Reginald Lewis: Bootstrapping Buyouts

Reginald Lewis: Bootstrapping Buyouts - Neckar’s Notes 18/10/20, 5:43 pm
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Reginald Lewis: Bootstrapping Buyouts

Lessons from a dealmaker who succeeded against all odds.
Neckar
Oct 16 3 1
On Thanksgiving weekend 1987, an aspiring black dealmaker named Reginald Lewis walked into
the o>ces of private equity Crm KKR on 9 West 57th Street. In August, Lewis had won a $985
million bid to acquire the international food business of Beatrice, a conglomerate that KKR was
dismantling. Then the stock market had crashed.
In a meeting with “King Henry” Kravis and bankers from Drexel Lewis asked for a price cut of
$35 million. “If he doesn’t do it, I’m walking,” he had told his associates before the meeting. The
December 1 closing deadline was fast approaching. Lewis and his team had been working around
the clock. It was a deal that nobody thought he could pull oT. If not for the personal backing of
Michael Milken, KKR wouldn’t even have let Lewis bid in the Crst place.
Kravis was the last one to join the meeting. AWer hearing Lewis out, he said:
“We appreciate your views on the matter. We’ve done our analysis and we don’t quite get there
the same way you do. We’ve really come a long way on this and we’d really like to see you
consummate this deal. We’re pulling for you.”
There would be no price cut.
With all of his chips on the table, Lewis had to make a decision: walk away from the deal he
had spent a lifetime preparing for, or channel the focus and determination that had gotten
him this far. Fold his hand or “keep going no matter what,” as he o?en said.
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“People who get their thrills from talking about big deals end up not doing them. The fewer
words, the better. It's action that counts, not words. That's the cardinal rule of deal-
making.”
“This is a success story due to the transaction, not because of my race. Iacocca is not cast as
an Italian-American businessman and Icahn is not a Jewish-American. Why should I be an
African-American?”
“Why the fuck do we have to prove ourselves over and over? I’ve got to go to the other side of
the table. This is not the way I want to spend the rest of my life.”
“I was no overnight success. It took 25 years of hard work to get to where I am. That’s what
everyone has missed.”
“I know I have cancer of the brain,” he told his wife, “I used my brain as a weapon to go
forward and to disprove a lie about people of color, and I had no protection.”
Reginald Lewis
Reginald Lewis rose from a working-class neighborhood in Baltimore to become the
8rst African-American to compete at the highest level in the game of corporate
buyouts. His story is one of ambition, determination, 8erce work ethic, and sacri8ce.
A"er pulling all the stops to get into Harvard Law School, Lewis burned the midnight oil
to build a successful law practice. Through his work he became familiar with the
burgeoning private equity industry. Frustrated with the grind of being an advisor, he
decided to put together his own deals. His crowning achievement was the $985 million
buyout of Beatrice International in 1987. Only a few years later he tragically passed away
from brain cancer. If not for his early death, I’m convinced he would be a household
name today.
His biography “Why Should White Guys Have All the Fun” is a play-by-play account of
his eQorts to move to the other side of the table, to become an owner rather than an
advisor. It shows how he bootstrapped his deals and doesn’t shy away from the personal
sacriRce: Lewis dedicated much of his life to his work. His demanding and sometimes
brash nature led to falling-outs with partners and associates. It’s a great book if you’re
putting together deals yourself, particularly if you’re looking for inspiration a"er a
setback. Lewis faced long odds and a steep learning curve: some of his early deals fell
through at the last minute, prompting him to question everything.
What impressed me most were his focus and determination. Once Lewis had his mind
set on a goal, no matter how unlikely it seemed to others, he wouldn’t stop 8ghting for
it. He worked day and night until he broke through whatever wall separated him from
success.
Lewis was born in 1946 and grew up in Baltimore with his mother and grandparents.
“My mother leW my father when I was 5 and arrived at grandma’s house in the middle of the
night with me under her arm.”
His mother told his grandparents that she and her young son would not be a burden and
pay their share in the household. Lewis rarely saw her as a boy: she worked two jobs, as a
waitress and department store clerk. “That stuck,” he said. From a young age, he was
hardworking and ambitious.
Throughout his schoolyears he worked a variety of jobs, starting with paper routes and
ending with a summer as a waiter at the country club where his grandfather worked. His
grandfather told him: “always remember, your skill is what’s important. Get that and build on
it and sooner or later you’ll have a big payday—count on it.” Years later, Lewis would take
him for lunch at the Harvard Club. Lewis told a friend it had been one of his life’s
proudest moments.
At Rrst it looked like football was going to be his ticket to a good life: he attended
Virginia State University on a football scholarship. But a shoulder injury squashed that
dream. Lewis had been working a variety of jobs, including arranging student yearbook
photographs and night shi"s at a bowling alley. As a result, his grades had suQered. All
of a sudden he found himself disoriented and without a clear path forward.
Never take “no” for an answer: getting into Harvard

