Cover

Why Gerry Schwartz Needs Air Canada

Kimberley Noble October 11 1999
Cover

Why Gerry Schwartz Needs Air Canada

Kimberley Noble October 11 1999

Cover

Why Gerry Schwartz Needs Air Canada

He has a firm worth billions and a charmed life: now he is in the fight of a lifetime

Kimberley Noble

The big black Mercedes glides past the beds of goldand wine-coloured chrysanthemums that spruce up Toronto’s business district in early fall. Quickly and discreetly it transports Gerry Schwartz from his Onex Corp.’s corporate headquarters in a gleaming office tower to a lunchtime reception at one of those neo-classicallooking clubs on University Avenue.

Seated behind Tonny the driver, Schwartz dons elegant bifocals and starts riffling through a slab of newspapers and memos, systematically dropping whatever he digests or rejects at his feet. Schwartz uses the few minutes he is in the car to think of ways to combat what he sees as an arsenal of dirty tricks that Air Canada is employing to discredit Onex’s $ 1,8-billion bid to buy and merge the Montreal-based carrier with Canadian Airlines International Ltd. of Calgary. It took a team from Onex, Schwartzs Torontobased investment management company, six months to put the controversial airline deal together. Now, the company’s founder and chief executive has only four more weeks to make it fly. So he makes every minute count.

The car fills with the thwacking sound of pa-

per hitting the floor. When Schwartz comes across an item that requires immediate attention, he punches numbers into the car phone mounted on the back of Tonny s seat, and dictates precise instructions for colleagues. Could Onex vice-president Anthony Melman please inform “his friend in Calgary”—aka Canadian Airlines president Kevin Benson—that it’s time to go public with Benson’s version of what exacdy Air Canada said during the two companies’ aborted merger talks last January. (Benson flies to Toronto the next day to give a news conference.) Would one of Onex’s directors, J. William E. Mingo, QC, a Liberal fund-raiser and one of the most influential business figures in Eastern Canada, call Schwartz back ASAP about a Halifax travel agency that’s running ads warning consumers of the dire consequences of the airline plan? Is there a possibility that Air Canada is behind this campaign? “I don’t think this is appropriate,” Schwartz says. “Let’s talk.”

These days, Schwartz is on the nightly news more often than not; he’s the stiff guy with the frizzy hair and circumflex-shaped eyebrows who is trying to sell Canadians on the merits of the

He has been labelled an American front. But nobody who builds an $ 11 -billion company likes to be called a toady.

Onex deal. On TV, Schwartz, 57, looks either too scripted or overly eager to please. Before an audience, the Winnipeg-born financier holds himself, as a friend once told author Peter C. Newman, with “the impeccable posture of a hand puppet.” But follow him around for a day, and a different picture emerges. Up close—in his car, at home, among friends and colleagues—Schwartz is cheerful and hospitable. Not relaxed, exacdy, given all that’s going on, but focused, calm and comfortable.

Acquiring and building brandname companies is what Schwartz and his Onex team do best. He would be enjoying the corporate hardball with Air Canada except for one thing: this battle has turned intensely and nastily personal. Schwartz has been accused of fronting for an American takeover of Canada’s airline industry and of using his political network to unfair advantage. Why would someone who has got it made risk this kind of aggravation?

He had expected Air Canada, if it could not put together a better offer, to challenge the legality of the Onex bid. The airline also launched a court challenge of the Onex takeovermerger, saying it contravenes a law restricting individual ownership in the airline to 10 per cent. Last week, however, Air Canada lost a pivotal legal battle when an Ontario judge ruled that Onex has the right to call a meeting of Air Canada shareholders before its offer expires. Onex, elated,

in the works, those same restrictions were set aside. Canadians, it seems, think that Schwartz is getting special treatment. In a recent poll, more than two-thirds of Canadians said they were reconciled to having a single national airline— but less than half supported the Onex bid.

These criticisms really bug him. Nobody who has built an $ 11-billion company from scratch likes to be portrayed as somebody’s toady. Of the political accusations, Schwartz snaps: “There’s all this innuendo about whether the fix is in and did Gerry get a big favour from the Liberals. My reaction is really simple: look at our record. It is fantastic. I don’t need favours from the government to succeed.” There are, invest-

promptly scheduled the gathering in Montreal for Nov. 8.

