The Reinvention of Nelson Peltz
THE FORMER TAKEOVER TITAN IS NOW A BRAND BUILDER--AND MAYBE EVEN THE SHAREHOLDER'S NEW BEST FRIEND
(FORTUNE Magazine) – In March 2006 power investor Nelson Peltz invited Heinz CEO Bill Johnson to dinner at Morton's Steakhouse in West Palm Beach. After the two men sat down, Peltz stunned Johnson with an in-your-face barrage, announcing that "I'm going on your board!" Peltz, whose Trian Group controlled 5.4% of Heinz shares, then lectured Johnson on his recipe for reviving Heinz, from ditching hard-to-open ketchup packets to multiplying the ad budget. "We disagreed," recalls Johnson of the bruising encounter. "It wasn't a cordial meeting."
In February of this year, the two men dined again, and this time the atmosphere was quite different. Peltz invited Johnson and his wife, Susie, to his palatial 15-acre estate in Palm Beach, one of the most expensive private homes in America. The Johnsons admired their host's collection of French Empire antiques and museum-quality Impressionist paintings, and enjoyed cocktails in the spectacular loggia overlooking the Atlantic featuring glass walls that rise from the basement to keep out the rain. "We talked that evening about how to build long-term value," says Peltz. "You must make some decisions Wall Street dislikes. I'll help give Bill the cover to make those decisions."
What accounted for the dramatic change in tone? That's easy. During the 11 months between dinners, Peltz won two seats on the board--and the hearts and minds of Heinz executives with the power of his ideas, especially a massive marketing push to get customers excited about ketchup. Since Peltz launched his campaign a year ago, Heinz stock has jumped 34%, to $45, putting almost $4 billion in shareholders' pockets. "The form of activism he's practicing is legitimate," says Heinz's lead director, Tom Usher, the retired CEO of U.S. Steel. "He's been a positive force at Heinz."
Indeed, Nelson Peltz is a force of nature--and one of the more compelling characters on the business stage today. He's worked his magic at Snapple and Wendy's as well as Heinz--and in a move announced just days ago, he's set his sights on the world's largest confectionery company, Cadbury Schweppes (to which he sold Snapple in 2000). Silver-haired at 64, with a gravelly baritone and sharp features, he remains relentlessly competitive--whether he's tangling with corporate boards or cheering on his brood of hockey-playing sons. A college dropout who went to work driving trucks for his father's food-distribution business, he lives in baronial splendor on two of the most luxurious estates in the land. Since launching his empire in the 1980s with the help of Michael Milken's junk bonds, Peltz has suffered through censure by the London Stock Exchange and the collapse of a big British real estate company he ran in the early 1990s, and he's won the scorn of corporate watchdogs for his compensation.
So far, we could be talking about any of a dozen Wall Street operators. But Peltz stands apart from the pack. He is the antithesis of fast-moving raiders like Carl Icahn and Ron Perelman. His goal isn't to grab a quick buck by forcing targets to over-leverage their balance sheets to pay for huge share buybacks or special dividends--it's to build value through improving operations. Unlike voracious private-equity firms, he plies his trade in the public markets, where ordinary investors can share the gains. "Increasingly, stockholders are tiring of private equity stealing companies from under their noses," claims Chris Young, a vice president of ISS, the proxy advisory service. "Peltz is doing the same thing that private equity does, only for the public shareholders."
Nelson Peltz as the shareholder's best friend? It may sound far-fetched, but he's making an intriguing case for that title. Peltz calls his formula "operational activism." He defines it as working the managements of high-potential but underachieving companies, like Heinz, to raise earnings by paring overhead, shedding ancillary businesses, and most of all, burnishing famous brands. The good thing about private equity, says Peltz, is that "it's up-close and personal. The CEO talks to the owner every day, not once a quarter." He aims to recreate the pressure exerted by private equity in public companies: "We say, 'Keep the company public and force managers to break a sweat, but without the excessive leverage imposed by private equity.' Raising $1 by issuing new debt is worth $1. But if I can raise earnings by $1, that translates into $10 to $15 in value. Guess which is better?"