I grew up in a small German town where rules and order were important and followed to
a tee. Even with no cars in sight, people stood at the red light, refusing to cross the
street. It took some time in New York before I lost that habit. As a result, I’m fascinated
by people who refuse to accept the rules, who don’t accept the limitations separating
them from their dreams.
This was Lewis, when he heard about an initiative by Harvard Law School. A new two-
month summer program introduced minority students to the Reld of legal studies. It was
designed for college juniors who could then prepare to apply for law school. Colleges
could submit a shortlist of suggested candidates for Harvard’s consideration.
Lewis was already a senior. And with his mediocre grades he wasn’t on his school’s
shortlist. And yet, he ended up going.
Once he realized the potential of the situation, he became laser focused on this goal:
Rgure out a way into the program. Then turn it into an admission to law school, even
though that was explicitly not the purpose of the program.
“An incredible calm came over me and the plan began to emerge. First, have a tremendous
Cnal year in college; second, know the objectives of the program; third, break your ass over the
summer, eliminate all distractions—nothing except the objective.”
“It wasn’t easy knowing where to begin. First, I needed to get the literature on the program.
My school only gave a summary of it, so I wrote to Harvard for speciCc details the same day I
found out about the program. Harvard responded immediately, which really impressed me.”
First, he read everything he could Rnd about the program. Then he worked with his
favorite professor to obtain an extensive and enthusiastic recommendation letter. His
school agreed to add Lewis to the initial list. And with the letter standing out, Harvard
selected him for the program.
Lewis mapped out the next stage of his plan:
“During the Crst semester, say nothing about going to Harvard. First, prove that you can
compete; for example, take a di>cult course at Harvard College during the summer and do
well. Second, do the job. Build upon your strengths. This was the brief and I’ve never
executed better.”
The program ended with a mock trial for which Lewis had prepared extensively. He
brought all his energy and focus to the table and was rated among the best students for
the course. He had bonded with the professor running the program and sought him out
a"er the trial. Now there was no more downside to asking about admission. This was the
program’s Rrst run and he was perhaps the Rrst and only student who had a chance at
turning it into an admission ticket.
Over the course of the summer he had cultivated several other professors who were
impressed by his interest and work ethic. They became his advocates with the vice dean
whose decision it was. Incredibly, Lewis convinced the school to admit him based on his
performance (academically and socially) during the program.
“I’m told that I am the only person in the 148-year-history of Harvard Law who was ever
admitted before he applied.”
I’m not suggesting the same could be accomplished today. The lesson to me was that
Lewis saw a unique opportunity in front of him. This path was not possible according
to the rules set out by the program. Lewis’s goal was behind barbed wire. He was in the
wrong school year, had mediocre grades, and nobody was supposed to be admitted from
the program to law school anyway. However, his instinct told him it could be done. He
invested all of his time and energy into trying and succeeded in liGing himself on an
entirely new track in life.
Lewis graduated from Harvard Law School as a member of the class of 1968. Shortly
before his death in 1992, he made a $3 million gi" to establish the Reginald F. Lewis
International Law Center, the Rrst building on campus named a"er an African-
American.
Grinding it out
Despite graduating from one of the country’s best schools, Lewis’s time as a lawyer was
anything but easy. He had a promising start, joining the prestigious law Rrm Paul Weiss
as an associate. But he heard that he wouldn’t be on track to make partner and decided
to leave a"er only two years. He joined a group of lawyers to form a new Rrm: Murphy,
Thorpe & Lewis. While the other partners le", one a"er another, over the course of
several years, Lewis carried on, grinding all week to Rnd clients and occasionally dipping
into his savings to make payroll.
“I was already working about 12 hours a day and for the next year I must have kicked it up to
about 18 hours a day during the week and 6 to 8 hours on Saturdays and Sundays.”
His biography makes it clear that he was tough to work for: highly demanding, brash,
hard-charging.
“Everybody was afraid of Reg over the years and it got worse,” Clarkson says. “He would treat
the opposition with kid gloves and he would scream at everybody else on his side of the table.
It was warfare all the time with Reg.”
Eventually he found a proRtable niche: a newly established government program called

