February 28, 1999
ALPA, Intl
Committees
Consider:
In 1984, a Franke-led, $300 million leveraged buyout of Southwest
Forest Industries fell apart after the proposed buyers failed to come up the necessary
financing. Later that year, a bid from Jefferson Smurfit Ltd. to buy Southwest Forest was
scuttled when the Irish company was unable to provide Franke, who was Southwest’s
chairman, with assurances it could close the deal in a timely manner.
But compared with his successes, the setbacks have been relatively
few. Franke had arrived at Southwest Forest Products in 1969 and as its 32-year-old
general counsel, he found an old-line lumber and paper products business that was on a
shopping spree. In his efforts to build the business into a national company, then-Chief
Operating Officer Jim Ben Edens had picked up a savings and loan, mobile home
manufacturing business, architecture and planning firm, a handful of real estate
developments and plenty of debt. When Edens died in 1973, it fell to Franke to make sense
out of the melange. “The net result was that we had a lot of businesses that had not
been thought through,” Franke said in a 1982 Arizona Republic article. His solution
was to focus on the company’s core timber and paper products businesses.
Franke sold non-core businesses, streamlined the company and paid
down debt. Just when things were looking up, he plunged the company back into debt by
buying a Florida paper mill, 4,000 acres of timberland, a railroad and a deep-water port.
Then the bottom fell out of newsprint prices and the home-building industry. Southwest
Forest lost $27.38 million in 1982 and $24.69 million in 1983. The 1982 loss was the
company’s first red ink since 1963. In 1984, Franke and others hoped to take the firm
private by purchasing all of the 13 million outstanding shares in the company for $24
each. The $300 million deal fell apart when investment bankers Morgan Stanley & Co.
couldn’t raise the funds needed to finance the transaction.
Later that year Franke had another had another buyer in dock. Irish
lumber products Jefferson Smurfit Group Ltd. also offered to pay $24 per share for the
outstanding stock in Southwest Forest. The announced offer boosted the price of the
company’s stock to nearly $20 per share. But the offer was later reduced to $19 per
share and after six weeks of talks, Franke terminated the negotiations. At the time he
alleged that Jefferson Smurfit failed to remove uncertainties about its ability to
conclude the acquisition in a timely fashion. The Irish company countered that Franke
insisted on a series of conditions that were contrary to accepted business practices –
specifically, that Jefferson Smurfit deposit $5 million with Southwest that would have
been forfeited if a definitive merger agreement was not reached within 30 days.
Termination of the agreement enraged shareholders who watched the
price of their shares settle back to the $14 per share range. Speculators who bought the
stock on arbitrage were particularly angry. “When we finally terminated our
relationship with Smurfit, the abuse, the rumors, the telephone calls in the middle of the
night to my home, the personal threats on an anonymous basis – they were a real indication
of the quality of the people involved,” Franke said in a 1987 Arizona Republic
interview. “Nothing mattered to them but their ability to grasp a quick profit.”
Embittered employees
Over the next few years, Franke was able to improve Southwest Forest’s balance sheet
by selling assets and paying down debt. But the salvage program, which labeled Franke as a
turnaround expert, also included layoffs and forced reductions in pay. Those measures left
many Southwest employees with bitter feelings toward Franke that persisted throughout his
tenure with the company. But Franke pointed out in an interview last week that he took the
largest pay cut of anyone.
“The cuts were from 5 to 10 percent and I took 15,” he
said. Franke was plagued by labor problems at Southwest Forest, punctuated by numerous
strikes, confrontations and accusations of union busting. “Some of the employees
chose to decertify the unions, which created tensions,” he said. “We had trouble
with the Papermakers union, which was very structured and rigid. But through it all I
never felt unwelcome on any of our properties and I believe most people felt I was
fair.”
