Thomas H. Lee Co.

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Thomas H. Lee Co.

75 State Street
Boston, Massachusetts 02109
U.S.A.
(617) 227-1050
Fax: (617) 227-3514

Private Company
Founded: 1974
Employees: 100
Sales: $1.5 billion (1995 est.)
SICs: 6799 Investors, Not Elsewhere Classified

Thomas H. Lee Co. is one of the oldest and most successful private equity investment firms in the United States, identifying and acquiring substantial ownership positions in middle market growth companies through leveraged acquisitions, recapitalizations, and direct investments. Since its founding, the company has invested over $2.5 billion in more than 100 businesses, building companies of lasting value and generating attractive returns for its investors and operating managers.

Thomas H. Lee may not be a household name, but many of the companies he has owned are. The “Lee” list has included all or part of such companies as General Nutrition (GNC), Ghiradelli Chocolates, The Learning Company, Playtex Home Products, Rayovac Corp., TRW Information Systems & Securities, Sun Pharmaceuticals, and Snapple Beverage Company, just to name a very few.

Getting Started, 1974-91

The company was founded in 1974 as a private investment firm by Harvard University graduate and former First National Bank of Boston employee Thomas H. Lee. The Boston-based company manages $3 billion in capital, focusing on acquisitions of middle-market growth companies and known for acquiring equity in established companies, often through leveraged buyouts.

In 1982, Lee paid $15.5 million for a controlling interest in Guilford Industries, a $41 million manufacturer of office furniture fabric, putting up $2.5 million in equity cash and raising another $6 million in financing and $7 million in bank debt. In 1987, he sold out, making nearly $35 million.

One of Lee’s best early deals happened in 1985 when he bought Akron, Ohio-based Sterling Jewelers for $28 million, 90 percent of which he had to borrow. He turned around and sold Sterling in 1987 for $210 million to what is now Signet, one of Europe’s largest jewelry retail chains.

But success has not made Lee blind. He is very quick to point out his own mistakes. And he made one in 1985. That year Lee’s uncle, Herbert Schiff, was nearing retirement as CEO of $1.3 billion SCOA Industries, a regional discount retailer based in Columbus, Ohio, a company Lee’s grandfather founded as The Shoe Corp. of America in 1905.

SCOA’s largest and most profitable subsidiary was Hills Department Stores. Still managed by founder Herbert Gold-berger and his son, Stephen, Hills could boast 125 stores, 29 consecutive years of increasing sales and operating profits, an earnings growth rate of 23 percent over the previous 10 years, and an average return on equity of 24 percent. Hills, quite literally, was floating the entire SCOA enterprise.

Lee spun off Hills and sold the rest of SCOA for $55 million. The company then invested $11 million of stock in Hills, and obtained nearly $110 million more from four classes of preferred stock; $270 million worth of junk securities in three separate debt issues placed by Drexel to the likes of Columbia Savings & Loan, First Executive and Equitable Life; and $252 million more from banks.

Eighteen months later, in July 1987, Lee took the company public under the old Hills Department Stores name, bringing in nearly $40 million. Lee himself owned some 48 percent of the company. But then, purportedly blinded by family ties and dreams of making the company profitable again, Lee did not cash out. With the retail industry in the Northeast already going sour while Stephen Goldberger aggressively pursued expansion plans for some 89 new store openings, including 33 Gold Circle outlets picked up from the struggling Federated Department Stores, the company unraveled. Hills filed for Chapter 11 in 1991. Lee, his company, Merrill Lynch, and Westinghouse Credit all tried to save Hills with money, but that, too, failed. Lee took over as CEO, reportedly booting Goldberger, and closed stores determinedly. Chemical Bank entered the picture with a $250 million debtor-in-possession loan and Hills continued operating its remaining 154 stores.