MESBIC which provided capital for minority-owned businesses (today the SBA still
provides government-backed loans to smaller businesses). Through his work he
developed a network of entrepreneurs and bankers and cut his teeth on the structuring
of acquisitions and buyouts.
Becoming the client

“I've spent a lot of time representing acquirers. I know how to get transactions done. Plus, I
want to do something that will allow me to make money while I'm sleeping.”
As an advisor, Lewis helped his clients execute deal a"er deal and, presumably, quickly
noticed the discrepancy between his own grind for billable hours and the rapid and
scalable wealth creation possible through good investment decisions.
The size of his business was determined by his own billable hours, his price per hour,
and his ability to grow the Rrm with more partners and associates. All of these factors
faced real constraints, including his own temperament and willingness to share control
of the Rrm. Meanwhile, deals oQered scale through the use of other people’s money, from
bank debt to junk bonds and junior debt and equity oQered through the MESBIC
network. Naturally, he decided to put together deals of his own.
Or in his words:
“Why the fuck do we have to prove ourselves over and over? I’ve got to go to the other side
of the table. This is not the way I want to spend the rest of my life.”
He started talking to brokers, looking for “low-tech, high cash how, and good
management” businesses. His early attempts included a sausage company in his
hometown Baltimore and a manufacturer of beach chairs.
The deals got close to but not across the Rnish line. Parks Sausage was sold to a group
that showed up later in the process but carried more credibility and capital. The seller of
the beach chair company backed out at the last moment, then sold the company later for
a higher price. Unsurprisingly, Lewis was frustrated.
“When something like that happens to you and when you are inexperienced and let your
ego run wild, you are crushed. You second-guess every decision you made, when rarely does
any of that matter.”
“The only conclusion I could reach was that even aWer Cnding the needle in the haystack,
putting together great Cnancing, courting a 61-year-old businessman, getting a deCnitive
contract signed without a penny up front and more, much more, I STILL WAS NOT READY.”
These deals became important lessons. Lewis realized that he couldn’t run point on all
aspects of a deal, let alone also manage a law Rrm at the same time. He became more
thoughtful about assembling a team of advisors. He also recognized the importance of
incentives: for the advisors involved and for the management team controlling the
asset.
“The hardest fact to come to grips with was that many of your strengths can indeed be
weaknesses at diRerent stages in the deal process. For example, in Almet, I was the Cnder of
the deal, chief Cnancial analyst, fundraiser, quasi-legal o>cer, and chief strategist. In short, I
was going about it assbackwards. For Sve years, I had gone about it all wrong, using an
approach that could get me close, but not get the job done. A hard pill to swallow.”
“Another issue which emerged quite quickly was to take the emotion out of the equation to the
fullest extent possible. These were business transactions, nothing more. Not jousts, tests of
moral Cber, etc. Of course, passion is o?en important to get a project started, but once it
gets going, the pendulum shi?s very quickly to cold calculation from passion.”
“Most of the people who were good at this were involved full time. Part-time deal-making is
almost a contradiction in terms. Also, forget about the old boy network. What was driving
transactions in today’s market was fees. Fees to the banks, the investment bankers, the
lawyers, the accountants, the deal-Snders. Strong economic incentives were very much the
order of the day.”
Building a winning process

