Date: 7.6.1998
Ted Forstmann is one of our most successful dealmakers. But please, he says, don't lump me with those other guys.
JUST BEFORE lunching with me, Theodore Forstmann, the chatty LBO king of Forstmann Little & Co., bought a candle company for about $400 million. Oddly, the deal didn't light up conversation at the downtown Manhattan Italian restaurant Forstmann selected for lunch.
Forstmann would have preferred talking about his charitable work. A sign of the times? Or just good p.r.? I wonder as we both order pasta. Forstmann, 58, is the flashy bachelor investor--almost as well known for his friendship with the late Princess Diana as for his prowess on the LBO scene.
He guards his image as carefully as his fortune. However, in the film Barbarians at the Gate, based on the book, Forstmann' s character is dressed like an Indian at a costume party and meets James Garner, who plays Ross Johnson, in the men's room--total fiction. Still, Forstmann isn't displeased. "People say, 'You were such a hero! '" he says.
He certainly is a hero to people who invested with him in that Gulfstream Aerospace Corp. deal. It differed from many of his other 21 deals in that he actually rolled up his sleeves and ran the company. His and his limited partners' $850 million investment in 1990 has turned into $4 billion since it was brought public in October 1996. But that was yesterday.
Today the trickle of investment firms creating the LBO business has become a flood (FORBES, "LBO madness," Mar. 9). In the last two years institutions alone committed $70 billion for leveraged buyouts. Forstmann is having trouble finding deals he likes.
"It's amateur hour at Minsky's," Forstmann says with a wave of the hand, dismissing his rivals and many of the deals they are doing these days. "It's like the Italian restaurant business in New York, " he says, referring to today's LBO game. "The owner was headwaiter at a previous restaurant. That owner was headwaiter at another previous restaurant, etc."
With an unpretentious manner, Forstmann talks and eats fast, but we manage to get a question in: From what we gather, you don't recommend these newer LBO-meisters? "Absolutely, definitely not!" he says. Then, squirming in his chair, Forstmann points his fork at me and says testily, "I don't want to be portrayed as predicting doom and gloom because I don't know what' s going to happen. I don't care about what these other guys are doing. I can't tell you how much I don't care!"
What he means is he doesn't like to be thought of as just another guy taking advantage of the bull market and leverage (debt) to trade in companies. In "LBO madness," Forstmann was grouped in a photographic lineup with Henry Kravis, Tom Hicks and other LBOsters. "I don't belong in that lineup," he insists. "If what they are doing are leveraged buyouts, then certainly I do not do leveraged buyouts. "Oh, no? What's the difference? "The capital we have is unique. We never use junk debt."
Forstmann is referring to the fact that he raises his own subordinated debt- -mainly from pension funds--paying relatively low interest, usually one point above Treasury bills. It means Forstmann has ready capital, but other financiers must raise funds in the public debt market. "It's a huge advantage," he says. "It made a difference in Ziff- Davis," referring to when his firm bought the publishing company for $1.4 billion in 1994 and sold it for $2.1 billion in one year.
He also swears Gulfstream Aerospace Corp. and General Instrument, two Forstmann buyouts in 1990, would have gone bankrupt without his low cost of money. So why isn't he doing many deals these days? The business is too crowded with people who--in Forstmann's analogy--used to be waiters and now run restaurants. Prices are up. Besides, he can't find the ingredients he wants to serve his investors.
In the early days, the late 1970s and early 1980s, when he was a pioneer in the business, "inflation was 14%, and interest rates were 8%. . . . You made a 6% gain just doing a deal," he says, wolfing down his buttered spaghetti. "You want to know our edge? Some people pick Kohlberg Kravis Roberts for. . . . " He pauses a long while, indicating he actually can't imagine why anyone would. . . . "People like me," he says. "I don' t beat around the bush."
In Barbarians at the Gate, which described the frenzied bidding for RJR Nabisco, Inc., the authors tell how Forstmann considered bidding and gave it up as prices got out of control. From a base of $75, the deal ultimately went to KKR at $109. In not bidding, Forstmann was vindicated when KKR struggled for years before emerging whole from the RJR takeover.
"In the 1980s everybody would boast, 'I can get Michael Milken in five minutes,' and the other guy would say, 'Well, I can get him in four minutes.' Well, if you'd asked me, I would have said he's called me five times--I've never taken his call. One time I did take his call, about the tenth one, and I said, 'The deal's not for me.' "
More to the present, he's recently walked away from yet another deal. That is, he considered a bid for Polygram with an investor group including Michael Ovitz, but prices got too steep; he bailed and it was sold to Seagram's Edgar Bronfman. Forstmann forks his pasta and sighs. "But this is like talking about the Spanish-American War."
What about the company he did buy, Deerfield, Mass.-based Yankee Candle Co.? Forstmann says the company, the dominant player in scented candles, has terrific growth potential. "Here's how I do market research. I ask all kinds of women, sophisticated and not, if they like them- -and so far every single one buys scented candles. Women love them." He asks me. Sorry, I never use the things. That snuffed out the candle conversation.
Back to why Ted Forstmann is different from those other LBOsters. "I don't do auctions," he says. "I would sooner take my pants off in public. I tell the seller, 'This is the deal. If you want it, say yes by 5 p.m.' " Another difference: "Price is about the fifth thing I consider. You steal the wrong company and you slowly go broke. I want all the characteristics of a good wife, because after you buy it, the financial characteristics are yours."
All this talk about wives and scented candles leads me to ask about Princess Diana. Running his fingers through his hair, Forstmann looks down at his plate. With moist eyes and sotto voce, "I don't want to talk about it." He does want to talk about his pro bono work.
Forstmann is a huge promoter of free market principles. He wants to see them applied in education. "Right now we have a state-sponsored monopoly that offers a bad product at high prices," he says. Forstmann, along with hedge fund investor John Walton (son of Sam Walton of Wal-Mart), are launching a national program to offer poor kids a chance to go to private schools. Recently, they committed $100 million.
"If you're trying to paint a portrait of me," he hints, "it has lots to do with these educational initiatives. I just want to help as many kids as I can." Now that's a cause worth lighting a scented candle for.
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