With one bound he was free! In a breathtakingly audacious piece of financial engineering, Bennett LeBow has secured his two loss-plagued, debt-laden high tech businesses, Western Union Corp and systems builder MAI Basic Four Inc by dumping their debt off onto the hugely cash-generative Liggett cigarettes business – Liggett makes most of the own-brand cigarettes sold in the US. Liggett is the operating company of Brooke Group Ltd, 16% of whose shares are in public hands: its chairman and majority shareholder is Bennett LeBow. The sleight of hand that seems to offload the debts of Western Union Corp that had pushed the company to the brink of bankruptcy was achieved by having Brooke Group acquire Brooke Group Limited Partnership, which was the private investment vehicle of LeBow and held his interests in MAI and Western Union and a number of smaller holdings in other companies. Of course although from the point of view of MAI and Western, it’s a case of now you see it, now you don’t with their debt mountains, the debt is all too visible, right there on Brooke Group’s balance sheet. From a company that had twice as much cash as debt in its balance sheet, it is now saddled with $300m in costly-to-service junk debt. He took an equity investment and turned it into a junk bond, a disgusted portfolio manager at Matrix Securities who dumped his Brooke shares in response, told the Wall Street Journal. LeBow and partners previously held 84% of Brooke Group through their ownership of Brooke Partners; now they hold 84% of the combined company, in effect securing their previously super-high-risk investments in exchange for a stake of just 16% of those non-Liggett investments. Not that the new Brooke Group balance sheet looks too rosy – on September 30, it had a net worth of $105m and no debt, now it has $453m in long-term debt and a negative net worth of $104m. And it will have to shell out $45m a year to service the MAI and Western Union debt. Mr LeBow hasn’t forgotten the outside shareholders in Brooke Group completely: they will receive senior secured contingent value rights that will trade separately and be redeemed in three years, and will guarantee an annualised total return on their Brooke shares of 15%, by making up any shortfall. And the shortfall could be substantial – Brooke Group shares, trading at $12 before the news sunk in, have plunged to $7.75. The effect of the contingent rights mean that they will have to pay out at the end of 1993 the difference between the then share price and $18.25. The downside is that they can be called for redemption any time after next May on the same 15% formula, and any payout will reduce the value of Brooke Group to its continuing shareholders.