What the Onex boss had not expected was that Air Canada would win so many skirmishes on the anti-Schwartz front. The airline (backed by a growing chorus of critics) has accused him of being “the face” for Texas-based AMR Corp., American Airlines parent, which owns a 25-per-cent stake in Canadian and would put up more than half the cash required for the Onex deal in exchange for 14.9 per cent in the merged airline. Air Canada has also suggested that Ottawa is open to Schwartz’s solution for the ailing industry only because of his connections to Transport Minister David Collenette and other Liberal party members. The airline’s chief executive, Robert Milton, complains that when Air Canada asked the government last winter to suspend competition rules so the two national airlines could talk about merging, it refused. But six weeks after Benson told Collenette that an Onex bid was

ment analysts reckon, three people in Canada with enough money and brains to restructure the war-torn airline business: Schwartz, Vancouver’s Jimmy Pattison and Montreal’s Paul Desmarais. Two of them have so far stayed on the sidelines, preferring to put their cash and energy into investments that don’t land them in court or on the front page every day. Schwartz is bucking the trend. Everyone wants to know, what’s in it for him?

Whatever Schwartz says, it’s not about money. Sure, he wants to see his company grow. But this is no personal getrich-quick scheme. He is already worth an estimated $500 million, and that’s not counting the multiple voting shares that give him control of Onex. Schwartz and his wife, Indigo Books & Music Inc. founder Heather Reisman, own a 12room mansion in Toronto’s Rosedale neighbourhood, have just bought a house in Palm Beach, Fla., and are in the process

of building another in Bel Air, Calif. (Three of their four children live in that state.) They also rent what Reisman, 51, calls an idyllic 100-year-old New England summer house, complete with mildewed wicker furniture, on a bluff in Nantucket.

Schwartz owns a collection of vintage cars, which he talks about excitedly but seldom has the time to drive, and a 19foot dinghy called the Know Heather. “There’s a double meaning to that,” he says. “Heather doesn’t come out on the boat.” The couple is famous for throwing glamorous parties and giving one another lavish gifts. On Reisman’s 40th birthday, .« Schwartz hired the Kingston Trio to sing I for her. She responded by presenting him I with a red Porsche on his next birthday. = When in the south of France, they like to stay at a hotel in Antibes where suites can run up to $4,500 a night. This past summer, they spent a few days in Italy, and five weeks in Spain’s Balearic Islands. Next on their holiday agenda is a millennium New Year’s Eve party at their Florida house. “This,” says one observer of Canadian high society, “will be the party of the decade.”

Yet these are not frivolous people. Rather, they are earnest, committed, philanthropic. Schwartz may throw grand parties, one friend says, “but you’ll find him back in the kitchen talking Middle Eastern politics with [Israeli cabinet minister] Natan Sharansky.” The couple’s interests outside of work and children include Liberal politics, buying and renovating houses, Israel, art, books and, as corny as it sounds, each other. Friends say the relationship hit an extremely rough patch a few years ago, when both Schwartz and Reisman suffered big career setbacks, but the marriage survived. “Heather Reisman is a big passion of mine,” Schwartz says. “I am unbelievably in love with her. I can spend an insatiable amount of time with her. I can go away with her for three weeks with

nobody else there and have more to talk about at the end than I did when we went away.” What does Reisman find so appealing about him? “He is honourable,” she says. “He has unbelievable judgment. And when he says he’ll do something, he delivers.”

For example: Schwartz said, back in the early 1980s, that he was going to build one of those great legendary fortunes, just like Desmarais, and that he was going to do this by starting his own leveraged-buyout firm. The only son of a Winnipeg auto-parts dealer and a lawyer, Schwartz spent his childhood in an apartment upstairs from his grandparents, and then in the upper-middle-class neighbourhood of River Heights. His high-school ambition, he says, was to be “an executive and to have a big job that would pay at least $ 10,000 ayear. I thought $ 10,000 was a big deal.” And in the late ’50s, it was. He studied law at the University of Manitoba, and articled for a well-known Winnipeg tax lawyer named Izzy Asper (who would later build the CanWest Global media empire). By his 20s, Schwartz was beginning to dream of bigger things and a life beyond Winnipeg.

Schwartz quit the law firm and, with his young family in tow, moved to Boston to earn a Harvard MBA. From there, he went to New York City, where he eventually worked alongside Jerome Kohlberg, Henry Kravis and George Roberts, becoming part of the team of bright young investment bankers that pioneered leveraged-buyout techniques on Wall Street. He also did deals with Michael Milken, the junk-bond king.

One night in a Manhattan jazz club in the late 1970s with Asper, the two decided to take what Schwartz had learned to Canada—where, they figured, they would have the buyout field pretty much to themselves. The result was CanWest Capital Corp., which the two men ran until 1983, when their relationship imploded over what began as a difference of opinion over whether to withstand pressure from the company’s banks or sell an insurance company the firm owned. Schwartz, the pragmatist, voted against the more emotional Asper. The partners split CanWest down the middle and Schwartz plowed his share into the investment partnership that would become Onex.

