ONEX IS LARGELY UNKNOWN AT HOME, BUT ACTIVE IN AMERICA
ONEX IS LARGELY UNKNOWN AT HOME, BUT ACTIVE IN AMERICA
There are power tools whining in the background, the walls are bare and rolls of richly colored carpets are waiting to be unfurled over the polished hardwood floors. Although Onex Corp. moved into lavish lakeview offices in downtown Toronto last April, there seems to be no hurry to transform empty space into the diversified management company’s corporate headquarters. For one thing, the driving force behind Onex, its founding chairman and chief executive officer, Gerald Schwartz, 51, has been occupied elsewhere. In rapid succession, he has recently shuffled Onex’s stable of assets—selling the bulk of its 78-percent stake in Purolator Courier Ltd. to Canada Post, selling part of its investment in U.S. supplier Automotive Industries Holding Inc., and making an initial public offering of shares in its freight car company, Johnstown America Industries Inc. For another thing, Schwartz, who brought a whiff of Wall Street glamor to Canada with his splashy leveraged buyouts and his political connections, is not a man who likes to be rushed. “We take an excruciating length of time to buy an asset,” he says. “We did nothing in the late 1980s because of all the pressure to do deals. That’s not our game.”
While Schwartz may have a strong vision of the Onex “game,” it is not one that is widely understood in Canada. Despite the fact that he has extended the company’s entrepreneurial reach beyond Canada and into the highly competitive American market, its recent string of successes in the U.S. industrial manufacturing and food services sectors has gained limited atten-
tion at home. And even though the leveraged buyout business crashed to earth in 1990 along with junk-bond king Michael Milken and such corporate high-flyers as Robert Campeau, Schwartz is determined to prove that the formula still works and that debt is not a dirty word. In fact, using significant amounts of debt as leverage, Onex continues to acquire undervalued companies and restructure them or add to their asset base
with a view to reselling them at a profit
But with the $30-million sale of Purolator announced in June, the company will no longer have any major Canadian holdings. And even before that deal, 85 per cent of its $1.6-billion asset base—and most of its 1992 revenues of $2.8 billion—were in the United States. “Essentially,” says Terrence Fisher, an investment analyst with Toronto-Dominion Securities Inc. in Toronto, “Onex is an
American company that has been built up and is managed by Canadians.” That situation has left Onex in an unusual predicament. Ira Gluskin, a money manager at Gluskin, Sheff & Associates in Toronto, says: “In Canada very few people have heard of companies like Johnstown America. In the United States, where those names might mean something, no one has heard of Gerry Schwartz or Onex.”
As a result, there is a widespread uncertainty in Canadian markets about Onex that is clearly—and stubbornly—reflected in the company’s share price. In April, 1987, Onex issued stock for the first time, at $20.50 a share. When the equity market crashed six months later, Onex shares plummeted to $8.50 and, while they have recovered somewhat, closing last week at $12.25, they have failed to regain their initial price, embittering many early investors. “Investors were greedy for stock, bought at the peak of the market and got bagged,” says Fisher. “They blame Schwartz for that.”
Yet another problem for Onex is that it is a
conglomerate at a time when shareholders clearly favor those companies that focus on a single core business. Currently, diversified companies bear a market discount of up to 30 per cent on the potential market value of their assets. Onex currently controls two food service companies, construction and automotive industry suppliers, a freight car manufacturer, a wire mill, all in the United States, and a beverage dispensing equipment company in England.
Because of its heavy reliance on debt to finance such acquisitions, Onex is also plagued by its image as a leveraged buyout (LBO) company. In the 1990s, leveraged buyouts and the high corporate debt levels associated with them have become popular symbols of the greed and feverish financial climate of the late 1980s. Still, Schwartz insists that Onex is not a typical leveraged buyout company because it does extract fees from the companies it purchases, it does not rely on subsequent asset sales to cover the cost of a deal, and it tends to buy assets that complement existing investments. Furthermore, the company refused to participate in the frenzied binge of premium-priced mergers and acquisitions in the late 1980s. Schwartz estimates that in 1988 alone, Onex managers looked at 100 possible acquisitions and turned them all down. He adds, “It’s unfair that the LBO stigma has attached to Onex— and to me—because of my career and connections on Wall Street.”
Certainly by the standards of most other Canadian executives, Schwartz has had an eclectic career. After obtaining commerce and law degrees from the University of Manitoba, the Winnipeg native headed to Harvard University outside Boston, where he earned a master’s of business administration in 1970. Following a summer job in Switzerland as executive assistant to flamboyant international financier Bernard Cornfeld—whose Investors Overseas Services collapsed in 1973 amid allegations of fraud—Schwartz joined Bear Stearns & Co., a Wall Street firm that specialized in U.S. corporate mergers and acquisitions. Among his colleagues at Bear Steams were Henry Kravis, Jerome Kohlberg and George Roberts, who later formed the notorious leveraged buyout firm KKR, which launched the ill-fated takeovers of RJR Nabisco and Beatrice Cos.
In 1977, Schwartz returned to Winnipeg where he joined forces with lawyer Israel (Izzy) Asper to form CanWest Capital Corp., the corporate precursor of Asper’s CanWest Global Communications Corp., which owns the Global Television Network and other broadcasting properties in Western Canada. Having acquired several small Canadian companies over seven years, the two partners dissolved their venture after reportedly diverging over “strategic direction.” Schwartz moved to Toronto in 1983 where, backed by former CanWest investors, he started Onex Capital Corp.