In January 1991, Thomas H. Lee Co. acquired part of a supermarket chain when it bought Florida, New York-based Big V Supermarkets from affiliates of First Boston Corp. and Metropolitan Life Insurance Co. of New York for $212 million. The acquisition brought Lee Co. 27 Big V “ShopRite” stores in New York for $212 million. Additional partners in the venture included three other investment affiliates, members of Big V’s senior management, and some outside investors.

It was the company’s first full-scale investment in the retail food industry. The supermarket chain, founded in 1942 by William Rosenberg, had struggled, being purchased by First Boston for nearly $170 million from a retiring 79-year-old Rosenberg in 1987. J. Arthur Rosenberg, the 62-year-old son of the founder, stepped down as chairman. The company had revenues of $630 million in 27 stores at the time of the sale. David G. Bronstein became the new chairman and retained the titles of president and chief executive. Seven stores in Albany were sold, and several new stores were opened after the sale to Lee Co.

Business Is a Snap-pie, 1992-94

Although in business for nearly 20 years, Thomas Lee worked behind the scenes, quietly making deals and money (his personal net worth on the Forbes Four Hundred was listed at some $420 million in 1994, jumping to nearly $600 million in 1995 and $750 million by 1997).

That all changed in 1992, when he became a legend in investment circles. His firm purchased 63 million shares of Snapple Beverage Company in April. Eight months later, Lee took Snapple public, and a short two years later, in 1994, he leveraged the sale of Snapple to Quaker Oats Co. for $1.7 billion, making approximately $900 million from the sale. Unfortunately, Quaker Oats did not fare so well, buying Snapple when its popularity was peaking, tinkering with the company’s distribution system, and ending up selling the struggling beverage company in 1997 for $300 million, $1.4 billion less than it paid, leading to Quaker Chairman William Smithburg’s ouster.

In July 1992, Lee Co. bought 83!/3 percent of First Alert and BRK Electronics from Chicago-based Pittway Corp. for $92.5 million. The acquisition was especially notable since it garnered Lee the two leading manufacturers and distributors of smoke detectors, fire extinguishers, rechargeable flashlights and lanterns, timers, and other home security products. Pittway retained 16-²/3 percent of the companies. That December, Lee Co. purchased Pompano Beach, Florida-based Sun Pharmaceuticals, the third largest manufacturer of sun and skin care products in the United States.

In June 1994, Restaurants Unlimited Inc. (RUI) executives, Thomas H. Lee Co., and Union Bank of Switzerland bought out RUI’s majority shareholder, New York investor Eli S. Jacobs, who acquired control of then-privately owned RUI when he restructured the company in 1990, leaving RUI manager-stockholders with cash but little stake in the company. The deal followed Jacobs’s forced bankruptcy in 1993 by a group of international banks claiming the formerly wide-ranging investor, with ownership in Memorex and the Baltimore Orioles, among other things, owed them nearly $60 million.

The acquisition brought Lee Co. partial ownership of the Cinnabon “gourmet” cinnamon roll bakery chain, with 255 company-owned or franchised locations in 33 states, Canada, and Mexico; four Palomino “Euro-Bistro” dinner houses, in Seattle, Minneapolis, San Francisco, and Palm Desert, California; one Zoopa all-you-can-eat “international marketplace” buffet restaurant in Tukwila, Washington; and full-service concepts like Cutters, Stepps, and Simon & Seafort’s spread across six states.

The Late 1990s

In January 1995, Garth Drabinsky, owner of Livent, sold 13 percent of that company to Lee. The entertainment firm, suffering from a shortfall of cash from its purchase in 1993, released such films as Kiss of the Spider Woman. Also in 1995, Thomas H. Lee Co. formed a venture with BancBoston to buy the mortgage operations of Prudential Insurance Companies of America, but lost the deal to Norwest Corp., who eventually bought Prudential Home Mortgage. Lee Co. also sold subprime lender Equicredit to Barnett Banks Inc. that year, creating another long-lasting relationship.