While he was battling the unions at Southwest Forest, he also was
indirectly in conflict with them at Phelps Dodge Corp. Franke was on the board of
directors of the copper producer in 1983 when miners struck its Morenci mine. Phelps
Dodge’s decision to replace the striking miners with non-union workers was met with a
prolonged period of violence that resulted in the National Guard being called in to keep
peace. “At Phelps Dodge, I felt that there were circumstances where the
company’s viability was in question and it did what it had to do in Morenci,”
Franke said. “I was satisfied as a director that the company was taking a responsible
position and was acting in an appropriate manner.”
With Southwest Forest’s balance sheet improved, Franke hit pay
dirt in 1987. In January of that year, Chicago-based Stone Container Corp. made a $32.25
per share, or $445 million, offer for Southwest Forest Industries, which was finalized
later in the year. Franke made a reported $7 million on the deal. But Arizona lost one of
three Fortune 500 companies. Also, 110 corporate employees were laid off and the level of
community support formerly offered by Southwest Forest was diminished.
Focuses on Wafco Capital
After his departure from Southwest Forest, Franke concentrated on Wafco Capital Inc., his
privately held investment and financial services company. He also focused his energies on
economic development, organizing the Arizona Economic Council, a non-profit organization
charged with helping lure industry to the state. In the private sector, Franke’s
experience guiding Southwest Forest through hard times during the recession in the early
1980s proved invaluable when the 1989 recession sent Arizona real estate prices into a
nose dive, wiping out virtually all of the state’s savings and loans. Franke served
on the boards of two Arizona companies that were devastated by the recession: Circle K
Corp. and Valley National Corp., now Bank One.
After earning a respectable $67 million in 1988, Valley National,
the state’s largest financial institution, was hammered by loan losses in 1989,
winding up the year with a $150 million loss. By 1990, Valley National’s stock was
selling for $10 per share, after trading at more than $30 a year earlier. As chairman of
the bank’s executive committee, Franke had helped recruit Rich Lehmann from Citicorp
as the bank’s president and later chairman. Franke worked with Lehmann and other
board members to develop a turnaround plan for the bank that included cutting the
company’s dividend, closing branches and laying off employees. After posting a modest
profit in 1990, Valley National reported a $34.6 million profit in 1991.
In 1992, the bank agreed to be sold to Columbus, Ohio-based Bank One
Corp. for $56.50 per share. “Bill and I worked closely together there (Valley
National) to bring in new management,” said Phoenix businessman Mike Geddes, who also
was a member of Valley National’s board at the time. “Bill was always willing
and able to address tough issues and ready to make decisions when they had to be
made.”
As for criticism Franke may have taken too hard a stance on certain
issues, Geddes said: “Some people can take a tough stand and make you like it. Franke
probably doesn’t work as hard at that aspect as others.”
Concentrates on Circle K
Franke left the Valley National board in 1991 to concentrate on Circle K. “Circle K
was a customer of the bank, which posed a conflict of interest,” Franke explained. In
1988, Circle K Corp. reported record profits of $60.41 million and had assets of $1.5
billion. It was one of the Valley’s most prominent businesses and the second-largest
convenience-store chain in the United States. But just two years later, the company was
operating under Chapter 11 protection and looking at a 1990 operating loss of $820
million.
After the departure of Circle K’s high-profile chairman, Karl
Eller, Franke assumed the post of acting chairman. He hired Bart Brown and John Antioco as
chairman and president, and worked with them to develop a reorganization plan for the
company. “The best move I made was getting Bart Brown and John Antioco into the
company,” Franke said.
In 1993, Franke helped negotiate the sale of the company to
Investcorp S.A. for $399.5 million, which facilitated Circle K’s emergence from
bankruptcy. Investcorp is a Bahrain investment company comprised of Arab investors, which
held stakes in Saks Fifth Avenue and Color Tile. Investcorp sold Circle K to
Connecticut’s Tosco Marketing in 1996. John Antioco, who from 1991 to 1996 was Circle
K’s president and later chairman, described Franke as the firm’s most active and
constructive director. “Bill was the most pivotal of our outside directors,” he
said. Antioco, chairman of Blockbuster Entertainment, said Franke introduced him to the
people he needed to know in Phoenix.
