If you think the 1980s are really over, you haven't seen what's going on at Edgcomb Corp., the country's largest steel distribution company.
Edgcomb is a failed leveraged buyout in which a lot of people lost money and some may lose their jobs; in which a perfectly fine but overly indebted U.S. company in a basic industry will probably be snapped up by financially sound foreigners; in which one of America's highest-toned investment banking houses is showing greed reminiscent of the junk bond pushers at the height of their power.
Failed LBOs are a dime a dozen these days. But the 1980s-style greed emanating from Blackstone Group, the New York-based firm that put the ill-fated Edgcomb deal together last year, is something you don't see every day. The head guys at Blackstone -- including Peter Peterson, former secretary of commerce, and David Stockman, former director of the Office of Management and Budget -- consider themselves financial statesmen, and regularly inveigh against government deficits, corporate overborrowing and other forms of financial excess.
But high-mindedness has limits. No one from Blackstone will talk on the record, but Blackstone has tried (and may still be trying) to make off with a $5 million fee for arranging a sale of Edgcomb in which bondholders, preferred stockholders and Blackstone's own investor group are being asked to swallow big losses.
To see what Blackstone is doing here, it helps to know a bit about Edgcomb, which is based in the Philadelphia suburb of Bensalem, Pa., and makes its living by buying steel and other metals at wholesale and reselling at retail.
Edgcomb's business usually produces steady, reliable cash flow and doesn't require much capital spending, making the company such a perfect candidate for LBO-hood that it hocked itself to the eyeballs three times in five years. The third time, unfortunately, wasn't the charm. Last month, Edgcomb defaulted on its 10-year junk bonds after making exactly one semiannual interest payment on them. You can't go belly up much faster than that.
When Blackstone LBO'ed Edgcomb last year, it was following a well-trod path. In June 1984, the game started when Edgcomb Corp. tripled its size by buying Edgcomb Metals, an unrelated company with a similar name, for $213 million, all but $7 million of it borrowed. Then came a January 1986 LBO ($243 million, almost 90 percent of it borrowed). Then, after the company had gone public again later in 1986, came the June 1989 LBO by Blackstone for $331 million, of which all but $14.7 million -- less than 5 percent -- was borrowed. In a leveraged buyout, a company is taken over using borrowed funds, most often by putting up the target company's assets as security.
Although Edgcomb issued lots of junk securities in the Blackstone deal that allowed it to pay much of its interest payments in new paper rather than cash, the company soon found itself unable to make even its cash interest payments without borrowing from banks. The whole steel distribution industry went kaflooey, dragging down debt-laden Edgcomb with it.
Under pressure from Edgcomb's banks, Blackstone and Drexel Burnham Lambert Inc., the firm that peddled the junk for the 1986 and 1989 LBOs, lent Edgcomb money to help it meet its bills. But Drexel went bust, and Blackstone decided that Edgcomb was becoming a bottomless pit and stopped putting its investors' money into it. So Edgcomb skipped the Aug. 15 interest payment on its junk bonds.
As things worsened, Blackstone rounded up Usinor Sacilor S.A., the world's second-largest steel company, to save the situation, sort of. Usinor, owned by the French government, has been on an acquisition binge in the United States -- it owns two businesses here already and is nosing around LTV Corp., the second-largest U.S. steel company. But Usinor wanted to pay less than Blackstone had paid, since Edgcomb is worth less than it was.
Now comes the fun part. It's reasonably clear that Usinor offered a fixed amount -- call it $110 million -- to buy Edgcomb's junk securities and stock at a discount. Those securities had total face values of about $200 million. Usinor left it to Blackstone to round up the securities and to decide who got paid how much.
In the old days, senior bondholders got paid in full before anyone else got a dime, but those days are long gone for reasons we'll get into some other time. Blackstone's initial offer -- a nonpublic document slipped to me by bondholder forces -- proposed paying senior bondholders $79 million, about 63 percent of the $126 million that they're owed. Other holders were offered progressively less, with Blackstone's investors offered 15 percent of what they had paid for their stock. Somehow, the document never gets around to mentioning Blackstone's fee.
This idea of senior bondholders giving up $26 million to stockholders -- with a fee thrown in for Blackstone -- enraged the bondholders, who in typical fashion are threatening to put Edgcomb into bankruptcy if they don't get more money. Usinor, also typically for a buyer in this kind of deal, is threatening to walk away unless the deal is done on its terms by Friday.
Late last week, Blackstone upped the offer to the senior bondholders to $88 million, about 70 cents on the dollar. It's not clear if the extra money came from Usinor, Blackstone's fee or other Edgcomb investors. To be fair to Blackstone, it should be noted that the firm left a $3.3 million fee from the 1989 LBO on the table and that it did find Usinor.
But this isn't Blackstone's finest hour. Why should you pay an investment banker to clean up his own bad deal? You don't pay your auto mechanic a second time if he messed up your brake job. You don't pay the lawn service to revive your grass if they burned it out with fertilizer. But this is investment banking, not real life.
Allan Sloan is a columnist for Newsday in New York.