ONEX’S HOLDINGS Sky Chefs Inc., Dallas (in-flight catering) ProSource Distribution Services, Miami (fast food restaurant supplies) TMB Industries, Chicago (concrete, freight cars, wire mills) Hidden Creek Industries, Minneapolis (automotive industry supplies) The Diggs Group, Dayton, Ohio (food service equipment supplies)
As Onex began to take shape, Schwartz made a splash in social and charity circles, marrying consultant Heather Reisman, now president of soft drink manufacturer, Cott Corp., which is controlled by Schwartz’s longtime booster and Onex director Gerald Pencer. He gained further prominence as the chief Liberal fund-raiser during John Turner’s election campaign in 1988, and lavishly entertained such high-profile guests as Senator Leo Kolber, Senator Keith Davey and Garth Drabinsky at his newly renovated mansion in Toronto’s affluent Rosedale neighborhood. Schwartz has also dabbled in personal investments, such as helping to finance the takeover of Canadian winery T. G. Bright in a bidding war against rival Andrés Wines.
Private Canadian interests aside, however, Schwartz says that Onex will continue to invest in the U.S. market. But, to date, he says that he has no plans to move the company south of the border. “I lived in the U.S. for 10 years and I made a conscious decision to return—and stay—in Canada,” he says. But, he adds “even though I love it here, I prefer to do business there.”
The company will also continue to defy the market by acquiring widely assorted holdings because, Schwartz insists, the strategy of deliberate diversification helped “on balance” to stabilize Onex’s financial performance during the recession. Furthermore, he says that he is pessimistic about Canada’s economic future—even if a Liberal government is victorious in the upcoming federal election. Declares Schwartz:
“Canada’s economy is structurally, fundamentally disadvantaged. The problems transcend party lines. And there are so many more attractive, long-term opportunities in the United States.”
Onex’s experience in Canada has clearly shaped that assessment. In fact, the only significant problems that the company has encountered to date have been in the domestic arena. In 1987, among other assets, Onex
acquired Onex Packaging, the Canadian subsidiary of Connecticut-based American Can Co.; Norex Leasing, a leasing company controlled by New York City-based Citibank; and Purolator Courier Ltd. Although each of the three companies was an industry leader at the time, that proved to be inadequate protection.
When Onex acquired Onex Packaging in 1984 for $220 million, it was the largest leveraged buyout in Canadian corporate history. Two years later, Onex Packaging, which manufactures rigid packing materials, raised $55 million in a public share offering to cover the costs of new high-technology equipment and business restructuring. By 1987, however, stiff competition from the United States along with technical problems and the loss of a major client culminated in the company experiencing a $20-million loss on revenues of $425 million. In order to bolster the company’s flagging performance, Onex and U.S. packaging company, Ball Corp. of Muncie, Ind., spent $89 million in 1988 to take Onex Packaging private again. Although Onex posted a pretax gain of $63 million from the ultimate sale of Onex Packaging and distributed a portion of the proceeds to shareholders in a special dividend, Schwartz learned a hard lesson about “economies of scale” in the North American market. Today, he says: “It’s just not good enough to be the best in Canada. That means you’re number 10 everywhere else.”
The investments in Purolator and Norex were also homegrown disappointments for Onex. In the courier business, fierce competition and a stubborn recession resulted in a 1992 loss of $9.4 million on revenues of $553 million. With Norex Leasing, which was eventually sold to the Canadian Imperial Bank of Commerce at a break-even price, the business was adversely affected by a sudden change in federal tax regulations governing leased equipment. In Onex’s 1992 annual report, Schwartz candidly stated that “sometimes investments don’t work out as expected.” But, he added, Norex “was a good example of Onex’s willingness to act to conserve value when circumstances go against us.”
At the same time as Schwartz worked to reduce Onex’s Canadian holdings, he focused increasingly on opportunities in the United States. In 1987, Onex bought the airline catering division of American Airlines. Since then, in addition to renewing long-term contracts with American, Onex has aggressively expanded its operations to supply catering to many other airlines. Despite the recent slump in airline industry profits, Schwartz claims new international alliances between airlines are rekindling an interest in improving in-flight meals as a competitive tool. Similarly, Onex last year bought ProSource, the U.S. supply distribution subsidiary of Miami-based Burger King. Through small additional acquisitions and strong marketing initiatives, ProSource is now providing the same continental service to other fast-food chains such as Wendy’s and Kentucky Fried Chicken.
In its acquisitions, Onex uses debt as the principal financing tool and ensures that servicing the debt becomes the responsibility of the operating unit, with no legal recourse to Onex. With the 1987 purchase of Beatrice Foods Canada Ltd. when its Chicago-based parent was dismantled, Onex paid cash of only $21.9 million towards the purchase price of $316 million. The company was resold in 1991 for $475 million after Onex had rationalized Beatrice’s dairy business and merged it with two other dairies that it subsequently bought for a total of $80 million.
After its recent burst of activity, prompted by strong market demand for new equities and for corporate assets in a period of relatively low interest rates, Schwartz says that he is shopping for bargains once again. “It’s a great time to sell,” he says, “but a mixed time for buying right now.” And while he contemplates Onex’s next purchase, he can spend some time unpacking.
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