It's a tricky task, since Peltz is neither the full owner nor the CEO but works as a board member or through directors who are allies. But his approach does offer him some major advantages. Unlike private-equity firms that purchase entire companies at a premium, he can buy blocks of stock without driving up the price. He also avoids the bidding wars that are inflating those premiums--witness the huge, auction-driven price Blackstone is paying for Equity Office Properties. Best of all, Peltz faces relatively little competition in his niche. "A lot of people can do financial engineering," says Jerry W. Levin, the former CEO of Burger King who now runs the brand consulting group JW Levin Partners. "Far fewer can improve operations. But it's where the big returns will come from in the future."
Peltz does his dealmaking through two related companies: Triarc and Trian. (The confusingly similar names derive from Triangle Industries, Peltz's first big acquisition.) Peltz and longtime partner Peter May own 40% of Triarc, which is a publicly traded company with a $1.8 billion market cap. Triarc owns Arby's, the fast-food chain, and an asset-management company called Deerfield Capital. In November 2005, Peltz, May, and Peltz's son-in-law Ed Garden, a former investment banker, launched Trian, a hedge fund whose investors include university endowments, pension funds, and insurance companies. Peltz does not discuss the size of the fund, which returned 37% in 2006, but it currently has more than $2 billion in publicly disclosed investments in companies like Wendy's and Chemtura, a chemical products manufacturer. In February, Peltz reported a 5.5%, or $320 million, stake in Tiffany. And in mid-March, Cadbury Schweppes announced that Trian had taken a 3% stake in the company, worth about $730 million. A couple of days later Cadbury, in an apparent nod to Peltz and other investors, said it would split itself in two, spinning off its U.S. beverage operations, whose products include Dr Pepper and Snapple. The stock jumped on the news.
At Triarc's and Trian's shared offices on Park Avenue in midtown Manhattan, Peltz and May regularly gather with a team of 15 analysts, accountants, and former investment bankers to scrutinize the performance of current holdings and search for new opportunities. Peltz and May always occupy the same seats at one end of an oval, leather-inlaid table in a room decorated with architectural drawings of the Paris Bourse. Both men believe in constantly assessing their properties' strengths and weaknesses against the best performers in their industries. Their lieutenants prepare detailed comparisons on margins, the percentage of sales spent on marketing, "deals and allowances" paid to retailers, and growth in overhead vs. sales. Peltz prides himself on knowing businesses so intimately, from factory floor to supermarket shelf, that he can systematically break down any management's rationale for mediocre results.
When it comes to potential targets, Peltz and May favor companies with strong brands that aren't basket cases but have been drifting sideways, à la Heinz and Tiffany. They worship free cash flow, and believe it's more efficient to revitalize a great brand than to try to build one from scratch. "If you can get a brand growing again, free cash flow grows dramatically," says May. "And then the stock is rewarded with a higher multiple."
While they share the same philosophy and relentless drive, Peltz and May, 64, have different specialties. May, a courtly former accountant and University of Chicago MBA, is an expert on operations. He's more likely to focus on inventory turns than Peltz. By contrast, Peltz is an intuitive, natural dealmaker. He concentrates on the big picture. "Give me a few facts about a fast-food company," he says, "and I'll tell you what Ebida should be. Like Carnac!" He also loves exploring what grabs the public taste. "I try to figure out the marketing puzzle," he says. He's a one-man market-research lab, haunting fast-food restaurants to try the latest burgers, sodas--and ketchup packets.
Their penchant for on-the-ground digging helps Peltz and May avoid costly mistakes. A case in point was their brush with Krispy Kreme. In 2004 they pondered buying a big chunk of the doughnut chain. "But I couldn't make heads or tails out of their financial statements or what they were telling investors," says Peltz. So he and his team got on Peltz's Boeing 727 to visit stores and talk to franchisees in Toronto, Las Vegas, Los Angeles, and other cities. "We ate a lot of doughnuts," recalls Peltz, "and saw that the stores were half empty." Yet the franchisees complained that the company was pushing them to build more stores. "We figured out that the company was making most of its money selling the franchisees equipment, not on doughnuts," says Peltz. "The company wasn't giving the facts to shareholders." Stuffed with cinnamon twists and information, Peltz passed on Krispy Kreme, avoiding the subsequent meltdown in its stock.