Perhaps the most important insight was that he needed to improve his sourcing eQort.
He started to follow a disciplined process of calling up his network of bankers to
constantly ask for more “product” (ideas in the form of transaction prospectuses). And he
had to dedicate the time to read and process all that information to Rnd the right
opportunities.
“I then became a prospectus junkie and read all the deals which were publicly reported. It
is amazing how much you can learn from public records about how people go about things.”
He channeled a diQerent aspect of his personality: rather than hustling to Rnd clients, he
imitated Warren BuQett. He had to sit and read document a"er document, until the
network of data points started to surface actionable ideas.
From his biography:
“Most people would have found the prospectuses incredibly tedious reading, but not Lewis. He
read them closely, dreaming a little and learning a lot. Each prospectus was like a little history
book that told Lewis about the o>cers of a company, their salaries, their strategic thinking—
even about lawsuits Cled against a company. Lewis ate all of this up and he liked nothing
better than to take a set of prospectuses home to read.”
McCall Pattern: Deep Value Private Equity

The stars aligned for Lewis in 1983, when he read an article about the merger of two
conglomerates: Esmark and Norton Simon. Esmark’s CEO had mentioned several
business units he wasn’t interested in, including one called McCall Pattern.
McCall was the second largest player in the shrinking market of home sewing patterns:
paper cutouts used to sew clothing such as dresses or skirts. Incredibly, this business is
still around today. However, in the 1980’s the industry was in decline already and Lewis
correctly concluded that the company wouldn’t attract much attention or competing
bidders.
“A lot of people had written oT [McCall] as not having much of a future, [but] the more I
researched the facts the more I thought it had a great future, because its strongest asset was its
most fundamental asset of all, and that was the people. It had a wonderful group of
employees at the top, the middle and throughout the organization who had excellent
experience, who knew their business very well and who were committed to doing what was
necessary to keep the company dynamic. The company had actually performed very well
for a long period of time. When I delved into the facts, I decided that the fundamentals were
actually quite good.”
Lewis saw a leading business, albeit in a shrinking market, with attractive margins and
strong cash generation. If he could buy the company at a very low valuation and improve
the cash how, he could pay down debt and sell the business a few years later. It was
private equity 101 with a deep value asset.
Finally, Lewis could apply the lessons of his failed deals:
He had set up his own buyout Rrm, called TLC or The Lewis Company, and had a
dedicated team to support him. Bear Stearns was working for him to arrange bank
Rnancing. Lewis could focus entirely on building the relationship with the seller and
the management team, negotiating terms, and managing the overall deal process.
A"er building rapport with executives at the parent company, he charmed the McCall
management team. He learned they had tried to structure their own management buyout
and realized that equity upside would be important. He took Earle Angstadt, McCall’s
President, for lunch to the Harvard Club. When asked “what are you going to do for
management,” he was prepared to oQer equity and a chance for signiRcantly upside.
Angstadt became his ally and lobbied internally on Lewis’s behalf.
“He had all of his thoughts and proposals well organized. We related to each other very
quickly in our Crst meeting. My Srst instinct was that this was the man with whom I wanted
to make a deal.” Earle Angstadt
Instead of presenting himself as a sole bidder, he said he acted on behalf of a “group of

investors.” The group consisted primarily of Lewis and two friends who contributed
$10,000 and $5,000 respectively. Still, it was a group. Lewis reasoned that his
counterparts would automatically assume the investors behind the group were white.
The undisclosed group provided a way to eliminate the risk of losing the deal due to
racial prejudice, a factor he suspected had played into one of the failed deals.
Lewis saw the parent company had pulled $18 million of cash out of the business over
the prior 2.5 years. That was his initial lowball bid: $18 million for a company with $6
million in operating proRt. In order to win the deal he ended up raising his bid to $22.5
million: $20 million cash and $2.5 million of seller notes.
“McCall was earning about $6 million in operating proCt. This was a Cgure I would repeat
oWen. The fact is, however, I never focused on earnings. Others like to hear it so I repeated
it, but I kept my eyes glued on cash Xow. When I worked through the numbers, over a 2½-
year period NSI had pulled about $18 million in cash out of McCall. That, then, was my price
—$18 million. In my heart I was ready to go higher.”
When his bankers were slow to arrange the Rnancing, he called up their competitors at
Drexel. This created a competitive dynamic and opened the door for future conversations
with Michael Milken.
The 8nal deal was an impressive example of bootstrapping: Bankers Trust provided $19
million of senior bank debt. An MESBIC lender provided $0.5 million of junior capital.
$2.5 million in seller notes were owed to Esmark. Management put in $0.2 million of
cash. Lewis himself borrowed $0.5 million from his bank to contribute as cash equity.
He acquired control of a company valued at $22.5 million with only $0.5 million in
borrowed cash.
A"er the closing dinner he told an exhausted partner: “You don’t have to come in tomorrow,
take Saturday oT. Just come ready to deal on Monday.”
Rolling up the sleeves

