360’s plummeted. Redfield and Friedman managed to compensate for the loss by switching accountants and selling off a subsidiary. While it seemed that the company had learned a lesson—to avoid owning a large stock of data processing equipment—another breach in that maxim caused irreversible damage just a few years later.
In 1977, Itel contracted National Semiconductor Corp. and Hitachi, Ltd., of Japan to build central processing units interchangeable with those made by IBM. In 1978, Itel shipped over 200 of its systems, called Advanced Systems, and booked an operating profit of $73 million. Projecting continued success, the company signed long-term purchase contracts with its two suppliers and increased its marketing force by 80 percent.
In case sales of its Advanced Systems were not as bullish as planned, Itel had arranged a seemingly foolproof insurance policy with Lloyd’s of London. Between 1975 and 1978, Lloyd’s insured Itel against losses in the event a lessee might return a computer before termination of the agreed lease. In essence, Itel was insured against technological change that might render obsolete its leased computers.
Despite insurance coverage, technological change arrived quickly, adversely affecting sales of Itel’s Advanced Systems. Widespread industry speculation suggested that IBM was planning to launch a new line of machines for the first quarter of 1979 (the IBM 4300 Series). Customer uncertainty regarding IBM’s plans put much anticipated business on hold. In addition, the wait for IBM’s announcement stifled sales in Itel’s System/370 business as well as its recent $10 million investment in minicomputers from Data General. Itel’s first quarter report for 1987 showed a loss of $4.4 million in overall computer operations.
Even with reduced sales, Itel was committed to long-term purchase agreements with its computer manufacturers. While Hitachi had agreed to cut back on deliveries, National Semiconductor refused to do the same. Sales remained flat, and inventories of Advanced Systems swelled to around $45 million. Such pressures were exacerbated by delays in insurance adjustments by Lloyd’s. By August 1980, Lloyd’s had paid only $8.4 million of $21.5 million in claims. In an attempt to raise cash, Itel began selling assets, including a railcar manufacturing plant, eight ships, an information service for stockbrokers, and even the corporate airplane. Despite $175 million raised, the second-quarter report for 1979 showed a $60 million deficit. Itel’s board demanded decisive changes in management and business strategy.
Immediately following the disastrous second-quarter report, Itel’s executive committee decided to dissolve the office of the president, which had earned the acronym, “OOPS,” by disillusioned management. Within a week, Redfield was forced to resign, shortly followed by Friedman. Thomas S. Tan, formerly head of transportation services, was named president and chief operating officer. The position of CEO remained empty until the March 1980 appointment of James Maloon. In a strategy to reverse losses, Maloon focused operations on Itel’s railcar and container leasing divisions as the core of renewed business.
By February 1981 Itel’s annual revenues had shrunken to roughly $210 million, and its debt had swelled to $1.3 billion. On January 1 the company sought protection under Chapter 11 of the bankruptcy code. When it emerged two years and eight months later, Itel was a mere shadow of the computer-leasing giant of the 1970s. Whereas $661 million in revenue netted $21.5 million from computer leasing in 1978, Itel earned $19.4 million on $83 million in revenues in the first half of 1983. After leading the company through the restructuring plan as chairperson, president, and chief executive officer, Herbert Kunzel passed command to a post-reorganization team headed by William P. Twomey.
Reorganization did not bring immediate success. By 1984, Itel’s core business was in railcar and container leasing, markets that were still in the throes of a three-year slump. After emerging from bankruptcy, the company faced $317.5 million in secured debt and $217.5 million in notes. Interest payments alone in the first nine months of 1984 amounted to $60 million, contributing to a net loss of $6.7 million.
With its finances in the red, Itel drew the attention of Samuel Zell, an entrepreneur with a reputation as a wildly successful turnaround artist for distressed real estate and undervalued, publicly held companies. Zell’s knack for resurrecting dead real estate operations had earned him the name “Grave Dancer.” His entrepreneurial zest began with investments in foreclosed student housing at the University of Michigan law school in Ann Arbor, Michigan. Within 20 years, he had amassed holdings reportedly worth $2.5 billion, ranging from stakes in Mississippi River excursion business to mobile home manufacturing. By 1985, Zell was chair and general partner of the Equity Financial and Management Company, a privately owned real estate management company based in Chicago. He was also chairperson of Great American Management and Investment Inc. (GAMI), a diversified real estate investment company that was emerging from bankruptcy when Zell took it over in 1980.