In October 1995, the Gillette Co., parent company of Braun, agreed to acquire Thermoscan Inc., the leading manufacturer of infrared ear thermometers from Thermoscan’s founders and Thomas H. Lee Co. for $105 million. Thermoscan would be operated by Braun, who marketed the leading electric dental unit, the Braun Oral-B, in the U.S. and Europe. That month was marred by Lee’s highly publicized divorce from first wife, Barbara Fish Lee.

The following month, however, Playtex Home Products, itself substantially owned by Lee Co., bought the latter’s 78 percent ownership of Banana Boat Holdings (BBH), a sun and skin care line, for $40.4 million, increasing the feminine hygiene company’s stake in BBH to a full 100 percent.

In January 1996, Lee Co. purchased almost 25 percent of New York Restaurant Group (NYRG), owner of several prestigious restaurants in New York City and Chicago, including Smith Wollensky steak house, contemporary American cuisine-based Park Avenue Cafe, a seafood unit called The Manhattan Ocean Club, and Mrs. Parks Cafe, from NYRG founder and President Alan Stillman. Stillman, who once sold oils to perfume manufacturers, created T.G.I. Friday’s in 1965 on Manhattan’s Upper East Side as a way to supplement his income. His moonlighting excursion changed the course of the casual-theme dining industry, spawning a restaurant chain that would become one of the most imitated concepts in that market. Stillman planned to use the investment to finance national expansion into such cities as New Orleans, Philadelphia, and Washington, D.C.

A bit of Thomas Lee’s success was due to the quality of business partners he surrounds himself with. In February 1996, the company, in its first co-investment with Bain Capital Inc. (whose managing director was Mitt Romney, son of former Michigan Governor George Romney), acquired 84 percent ownership of TRW Information Systems & Services Inc. of Orange, California, for $1 billion from Cleveland-based TRW’s much larger manufacturing businesses that make such products as automobile air bags and missile tracking systems.

The deal for one of the most prominent names in the information business, best known for its reports on Americans’credit histories, as well as being one of the nation’s largest providers of real estate information and direct marketing services, was financed by Chemical Banking Corp. and Bankers Trust. The acquisition gave TRW—with consumer credit reporting services in Mexico and Japan, online business credit reports worldwide, a reciprocal partnership with a consortium of European countries and Canada to offer business credit information on European, Canadian, and U.S. companies—the muscle it needed to compete with market leader Atlanta-based Equifax Inc. and third-place Trans Union Corp. of Chicago. A public bond sale was held that June, raising approximately $300 million to help pay for the acquisition. The company’s name was changed to Experian Information Solutions.

Experian was sold in November to Great Universal Stores PLC, a Manchester, United Kingdom-based mail-order giant that also owned the Burberry clothing retailer, for $1.7 billion. The British company, chaired by Lord Wolfson of Sunningdale (chief of staff under British Prime Minister Margaret Thatcher), merged Experian into its much smaller credit-reporting business, CCN Group in Nottingham, U.K. and ran it under a holding company, CCN Experian Ltd.

In March 1996, Thomas H. Lee Co. and Madison Dearborn Partners, another venture capital firm, paid $135 million to Bank of Boston Corp. for 55 percent of its BancBoston Mortgage division, creating HomeSide Inc. Bank of Boston Corp. retained a 45 percent stake in the new company, seen as a groundbreaking way to capitalize on economies of scale by combining mortgage systems and servicing, and industry analysts praised the merger, which turned two mid-size mortgage lending operations into one of the largest and most efficient mortgage servicers in the United States.

Two months later, HomeSide bought Barnett Banks Inc.’s mortgage servicing operations, bringing $33 billion in servicing finance to the $42 billion already in place from BancBoston. Barnett obtained a one-third stake in HomeSide, reducing the other two investors also to 33!/3 percent ownership. HomeSide went public in January 1997 at $15 a share. After the offering, Thomas H. Lee Co. owned about 20 percent of the Jacksonville, Florida-based mortgage lender, Madison Dearborn six percent, and the two banks 26 percent each. In October 1997, HomeSide was sold to National Australia Bank for $1.23 billion, bringing Thomas H. Lee Co.’s stake up to nearly $250 million, $160 million more than its initial investment.