With his eye on boosting cash hows, Lewis made some key changes to McCall:
To boost working capital, bills were paid within 30 days rather than immediately.
Lewis had the idea of using idle time on the printing presses to make greeting
cards which turned into an additional proRtable business line.
The remaining sewing pattern companies regularly fought over market share.
When McCall’s largest competitor oQered promotional discounts, McCall’s
management followed suit. This cost the company $2 million. Lewis was furious
and ordered that the company would no longer oQer discounts. He was willing to
lose market share in favor of maintaining price discipline.
He pushed the management team to set aggressive targets for the year and
oQered signiRcant bonuses. Management earned maximum bonuses every year
under Lewis.
Lastly, he turned the company’s real estate into cash. His private equity Rrm
acquired the warehouse property and leased it back to the company.
With fresh liquidity and increasing cash hows, Lewis reRnanced the debt and distributed
cash to shareholders.
McCall’s operating income increased from $6 million in 1983 to $12 million in 1985 and
$14 million in 1986. But it was still a business in a declining industry and Lewis had no
interest in owning it for the long term. With much improved cash how, it was ready to be
sold.
In 1987, Lewis sold McCall to a British textile company for $65 million plus assumption
of the debt. The return on his equity investment was astronomical. Shareholders received
$65 million plus dividends and gains on the real estate. He counted around $90 million
in value compared to an equity investment of around $1 million. A ninety-bagger in a
few short years. That number would become very important to Lewis.
The value of a reputation

Lewis instinctively understood the importance of his reputation in the Rnancial
community. Sellers had to trust him to close the deal. Lenders were worried about being
paid back. Equity partners wanted someone with a track record of strong returns.
Shortly a"er selling McCall, he noticed an article that he felt omitted his role in
improving the business. He called the reporter to voice his frustration. Needless to say,
the reporter didn’t appreciate being yelled at. A"er the call, Lewis recognized his
mistake: the media could be his ally if he found a way to better manage the
relationship.
He immediately hired an experienced PR Rrm whose representative arranged an