Peltz commutes to Manhattan from High Winds, the 130-acre former home of Reader's Digest co-founder DeWitt Wallace in Bedford, N.Y. The property features a 27-room mansion, a huge lake, a waterfall, and a professional-quality indoor hockey rink with a Zamboni machine. A flock of albino peacocks roams the manicured grounds.
In Palm Beach, his French Regency-style home covers 44,000 square feet. Built in 1965, it boasts a foundation lined with lead to keep out moisture from the ocean. After Peltz bought the lot across the street to build a tennis court, he learned that he couldn't install one without a residence. So he added a second mansion for guests, complete with orchid house. One of his Florida buddies is golfer and sports entrepreneur Greg Norman, a close friend whom Peltz unsuccessfully proposed for the Heinz board. Norman, who takes Peltz on fishing trips at his Colorado ranch, calls Peltz "a mental marathon runner." He adds, "Nelson isn't a Harvard type. He's street smart. He understands what the masses want."
For all his love of opulence, Peltz spends most winter weekends ferrying his kids to drafty hockey rinks all over the Northeast. His ten children range in ages from 41 to 4. He has eight with his third wife, Claudia, a former fashion model. He's raised a brood of figure skaters and high school hockey stars. For Peltz, the hockey life is ideal discipline. "My kids are exhausted every day, and I keep them that way," he says. "It's gym, ice, homework. They're too tired to get in trouble." He also says that he tries to set an example: "I don't want them to see me walking off with a bag of golf clubs over my shoulder. If they see me work hard, it's better than a lecture." He's right at ringside to make sure all eyes are on the puck, boasting that he's scurried to as many as four hockey games on a single day.
After dropping out of the University of Pennsylvania's Wharton School in 1962, Peltz (who still has only a high school diploma) built his family's tiny frozen-food business in Brooklyn into the largest distributor in the Northeast. Starting in 1985, he marshaled more than $1 billion in junk bond debt, courtesy of Milken, to assemble the biggest packaging company in the world, Triangle Industries, by gobbling up National Can and American Can, among other prey. When Peltz and May sold Triangle to France's Pechiney in 1989, their gains amounted to around $840 million, and shareholders made eight times their investment. His best-known triumph was Snapple. In the late 1990s he bought the flagging iced-tea brand from Quaker Oats for $300 million, brilliantly revived its blithe, quirky appeal, and resold it three years later for more than $1 billion, capping one of the most spectacular deals of the decade.
Throughout his career, Peltz has had a reputation for being overpaid. And by many measures, Peltz's compensation at Triarc looks excessive. In 2005 he earned $29 million as chairman and CEO of Triarc, an astounding number at a company with just $1.2 billion in sales. The directors justify that figure by claiming that Triarc is more like an investment bank than a restaurant company. "This is more a publicly traded fund that works with management than a pure restaurant chain," says David Schwab, head of the compensation committee. "Nelson is paid for buying, growing, and selling companies, which he does on a regular basis."
Peltz makes no apologies. "I believe in pay for performance," he says. "People would be happy to pay a CEO a large amount of comp for doing what I've done with Triarc or Triangle." He points out that Triarc's shares have jumped from a split-adjusted price of $1 to $19 since he started negotiating with raider Victor Posner in 1991, and that the market cap has risen from $80 million to $1.8 billion.
There's no doubt Peltz has produced big value for shareholders. That's more than can be said for many CEOs who gorged while shareholders suffered, notably the deposed chiefs of Pfizer and Home Depot, Hank McKinnell and Bob Nardelli. Still, the fact is that Triarc isn't an investment bank or hedge fund. It's principally a restaurant company. Peltz's pay is unparalleled even at most giant food and beverage companies. Steve Reinemund, chairman and ex-CEO of Pepsi, made just over half of Peltz's comp for 2005 despite running a company 30 times Triarc's size and generating big gains for shareholders. Peltz is promising to establish Arby's as an independent company so that it's no longer part of a "deal shop."