His biggest challenge
Later in 1992, Franke found his biggest challenge. America West Airlines, one of
Arizona’s most important businesses and an employer of more than 8,000 people in the
Phoenix area alone, had been operating under Chapter 11 bankruptcy for more than a year.
It had been unable to land critical financing and its ability to continue appeared
doubtful.
At the request of then-Gov. Fife Symington, Franke was able to raise
$15 million from local businesses such as Phoenix Newspapers Inc., the Phoenix Suns, the
Salt River Project and Phelps Dodge Corp. The community support bridged a crucial gap in a
$187 million financing package that included $50 million in cash and $137 million in
aircraft lease concessions. When asked at the time how he was able to interest his friends
and business associates in investing in an airline operating in Chapter 11, he responded:
“I had to explain to the companies that this was, first and foremost, a community
service. The primary appeal had to be (to) save the jobs, and save the airline hub because
we needed a Phoenix-based airline to attract and retain business.”
Franke’s efforts bought the airline a temporary reprieve. As an
insurance policy, the local investors insisted that Franke take an active role in the
restructuring of America West and he be given the chairman’s post vacated by the
airline’s co-founder Ed Beauvais. Franke in the pilot seat didn’t sit well with
Mike Conway, America West’s president, chief executive officer and co-founder, who
openly criticized many of Franke’s decisions and management style. “I’ve
been around companies in turnaround situations for a long time, and there are natural
tensions when you come in and try to sort out the problems,” said Franke, who is also
on the board of Central Newspapers Inc., which publishes The Arizona Republic. “Very
rarely does the management team that takes a company into bankruptcy take it out.”
Conway was ousted in late 1993 and replaced with ex-Aloha Airlines
chief Maurice Meyers. Conway quit the airline’s board a month later. By the end of
1993 Franke was able to produce a $37.2 million profit for the year, the airline’s
first black ink since 1989 when it earned $20 million. From 1990 through 1992, the
airline’s losses totaled $428.5 million “He’s brought a lot of discipline
to the company, both operationally and financially, that they never had before,” said
James Higgins, airline analyst with Donaldson, Lufkin & Jenrette in New York.
“That’s really his major contribution.”
Higgins said America West would be “much weaker
strategically” if it had continued its prebankruptcy course. In early 1994, Franke
struck an alliance with an investment group led by Fort Worth financier and Continental
Airlines investor David Bonderman. AmWest Partners agreed to invest $220 million in the
airline in exchange for a 37.5 percent ownership position. Bonderman’s stock,
however, carried voting rights that gave him a 70 percent voice in the company. The deal
also included an alliance with Continental and later an option for Continental to buy
Bonderman’s stake.
Bonderman’s investment allowed the company to emerge from
Chapter 11 in late 1994. Although the airline’s profits have increased, the labor
problems that dogged Franke at Southwest Forest have been present throughout his tenure at
America West. He has watched the airline’s pilots, flight attendants and mechanics
form unions and he has taken heat for the company’s 1995 decision to fire 375
mechanics and outsource the work.
Now the airline faces a crippling strike by its 2,400 flight
attendants, who approved union representation in 1994 and have yet to be awarded a
contract by the company. “The employees paid a big price in the Chapter 11. They
suffered a lot,” Franke said. “A lot of that predated me, but I can’t say I
wouldn’t have done the same if I were there. As a result, there was a significant
amount of insecurity and anger when I arrived, and that translated into an opportunity for
unionization efforts.” Franke said the employees “are generally better off than
they were five or six years ago, but meanwhile we had to deal with pilots, flight
attendants and mechanics unionization efforts, although we still have the largest
percentage of non-union employees of any major airline.
“I don’t care if they feel the need to unionize, but I
have to run a company that is efficient and protects their jobs. The easy solution is to
give them what they want, but if I did that to everybody, this airline would not be in
business.”
| Franke Knows Setbacks Other business deals have fallen apart by Max Jarman, The Arizona Republic |
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| The termination of a merger with United Airlines is not the first big business deal America West Holdings Corp. Chairman William Franke has watched vaporize in his colorful 30-year business career. |