interview with the reporter. The eQort was a success, with the New York Times
publishing a highly hattering article titled: “90-1 Return for Investor.” Lewis and his
team would send copies of this article to anyone they dealt with.
From the article:
Reginald F. Lewis's Crst leveraged buyout was for a relatively small company, but it was a
huge success. He cashed out with a 90 - to – 1 return. Mr. Lewis and his investors put up $1
million in equity and received $90 million on that investment in three years.
''This kind of return puts you in the top, top, upper levels,'' said Maynard Toll, an investment
banker at the First Boston Corporation who has worked with Mr. Lewis. ''He is a very creative
Cnancial person.”
''Unlike some Cnancial people, Mr. Lewis rolled up his sleeves and got involved in the
direction of his company,'' Mr. Toll said.
Mr. Lewis, 44, is an intense lawyer who is likely to call an associate at 6 A.M. to deal with a
problem.
A few years later, McCall ran into trouble and Lewis was sued by the new owner and
bank lender. For Lewis, more than money was at stake. The lawsuit threatened a
cornerstone of his reputation. He refused to settle and fought for years in court.
Eventually, he prevailed.
As one of his partners said: “We were at war—that was the mindset. It was one of the
toughest periods during my 12-plus years with him. He would react with more vehemence on
issues in the litigation than on almost anything else I can remember.”
Beatrice: carving up a conglomerate
Beatrice was founded in 1891 as a small creamery. Through acquisitions it turned into a
sprawling food conglomerate.
From the paper: “Beatrice: A Study in the Creation and Destruction of Value”
“Widely admired as one of America's best run companies in the early 1970s, the Crm
struggled with problems of strategic direction and internal governance in the late 1970s, which
resulted in tremendous value loss. In large part because of this value destruction, Beatrice was
caught up in the Cnancial restructuring mechanisms of the 1980s and was taken over in a
LBO in 1986 that led to the sale of all the assets of the Crm within four years.”
The FTC had barred Beatrice from further acquisitions of dairy businesses. As a result,
the company had started to diversify into other food and even non-food operations. In its
Rnal stretch of dealmaking, Beatrice’s CEO bid for another conglomerate, Esmark,
which itself had just acquired the conglomerate Norton Simon (and sold McCall to
Lewis).
While Beatrice bid for Esmark, Esmark’s CEO Don Kelly had partnered with KKR to take
Esmark private. However, Beatrice outbid them and acquired the company. The former
dairy company now owned brands such as Tropicana and Playtex, Coca Cola bottling
plants, and even Avis Car Rental.
In a hilarious twist, Kelly then partnered with KKR to acquire Beatrice. It was an $8
billion deal and the largest buyout at the time. A"er the deal closed, Kelly and KKR
started selling oQ the various business units.
Beatrice: acquisitions followed by divestitures:
Growth of Beatrice’s assets:
Dealing at the speed of light
The ink on the McCall documents was barely dry when Lewis got a call from one of his
bankers. KKR was selling Beatrice’s international foods unit. Lewis was exhausted and
nearly declined to read the prospectus, but the banker insisted: “this thing has business and
assets all over the place. You’ve told us of your strong desire to go international and your desire to
be diverse.”
Beatrice International, one of the many assets being sold from Beatrice:
Beatrice International was in many ways the opposite of McCall Pattern: it was a good
and growing business (branded consumer goods and some grocery retail in France), it
was complex and global (64 subsidiaries in 31 countries, o"en with local partners as
minority owners), and it was signiRcantly larger with $2.5 billion in sales and $145
million operating income. Lewis still had no fund, just his own capital and whatever
leverage the market would provide.
It was also a well-publicized and highly competitive deal. The bankers received dozens
of initial bids from private equity groups and large food companies such as Pillsbury.
Lewis read the prospectus and collected his thoughts:
“What’s interesting about this company and what isn’t? How would I manage it? Who’s the
competition? What price will this thing fetch? What is the quality of management? Are there
hidden assets? I decided to list all the things I did not like about the situation and then see if
those “dislikes” could actually be disguised beneCts.”
His associate built a Rnancial model overnight and Lewis ordered his banker back from
her vacation on Cape Cod the same day. Days later he submitted a bid for $950 million.
Lewis received a call from the bankers running the sale: “We have received from your
group an oRer to buy Beatrice International for $950 million. We have a small problem—
nobody knows who the hell you are!”
Despite his success with McCall, he was still an unknown quantity. But he had cultivated
a secret weapon: Michael Milken. Since buying McCall, he had stayed in touch with
people at Drexel and eventually met Milken in person. ConRdent in Lewis’s ability,
Milken backed him in the Beatrice transaction.
Lewis laid out his plan:
“Michael, yesterday we bid $950 million to KKR for Beatrice International Foods. Beatrice
International has $2.5 billion in sales, $145 million of operating income, and 64 companies in
31 countries. Our plan is simple: Bid the whole thing and simultaneously, with our
acquisition, we sell Canada for $200 million, we sell Australia for $75 million, we sell
Latin America, maybe for $100 million. So now we’ve pared away about $400 million, and
we’ve still got a company with $2 billion in sales and over $100 million of operating
capital. But now we’ve only paid $550 million to $600 million.”
On a visit to KKR, Milken met Henry Kravis who said: “Michael, on this Reg Lewis – I know
he’s made a lot of money on the McCall deal, but he has no credibility with me on a billion-dollar
deal.”
Milken responded: “Well Henry, he’s got credibility with me.”
And with that, Lewis was in the game.
Michael Milken, Loida Lewis (Reginald Lewis’s wife) and Reginald Lewis:
Pulling off the impossible deal