In September 1996, Donaldson, Lufkin and Jenrette Inc. financed Lee Co.’s $200 million recapitalization of battery-maker Rayovac Corp., with Bank America Corp. acting as the administrative agent. Lee Co. picked up an 80 percent ownership in the third largest battery manufacturing company in the United States, behind Duracell and Energizer, selling to such major customers as Sears and Wal-Mart. The battery maker was taken public in November 1997. In December 1997, Rayovac purchased BRISCO G.M.B.H. in Germany and BRISCO B.V. in Holland, distributors and assemblers of customized hearing aid battery packages in Europe and, in March 1998, expanded into the rechargeable battery market with the acquisition of the retail business of Direct Power Plus (DPP) of New York, a full line marketer of rechargeable batteries and accessories for cellular phones and video camcorders, for around $7.4 million.

In October 1996, Syratech Corp., Leonard Florence’s table-top and giftware company, reached a merger agreement with Lee Co. in a $288 million transaction, giving the latter a nearly 75 percent ownership in the former. The acquisition also brought ownership in Syratech’s core silver brands, Towle, Wallace, and International Silver, which together held nearly 45 percent of the silver flatware market. Florence headed Towle in the late 1970s and early 1980s and acquired 14 companies before resigning in 1985. The company twice thereafter filed for bankruptcy. Florence went on to found Syratech Corp. in 1986, buying Wallace, International Silver, and Syroco that year and Towle in 1990 before going public in 1992. Syroco, a supplier of plastic outdoor furniture, was sold for $140 million, and Florence purchased Silvestri, Carvel Hall, Elements, Rauch Industries, C.J. Vander, and Farberware—for nearly $42 million—a leading manufacturer of cookware and small electric appliances in February 1996, shortly before selling to Lee Co., and then licensed the name out to Meyer Corp. for some $25 million.

In August 1997, Lee Co., backed by a $900 million loan from Chase Manhattan Corp. and Merrill Lynch & Co., leveraged a $1.06 billion buyout of Hampton, New Hampshire-based Fisher Scientific International, maker of scientific equipment, outbidding hostile Bass Group of Fort Worth, who held 10 percent of the company. Chase Securities Inc., Chase Capital Partners, Merrill Lynch, and Donaldson, Lufkin & Jenrette’s DLJ Merchant Banking Partners also invested equity in the deal.

Also in August, following $1.2 billion in acquisitions in a short period of time, Cambridge, Massachusetts-based computer software firm The Learning Company issued $150 million in preferred stock to Lee Co., Bain Capital Inc., and Centre Partners Management LLC of New York, who bought out The Tribune Co.’s share of The Learning Company, to cut its debt. Lee and the other investors received roughly 25 percent of the company. The Learning Company, itself purchased in 1995 by SoftKey International Inc., which took the former’s name, was responsible for such hit programs as the award-winning Reader Rabbit and Oregon Trail.

In September 1997, CIBC Wood Gundy Securities Corp.’s New York unit, along with First Union Corp., contributed a $115 million bank loan and a $75 bridge loan to help with the financing for Thomas H. Lee Equity Fund Ill’s $300 million recapitalization of Transwestern Publishing Co. LP, a San Diego-based publisher of telephone directories, until the latter company could complete a high-yield bond offering later that year. The Fund itself closed in 1995 with a value of $1.5 billion.

Continental Illinois Venture Corp., a subsidiary of BankAmerica Corp. and Trans we stern’s largest shareholder, also contributed to the investment. CIBC and First Union had originally made a loan in 1993 which financed Continental Illinois’ management buyout of Transwestern.

As the company entered 1998, it showed no sign of slowing down, acquiring a stake in an eye care center chain, among other investments. If Lee’s history is any indication, he will remain personally on the Forbes 400 list, and drive his company to further success.