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Published: Sunday, 11/28/2004

Smaller role by takeover firm at O-I welcomed

BY HOMER BRICKEY
BLADE SENIOR BUSINESS WRITER

Takeovers by corporate raiders in the 1980s and 1990s spawned numerous horror stories.

And the Toledo area suffered its share of carnage: Eight Fortune 500 corporations in northwest Ohio and southeast Michigan were taken over. In nearly every case, the headquarters moved elsewhere, and half of those firms disappeared from this region.

The sole survivor among the takeover targets, Toledo's Owens-Illinois Inc., went through waves of downsizing, cost-cutting, and sell-offs of assets.

But under the control largely of Kohlberg Kravis Roberts & Co. - a New York investment-banking firm once known as the king of leveraged buyouts - O-I became a larger, leaner, more focused, and potentially more profitable glass-container company.

For the first time since the takeover, the king is starting to bow out. KKR Associates LP, which owns about a fourth of O-I's stock through three limited partnerships, announced last week it will sell 25 million O-I shares in early December.

The sale could produce about $500 million for KKR and its investors, compared with the $180 million it put into O-I in early 1987. The takeover firm plans to keep 11 million shares of O-I, worth about $220 million based on recent trading prices.

Industry analysts and other experts say the stock sale will be good for the Toledo Fortune 500 firm's investors, executives, and employees, and probably will be good long range for the Toledo area.

"With the big investor gone (or mostly so) management can look farther out," said Russ Smith, a partner in R.G. Smith & Co., a merger-acquisition consulting firm in Herndon, Va.

"For example, if a company wanted to buy a smaller firm with emerging technology it might not be able to because of the big investor's requirements."

Brokers in the area believe the 25 million shares, which could go on the market as early as Thursday or Friday, will sell quickly, probably largely to mutual funds, pension funds, and other institutional holders. The shares are expected to sell in the $20 range, close to the $19.89 price where the stock closed Friday.

Part of the reason the stock is expected to sell easily is that the seller will pay the commissions, said Gary Sliemers, senior vice president in the Toledo office of the A.G. Edwards & Sons brokerage. The stock will be sold through a consortium headed by Banc of America Securities, Citigroup Global Markets, and Lehman Brothers.

The KKR sale should benefit O-I shareholders, brokers and analysts said, because millions more shares will be on the market, creating higher trading volumes, more liquidity, and perhaps less volatility.

O-I's improved financial position, including paying off some debt, also should help the stock prospects, experts said. Several analysts have "buy" ratings on the stock, and Stewart Scharf, an analyst with Standard & Poor's in New York, has forecast the stock may rise to $23 a share.

The loosened grip of KKR - which will have just an 8 percent ownership stake - opens the possibility of changing the O-I board's composition, said Robert Edmister, business dean at Bowling Green State University. "It could have a broader base," he said.

KKR bought the Toledo firm in 1987 for nearly $3.7 billion and ended public stock trading until 1991. At that time, six of the nine members of the O-I board were KKR executives, including Henry Kravis and George Roberts, two of the firm's founders.

In recent years, Mr. Kravis, Mr. Roberts, and two others left O-I's board, leaving just two KKR executives as O-I directors, perhaps the first signs that the New York company planned to pull away from Toledo's second largest firm.

Officials from KKR declined to comment last week on their plans to leave the O-I board.

Experts speculated that KKR's diminished ownership would loosen the reins a bit on the Toledo glass container maker's management and key employees.

John J. "Jack" McMackin, Jr., a Washington lawyer and longtime O-I board member, said last week that the KKR stock sale will increase O-I's flexibility, but he declined to elaborate, citing regulatory restrictions.

Officials of KKR and O-I also declined to comment on now the sale might affect the firm, its employees, and future decisions such as whether O-I will remain at its One SeaGate headquarters when its lease expires in late 2006.

No reason was given for the timing of the sale, or for KKR's holding onto 11 million shares. A KKR spokesman pointed to a policy statement saying that KKR considers itself to be "involved, patient investors, not traders," holding investments for an average of eight years, and exiting at a time when its value has been "maximized."

The investment firm has owned a big chunk of O-I for nearly 18 years. KKR's ownership share declined because of the 1991 public offering and later, smaller offerings. Early on, it owned 96 percent of the stock. That dropped to 30 percent in the late 1990s, and to about 23 percent recently.

O-I is a much different company than it was when KKR took it over, having shed several key businesses, but it wasn't devastated, as some takeover targets have been.

Kohlberg Kravis Roberts took over Chicago food giant Beatrice Cos., and sold it off piecemeal. Safeway Stores Inc., of Oakland, Calif., another KKR takeover, had to close a division, putting 8,600 out of work.

O-I, however, had $3.7 billion in annual revenue when KKR took control, but $6.2 billion today. The Ohio firm was allowed to borrow billions to buy competitors, including Brockway Glass in 1988 and Europe's BSN Glasspack SA this year.

However, the local company has 31,000 employees today, 13,000 fewer than when KKR entered the picture, and it has several fewer parts: a table glass operation, a nursing home unit, a paper products operation, and a mutual fund family are no longer part of O-I. Some that were spun off: Libbey Inc. and what is now Manor Care Inc.

During its tenure, KKR found out how profitable and unprofitable the Toledo business could be.

The glassmaker had a profit of $356 million in 2001, but in three of the last four years it has lost a total of $1.7 billion, mostly because of asbestos liability claims and write-downs of the value of companies it bought.

KKR, which began in 1976, said it and its investors have financed $118 billion for stakes in 110 companies since its inception. It has collected billions of dollars in fees for advice to companies and investors such as pension funds.

The value of O-I stock hit a high of $49 a share in the late 1990s and an all-time low of $2.50 in 2000, because of an asbestos-liability scare after the bankruptcy filing of Toledo company Owens Corning.

But why sell now? Experts suggested KKR might want to take advantage of the best share price in years, to invest in potentially more profitable firms, and to "take some of the money off the table" to reduce its risk.

As for why it is keeping 11 million shares, Mr. Edmister at BGSU said: "It sounds to me like KKR has a lot of confidence in O-I. They're not fools. They nurtured that company back to health."

Others speculated, though, that selling all the stock at once might send a negative message to investors who might consider it an omen.

Contact Homer Brickey at: homerbrickey@theblade.com or 419-724-6129.



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