On August 6, 1987, Lewis signed the agreement to acquire Beatrice International. He had
until December 1 to close the deal.
“He would come into his 99 Wall Street o>ce around 8:30 A.M. and work on things related to
the Beatrice bid until around 3 in the morning. On the weekends he took something of a
break, getting into his o>ce around 9 A.M. and leaving around 11 P.M.”
Lewis and his team worked around the clock in their due diligence and negotiations. The
deal was structured such that several international businesses were sold oQ to local
buyers at closing, leaving Lewis with a more focused, primarily European, collection of
assets (and less leverage as the business units were sold at higher valuations). Many
remaining businesses had local partners. Lewis had access to one of Beatrice’s corporate
jets and soon travelled around Europe to visit facilities and negotiate with the local
partners.
The international subsidiaries presented a signi8cant hurdle to a highly leveraged

deal: income was generated and taxed locally, before the cash was sent to the parent
company where it would service the debt. This meant that the interest expense at the
parent didn’t shield the income from taxes, a key feature of leverage buyouts.
Lewis’s associate Christophe:
"We developed the best strategy for acquiring a Srm with all of its operating income
outside the United States, with Snancing from the world's most edcient capital markets,
which were in the United States. One needed to do that in order to maximize the interest
deductibility from a taxation standpoint. We Cgured that out better than anyone else."
With his legal training and tenacity, Lewis was better suited than most to deal with this
problem. Not for nothing did he donate to Harvard to create the Reginal Lewis
International Law Center. Eventually he decided to set up a French holding company that
became a borrower and could deduct interest for tax purposes. The structure required
approval from the French ministry of Rnance, which Lewis personally negotiated with
the ministry’s Rrst deputy.
“There could not have been any greater pressure in any deal Reg ever did,” Tom Lamia said of
the French negotiations. “I think it was only when he got French government approval that
he saw that the Beatrice deal was going to be done.”
In exchange for being kingmaker, Drexel also demanded its pound of hesh in the form of
equity. At one point, the Drexel bankers even asked for a controlling stake. Lewis
threatened to blow up the entire deal and Milken had to intervene. Drexel ended up with
around a third of the equity.
Keep going, no matter what

A"er the October stock market crash, Lewis tried in vain to negotiate a lower price with
KKR. Henry Kravis understood that Lewis was deeply committed to the deal. This this
was the opportunity of a lifetime for the up-and-coming dealmaker.
Sure, public valuations had declined. But Drexel was still arranging most of the capital in
the form of debt. A"er selling the Canadian, Australian, and Asian operations for $430
million, Lewis would acquire control of the remaining company almost entirely with
debt. He contributed only $15 million of his own cash equity to gain control. Drexel and
management would own a combined minority share of 45%.
Lewis kept going and closed the deal on November 30, 1987.
The closing was an enormous and grueling two day aQair: it involved 180 lawyers,
accountants, Rnancial advisors, and executives. Teams were spread out over six hoors at
Lewis’s old law Rrm Paul Weiss. It was really a series of mini closings of acquisitions,
sales, syndicated bank debt, and subordinated debt. Investment banking and legal fees
amounted to $54 million.
Within six months Lewis sold the Latin American business to further cut the debt
load. By personally acquiring equity in the business unit prior to the sale, he also
recouped most of his equity investment. Not only did he control Beatrice International
(now TLC Beatrice), he was e[ectively playing with house money.
Thanks to a weaker U.S. dollar and streamlined operations, TLC Beatrice grew its
operating proRts more than 50% from 1988 to 1990.
“We earned $1.5 billion in sales, close to $100 million in operating income, and $45 million
aWer taxes. So on a buyout, we earned $3.62 a share on our common stock. You have to
remember that the common stock had cost $1.”
Lewis had only a few years to enjoy his success. He tragically died of brain cancer in
1992. His widow eventually took charge of the company, steadied it, then proceeded to
sell oQ business units throughout the late 1990’s. Shareholders reportedly received
distributions of hundreds of millions of dollars.
“I know I have cancer of the brain,” he told his wife, “I used my brain as a weapon to go
forward and to disprove a lie about people of color, and I had no protection.”
The above picture is from Fortune Magazine. Unsurprisingly, Lewis’s successful “billion
dollar buyout” (though eQectively smaller because he de-risked the transaction by selling
pieces oQ at the same time) attracted a lot of media coverage. All of a sudden, Lewis was
the “Rrst black man to lead a company with a billion dollars in sales.”
Lewis was frustrated by the focus on his race rather than his business and legal acumen.
When he felt that a reporter was too focused on that angle of the story, he stopped
calling them back.
From the LA Times:
“It's understandable that [my race] is something people focus on. But what I focus on are two
diTerent things. I focus on doing a Crst-rate job on a consistent basis.”
He rejected the narrative that his success, or his downfall if the highly leveraged deal
were to go wrong, had greater symbolic signiRcance. He always nudged the focus back to
the merits of the transactions and the businesses he was involved with.
“To carry around the notion that if I fail, it's going to mean that no other black person will
ever have a similar opportunity, or that if I succeed, it's going to open a Xoodgate of
opportunity for other black Americans, misses the point," he said at the time. "If our work is
perceived as an indication that we can function in a global, competitive situation, that's nice.
But I've always believed that anyway.”
“I’m not going to carry my race on my shoulder,” he once told a close conCdante. “If I can be
helpful to others, that’s Cne, but I’m not going to do my work because I am a role model for all
African-Americans. That’s bunk. I’m not responsible for anybody’s life, I’m responsible for
my life. And I’m responsible for realizing my own dreams.”
That doesn’t mean he forgot the hurdles and prejudice he experienced throughout his
life.
“Every African-American male who’s worth anything has a sense of anger built up in him
against society.”
I found his story both incredibly inspirational and tragic. He achieved so much through
sheer force of will, and had such little time to enjoy his triumph. And even though he
loathed the focus on his background, there is no doubt that his success motivated many.
Kenneth Frazier, CEO of Merck:
“Reg Lewis opened up a world of possibilities for an entire generation of black business
leaders. I distinctly recall my reaction when he engineered the acquisition of Beatrice
Foods. I said to myself, “Who is this brother?’”
Despite all hurdles and setbacks, Lewis kept going, kept chasing his dreams and carving
his own path. I highly recommend his biography and the documentaries about him (see
links below).
That’s it for this week. I hope you enjoyed it!
“Even in my own career, a person of very modest means has been able—by dint of his own
eRorts—to achieve great wealth and Cnancial independence, which therefore suggests that
some progress clearly has been made. But in my view, it is all too little when we consider the
day-to-day drama being insicted upon many of our children who are of African or Hispanic
descent and who are not yet fully included in the American Dream. Hard work, discipline,
being focused, and having your skill knitted together in terms of what’s needed to get the
job done.”
More on Lewis:
Documentary: Pioneers: Reginald F. Lewis (with snippets of Jesse Jackson, Milken,