While at CanWest, Schwartz, whose marriage had broken up, travelled to Montreal to check out a distillery company— a potential acquisition. He met Reisman, a single mother, social worker-turned-management consultant and devoted Liberal supporter. She was working for the firm hired to advise the distillery’s bank. Schwartz quickly decided against the asset, but spent two weeks acting interested in the deal—“to the point where it was starting to look odd,” he says. They started dating and moved to Toronto where, in 1981, they bought and began restoring an old rooming house in Rosedale. They were married the following year.

It was during this period, Schwartz likes to say, that he got pulled into Liberal politics “by the whirlwind behind Heather.” He became a major fund-raiser for Liberal leaders John Turner and Ontario’s David Peterson, but Schwartz and Reisman also grew personally close to prominent Conservatives, notably Toronto financier Hal Jackman, former federal finance minister Michael Wilson and both Brian and Mila Mulroney. “Gerry has been involved with just about everybody in power,” a top Liberal strategist explains. “But you also have to realize that this stems in part from a strong sense of public service. And that it’s real, not fake.”

How his wife sees him

Heather Reisman on Gerry Schwartz:

“Gerry’s never been the life of the party. He’s a very reserved, inward kind of person. He is also exceedingly bright and in control of his life. This makes him subject to being mistrusted and disliked.”

“We were living together, then married and sharing all kinds of things. But we were together for seven years before we combined our [collections of] books.”

“Gerry’s never met a place where he didn’t want to own a house.”

For years, however, few people in the investment community were willing to say the same about Onex. When film stars or foreign royalty came to town, one pension manager says,

Schwartz would be on the A-list of movers and shakers everyone would want at the dinner or cocktail party. Yet when it came time to invest clients’ capital, he was definitely B-list, because nobody could be certain what Schwartz was up to or how good he might prove to be.

Onex began as a private company financed by a variety of Canadian pension funds, banks and trust companies. Its mission: to seek out and acquire undermanaged companies, preferably ones with brand-name recognition or divisions of large companies. Among Schwartz’s early purchases were Purolator Courier Ltd. and AMR’s in-flight catering operations, renamed Sky Chefs Inc. Onex then bought up what one Schwartz friend calls “half the U.S. Rust Belt”—rail-car and auto-parts firms—as well as Toronto-based Beatrice Foods Inc. In 1987, Onex went public to great acclaim.

But then the early 1990s hit, and the bottom fell out of anything resembling a 1980s-style financial company. Even the pension funds began questioning the large stock dividends Schwartz was drawing out of Onex. Small shareholders, who often miss the fine print in prospectuses, suddenly discovered the chairman was raking in 20 per cent of the increased value of the company and began screaming at annual meetings. Onex’s share price, which had started out at $20.50 in 1988, hit $4.75 in 1990. Onex sold Beatrice, at a big profit, but Schwartz’s packaging and leasing companies turned out to be more of a challenge than the young company could handle. They were sold at close to or below cost. Yet many acquisitions, including Sky Chefs and Burger King’s distribution arm, began to pay off. Schwartz revamped Onex’s executive compensation system, making it more conventional. The economy bounced back,

but Onex’s subsidiaries far outperformed the overall recovery.

Suddenly, Schwartz was on the corporate A-list. He became known as a long-term, patient investor who knew how to create shareholder value—the Warren Buffett of Canada, a guy who did it his way. (People on the Bank of Nova Scotia board, to which he was appointed earlier this year, are waiting for the day when he shows up in his signature blackon-black ensemble, no collar, no tie. So far, he keeps chickening out. “I went to my first bank meeting wearing a suit and tie,” Schwartz says. “When I got back to the office, they all said, ‘Gerry, you suck.’ ”) Most important, he has managed to attract what every investment banker dreams of—a stable, collegial group of gung-ho executives. Even Asper says good things. “Gerry,” he says, “has built a company out of thin air that is one of the greatest in the country.”

These days, the smart money will follow Schwartz anywhere. When he decided to take a run at buying John Labatt

Ltd., Schwartz had no trouble persuading the giant Ontario Teachers’ Pension Plan Board to back his $2.3-billion takeover plan for the beer, food and entertainment conglomerate. It fell through when Labatt management, miffed by what they saw as Schwartz’s high-handed treatment of them, lined up a Belgian brewery willing to pay a great deal more money. This was the biggest disap-

Collenette’s code

Federal Transport Minister David Collenette last week set out five conditions for any proposal to merge Canadas two national airlines. “The market alone,” he added, “will not decide what is in the best interest of Canadians.”

The conditions for federal approval:

1. Consumers must be protected.

2. Regional services are to be guaranteed.

3. Employee rights and concerns are to be addressed.

4. Industry competition is to be fostered.

5. Effective control must be in Canadian hands.

‘What does he want to be the centre oí attention: his company or himself?

pointment of Schwartzs career. “It hurt,” he says. To this day, he beats himself up for listening to outside investment bankers rather than going with his gut instincts.