Before targeting Heinz, Peltz pursued an Arby's competitor, Wendy's. In December 2005 he issued an analysis, or "white paper," demanding that Wendy's spin off 100% of its highly profitable Tim Hortons, the Dunkin' Donuts of Canada. He charged that Wendy's company-owned stores were generating margins of just 9%, less than half the 20% posted by its franchisees. Peltz maintained that if the company-owned stores achieved the 20% benchmark, Wendy's would raise earnings by $200 million.
His analysis swayed the Wendy's directors, and three of the candidates Peltz proposed now sit on its board. "Nelson's white paper was right on target," says Jim Pickett, Wendy's chairman, who wasn't part of Peltz's slate. "The activists made the board more aggressive than in the past in pushing management to deal with the issues." A year ago Peltz said Wendy's stock price should be $75, or 40% higher. That's just about where it is today, when you include the Hortons spinoff in the total.
At Heinz, Peltz won the day because he stuck to the facts, hammering away at the company's weak record. Heinz management lost because it attacked the attackers instead of convincingly defending its record. Peltz charged that as Heinz shrank by shedding businesses, its overhead went in the other direction, hammering profits. His staff also extensively interviewed Heinz supermarket customers. They said that the company frequently offered big discounts at the end of the quarter to move ketchup. Peltz concluded that Heinz was competing far too much on price instead of launching advertising campaigns like its brilliant "Anticipation" spots in the 1970s. Peltz proposed a $300 million increase in marketing spending, paid for by a drop in incentive payments to retailers. His message was simple: Spend money on building the brand so that people will be willing to pay premium prices for Heinz products.
Heinz directors claim that the company was moving to slash overhead and pump up advertising before Peltz's arrival. But they acknowledge that he's spurred the process. "When you make yourself smaller, you need to pay attention to overhead costs," says director Chuck Bunch, CEO of PPG Industries. "Did Trian's position heighten our awareness of the issue? It probably did." Most of all, he earns praise for curbing his animal spirits and acting like a director, not a CEO--witness his strong relationship with Bill Johnson. "People were scared he'd be so belligerent and argumentative you couldn't have a meeting," says director Dean O'Hare, former CEO of Chubb. "Not so. The bottom line is that Nelson is an excellent board member."
In late February, Peltz took a stake in Tiffany. Seated in his glass-enclosed, penthouse-like Manhattan office, Peltz presented a fully formed, daring vision for the Tiffany brand. "Women see Tiffany as a place to buy a gift, or where gifts come from in those beautiful blue boxes," says Peltz. "But it's not where women go to shop for themselves. And it should be." Peltz pictures a Tiffany's that's less frosty and austere, where women are enchanted by scarves, watches, and handbags the way they are in the welcoming precincts of Hermès or Cartier. And this time, in contrast to the resistance at Heinz, management is warmly welcoming his ideas. The Tiffany brass has even invited him to dinner. How times change. Could it be that the fearsome Nelson Peltz, the legendary intruder, is going to have to get used to having cordial meals with management? feedback firstname.lastname@example.org
MORE HITS THAN MISSES
In a lifetime of dealmaking, Peltz has rarely made a blunder.
1985 Triangle, with $40 million market cap, buys National Can for $420 million.
1986 Triangle purchases American Can for $600 million.
1989 Peltz sells Triangle to French aluminum producer Pechiney for $4.3 billion.
1991 London Stock Exchange censures Peltz and May for selling half their stake in real estate company Mountleigh before an earnings announcement. Mountleigh goes into receivership a year later, owing $950 million.
1993 Peltz and May buy half of Victor Posner's 44% stake in DWG, owner of Arby's and Royal Crown, for $72 million. They later rename DWG Triarc.
1997 Triarc purchases Snapple from Quaker Oats for $300 million.
2000 Triarc sells Snapple, along with RC and other brands, to Cadbury Schweppes for $1.5 billion.
2005 December: Peltz announces 5.4% stake in Wendy's. Wendy's later adds three Peltz-backed directors.
2006 March: Peltz announces 5.5% stake in Heinz. August: Peltz wins two seats on the Heinz board.
2007 February: Peltz announces he's bought a 5.5% stake in Tiffany. March: Cadbury Schweppes says Trian has taken a 3% stake.
From the April 2, 2007 issue