Kravis, Ken Chenault)
Documentary: The Reginald F. Lewis Story
Biography: Why Should White Guys Have All the Fun?
NYT Obituary
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Reginald Lewis: Bootstrapping Buyouts - Neckar’s Notes 18/10/20, 5:43 pm

Neckar’s Notes Sign

There would be no price cut.

Never take “no” for an answer: getting into Harvard

Lewis mapped out the next stage of his plan:

Eventually he found a proRtable niche: a newly established government program called

Becoming the client

Building a winning process

network of data points started to surface actionable ideas.

From his biography:

McCall Pattern: Deep Value Private Equity

Finally, Lewis could apply the lessons of his failed deals:

Instead of presenting himself as a sole bidder, he said he acted on behalf of a “group of

Rolling up the sleeves

The value of a reputation

He immediately hired an experienced PR Rrm whose representative arranged an

From the article:

Beatrice: carving up a conglomerate

Beatrice: acquisitions followed by divestitures:

Growth of Beatrice’s assets:

Dealing at the speed of light

Lewis laid out his plan:

Milken responded: “Well Henry, he’s got credibility with me.”

And with that, Lewis was in the game.

Pulling off the impossible deal

The international subsidiaries presented a signi8cant hurdle to a highly leveraged

Lewis’s associate Christophe:

Keep going, no matter what

From the LA Times:

That’s it for this week. I hope you enjoyed it!

Documentary: Pioneers: Reginald F. Lewis (with snippets of Jesse Jackson, Milken,

Documentary: The Reginald F. Lewis Story

Biography: Why Should White Guys Have All the Fun?

Top New Community What is Neckar’s Notes? About

What George Soros Can Teach Us About EV Stocks

A Big Mac Fortune: How Den Fujita Brought Global

Yes Before No: How Dan Gilbert Conquered Mortgage

Ready for more?

Type your email… Subscribe

© 2020 Neckar. See privacy, terms and information collection notice

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