In 1983, Zell began acquiring shares in Itel’s common stock and common stock warrants, of which he owned 22 percent by early 1985. Despite management’s initial objections, Zell’s growing interests in Itel won him a board seat in November 1984. After the resignation of Twomey, Zell was elected as Itel’s chair and CEO in April 1985. In October of that year, Rod Dammeyer moved from his post as senior vice-president and chief financial officer for Household International Inc. to assume the presidency of Itel. Dammeyer and Zell immediately began a restructuring plan to revive Itel.
In March 1985 Itel increased its interest in Great Lakes International Inc., a marine dredging company, to approximately 18.7 percent. In January 1986 all remaining outstanding shares of Great Lakes were acquired. With the passage of the “Deep Ports” bill in 1986, $2 billion in federal funds were allotted to the redredging of port areas around the United States. Great Lakes revenues rose 61 percent to $172 million, with two deep port contracts in 1986 alone.
On December 23, 1986, Itel acquired 98 percent of Anixter Bros. Inc., a supplier of wire and cable to the communications and cable television fields, for about $500 million. On January 14, 1987, Anixter became a wholly owned subsidiary of Itel and reported gains of 23 percent to $835 million.
A program of aggressive acquisitions continued through the late 1980s. Between 1986 and 1987 revenues jumped from $288.7 million to $1.27 billion. In March 1987, the company purchased the container fleet and certain related assets of Flexi-Van Leasing Inc., for approximately $235 million. Combined with Itel Containers International Corp., the fleet combined approximately 370,000 TEUs (20-foot equivalent units) of equipment and over $500 million in assets. To manage these and other assets, Itel formed Itel Transportation Services, an umbrella organization for the company’s $700 million investments in railcar leasing, short-line railroads, and container leasing businesses.
Other acquisitions continued at a rapid pace. In August 1987, Itel acquired approximately 20,000 railcars and related assets from Evans Asset Holding company for about $300 million. With the January 1988 purchase of Xtra Corp’s container fleet for approximately $130 million in cash and stock, Itel increased its stakes in ocean shipping. Then in September of that year, Itel acquired from The Henley Group, Inc. its Signal Capital operations and Henley’s stock positions in two major transportation companies, Santa Fe Southern Pacific Corp. and American President Cos. Ltd., for a total of $1.2 billion. Signal Capital was engaged in diversified financing activities, including railcar leasing through its Pullman Leasing division. Pullman’s 30,000 railcars combined with Itel Rail’s fleet of 43,000 railcars to make Itel the largest railcar leasing company in North America.
Itel’s railcar leasing and railroad businesses escalated during this time. In October 1988, Itel Rail purchased the B.C. Hydro Rail Freight Division, a 141-mile line in southwestern British Columbia. Itel Rail built its first new maintenance facility in Dothan, Alabama, in 1989. Optimizing access to multiple customers, the company situated its shop on Itel’s Hartford & Slocomb Railroad, linked to the CSX, Norfolk Southern, and Atlanta & Saint Andrews Bay railroads.
Preparing for new growth in European transportation opportunities, Itel purchased about 35 percent of Grand Transport Systems of Great Britain in March 1990. A leading European lessor of marine container chassis equipment, Grand Transport operated lease fleets in Germany, the Netherlands, France, Denmark, and Belgium. Itel hoped to gain exposure and firsthand knowledge about transportation and distribution industries in Europe.
By 1989, having rebounded as one of the nation’s fastest growing companies, Itel began trading on the New York Stock Exchange after an eight-year absence. Placement on the “Big Board” reflected Itel’s tremendous growth since its 1985 restructuring: during a four-year period, revenues rose 730 percent to $1.6 billion, gross cash flow increased to $371 million from $90 million, and total assets more than quadrupled to $4 billion in 1988.