On Bay Street, however, most people view Schwartz as disciplined for walking away when the Labatt price got too high. And the company’s big shareholders like what Schwartz did instead. He offered IBM Canada Ltd. $750 million for its in-house parts manufacturing and service division. Under Onex’s management, Celestica Inc., as it is now called, added business lines and signed up new customers. Today, the Toronto-based operation is the No. 3 company of its kind in the world.

The only problem with Onex has been that, away from Bay Street, nobody knows what it is. The company is not a household name and lacks brand recognition— a commodity as important in investment circles as in the supermarket. This is what deals such as the airline merger and the Labatt offer Schwartz. These are trophy companies—and taking one over and turning it around can be better than all the investor-relations firms in the world for raising corporate profile, along with that of the founder and CEO. Schwartz, like every executive seek' “ ing a high-profile takeover, swears that all he wants out of an airline merger is a good business deal, not personal glory. But when, in the history of the modern corporation, did the two not go together?

Besides, as one friend says, “Gerry likes a bit of glitz.” He loves the entertainment business and is close to film producer Robert Lantos and deposed Livent Inc. impresario Garth Drabinsky. Schwartz originally met Barbra Streisand through Onex’s stake, now 26 per cent, in Phoenix Pictures Inc., the Hollywood movie studio that made The Mirror Has Two Faces and Terrence Malick’s war epic, The Thin Red Line. (Schwartz and Reisman hit it off with Streisand, who they now see socially in Los Angeles.) Onex also owns 15 per cent of Robert Redford’s Sundance Resort in Utah. Showbiz scares the suits in the bank towers silly, and it is the only thing that continues to concern them when it comes to Schwartz. Perhaps this is why he plays the Hollywood thing down—saying that while he and Reisman are still sent tickets for the Academy Awards, they seldom attend.

An airline might not have entertainment’s glamour, but it has the public profile. “This is a big issue for Gerry,” a pension manager who has been on the inside of some Onex deals says. “What does he want to be the centre of attention: his company or himself? I would say the latter.” That sense of recognition for what he has accomplished, the manager says, “that’s what his life was missing.”

Sitting behind his desk at the end of a long day, in front of a floor-to-ceiling cabinet of family photographs, Schwartz describes another of his motivations: building a solid company. “In every business we’ve been in, employment is higher than when we started,” he says. Sky Chefs had 6,800 employees when Onex bought it; today it has 27,000. Celestica

started with 2,500 employees and now has more than 15,000. In the proposed airline merger, Schwartz acknowledges that it’s impossible to put Air Canada and Canadian together without job reduction. He insists Onex’s takeover bid is about making money for shareholders. But unlike the hordes of downsizers who have swept North American business, Schwartz believes the way to do this is by investing time and capital in the operating business. That, he says, creates jobs. “Everybody’s spending all their time talking about whose hand is in whose pocket,” he says of the airline proposal. “That’s not the issue. The issue is, what can this airline become ? Combine these two companies, and you’ll have a $9billion, highly profitable domestic franchise that can go out and conquer the world.”

In this age of global companies, does it even matter if Canadians continue to control their own airline? “Sure it does,” says the man who’s accused of fronting American Airlines. “I think Canadians are entided to see the Maple Leaf go around the world and know that it’s Canadian-owned.” He is certain a merged national airline could increase its share of the international traffic in and out of Canada to 50 per cent (from 34 per cent now). “That,” he says, “is $800 million in new revenue and thousands of Canadian jobs.”

All legal and personal attacks aside, Schwartz is determined to find a way to make this deal happen. There’s a possibility that Air Canada and its partners will block his proposal by finding an investment bank or a merchant bank to back an-

other bid—but it wouldn’t, he says, “be a real operating business, not an Onex or a Jimmy Pattison or a Power Corp.” Onex officials told Macleans there is flexibility in their financial offer, but it won’t be revealed unless Air Canada management comes to the table. And Schwartz says Onex is also ready to do what’s necessary to quell fears about the impact on competition, airfares and jobs. If anyone has the skills to manoeuvre a merger through the airline industry’s twin perils of politics and seething rivalry, it’s Schwartz.

But Schwartz’s friends and Bay Street fans are afraid that if Onex doesn’t get its airline—especially given his disappointment over Labatt—Schwartz might never stick his neck out again. He says no. For one thing, Onex is too large to keep growing in the same way it has for the past 15 years. It has to chase the big, contentious deals. “I’ll tell you something else,” he says. “I want to grow. I don’t want to get stuck doing the same thing over and over and think I’m the best at it.” If this deal fails, Schwartz says that, yes, he’ll blame himself. “I’d take it terribly personally. It would hurt. But we’ll dust ourselves off and well come back.” And the next time, the next deal, most Canadians, not just the burghers of Bay Street, will know the names Onex—and Gerry Schwartz. HD