To accommodate such rapid growth, Itel greatly expanded its nationwide network of distribution centers in the late 1980s and early 1990s. In June 1989, the company acquired Paul Jeffrey Company, Inc., with five distribution centers comprising over one million square feet of space. One year later, Itel raised its number of distribution centers to 38 with the acquisition of Dornbush Group of Atlanta. By 1993, Itel boasted in its annual report of a “hub and spoke” distribution system, with inventory stored in state-of-the-art facilities throughout the United States, Canada, the United Kingdom, and Continental Europe.
In the early 1990s, Itel took aggressive steps to lower its debt burden. In a January 1990 move to reduce funding costs, Itel and Chemical Bank worked out a scheme whereby a special purpose subsidiary, Itel Rail Funding Corp., would use railcars and leases belonging to Itel as collateral behind a debt issue. Itel would sell fixed-rate leases on 6,500 rail cars to the subsidiary, which would then sell securities to investors, who would be repaid interest and principal from payment received on the leases. For additional protection of investors, Itel would also sell the actual railcars to the subsidiary.
Itel made several other moves to reduce debt. In December 1990, the company sold its intermodal container leasing assets to General Electric Capital Corp. for approximately $825 million, stunning analysts and employees. In March 1991, Itel sold its investment in American President Companies, Ltd. for $79.2 million. Then in June 1991, Itel sold substantially all of the assets and business of Itel Distribution Systems, Inc. for approximately $32 million. In October 1991, it continued the trend, selling Great Lakes Dredge & Deck Company to Blackstone Capital Partners L.P. for approximately $165 million in cash. And in January 1992, Itel Rail Corp. agreed to lease its entire fleet of 70,000 railcars to GE for a period of 12 years at $150 million per year. While many employees at Itel’s San Francisco-based subsidiary would lose their jobs, proceeds from the deal were used to pay off high-cost debt.
With raised capital, diminished debt, and new management, Itel took steps in the early 1990s to focus the company on the rapid growth of two major operating business units, Anixter Distribution and ANTEC. Anixter specialized in wiring systems products for data, voice, video, and multimedia networks, as well as power applications. ANTEC was formed as a stand-alone business in 1991 to develop new potential in the cable television (CATV) and broader telecommunications industry. By 1993, Itel had developed international markets for the two divisions. Anixter added offices in Kuala Lumpur, Hong Kong, and Taiwan to its existing Pacific Rim operations in Singapore, Melbourne, and Sydney. Other opportunities were explored in Southeast Asia, Latin America, the Middle East, and Eastern Europe, while business in Western Europe—France, Germany, Italy, Norway, Portugal, Spain, Switzerland—and Mexico, Australia, and Singapore, virtually exploded from 1989 to 1992.
By 1993, Anixter and ANTEC showed positive growth. Their combined operating income before amortization and extraordinary items was $18.8 million in the first quarter of 1993, up from $15 million in the same period the year before. Yet Itel as a whole incurred substantial, albeit less, losses for the same quarter, reporting a net loss of $6.6 million or $.023 a share of first-quarter 1993, compared with a net loss of $12.9 million or $.041 a share in 1992. Itel’s new focus on Anixter and ANTEC would have to continue to foster rapid growth for the company to establish itself firmly in the 1990s. Samuel Zell, the CEO and reputed “Grave Dancer,” still faced several challenges in attempting to resuscitate an ailing enterprise. Yet Paul Merrion, in an April 15, 1991 article for Crain’s Chicago Business, suggested that Zell might better be described as a “high-wire artist,” struggling to sustain Itel by expanding cyclical businesses and selling assets during a recession. Whether raising the dead or crossing a tight-rope, Zell and Itel faced challenges into the 1990s.
Itel Rail Corp.; Anixter Bros., Inc.
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____. “Zell’s Itel Needs its Own Workout; Grave Dancer Finds Problems Close to Home,” Cram’s Chicago Business, April 15, 1991, p. 17.
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