Investment capital can be an important ingredient in the growth of any business, but the prospect of “vulture” capitalism instead of “venture” capitalism strikes fear into the hearts of some. Sometimes the fear is right in your own backyard.
Two Clarion area large businesses were once owned by investment capital companies and are now closed for business.
Bain Capital once owned Sealy and KKR (Kohlberg Kravis Roberts and Company) owned Owens-Illinois.
One of the original purposes of the venture capital firms and engineered takeovers was to change the way a business functioned in order to make it more efficient.
However, private equity companies often finance the takeovers of companies by driving the price of the company as low as possible and then invest in it with as much borrowed money as possible. Some venture capital firms load up the company with too much debt, still charge the new company high fees, sell many of the company assets, and then many workers are laid off.
Sealy was sold to management and an investor group led by Bain Capital in 1997 for a $40 million investment. The sale was announced after Sealy has sold off its Wood stuff Manufacturing unit to an investor group for $35 million. At the time of the sale, Bain had invested in more than 90 companies, including Brookstone, Inc. and Staples, Inc.
Bain shut down the corporate headquarters in Ohio and shifted all of the Ohio jobs to North Carolina. In the seven years Bain owned the company, employment increased, but according to the Los Angeles Times the growth came almost entirely overseas. As the result of a “lean” manufacturing process, profits increased from $112 million to $168 million in three years.
Another Clarion Connection
In 2004 Bain sold Sealy to KKR (Kohlberg Kravis Roberts and Company) and here is where the Clarion connection continues.
KKR, a venture capital firm that specialized in leveraged buyouts, bought Owens-Illinois in 1987.
“Leveraged buyouts were a popular method of corporate acquisition in the 1980s, which involved borrowing large amounts of money to purchase a majority of stock in a company using the assets of the acquired firm as collateral,” reported Owens-Illinois Today and Tomorrow by the University of Toledo, “Once acquired, many of the company’s assets (including profitable divisions) were sold to pay down the debt.”
Reportedly, Clarion was also a victim of the asset sell-off and witnessed the sale of things such as long-standing rights to free natural gas for the plant.
“In the years immediately following the takeover of O-I by KKR, many operations of the company were sold off, including the Forest Products Division, several overseas ventures, its financial services business, and the Owens-Illinois Technical Center (which was sold to the University of Toledo). In 1991, the Health Care and Retirement Corporation of America was spun off as a separate entity, which would become HCR Manor Care. But at the same time, the company did acquire Brockway, Inc., the third largest container manufacturer in the country.
“On the positive side, the sale of these large divisions (particularly HCR) provided needed capital to take Owens-Illinois public. In December 1991, O-I stock was publicly traded again. But to help reduce the indebtedness, in 1993 the company ended its long affiliation with Libbey Glass, which was sold off.”
KKR sold off Owens in 2004 and, while it didn’t make much of a profit on the sale, KKR’s investors did earn a substantial return.
“KKR never sold stock to book profits on its 14-year investment in Owens-Illinois Inc., a glass bottler,” reported Motley Fool and the Wall Street Journal, “Its stake — once valued at $1.6 billion — is now valued at $258 million, giving the $180 million investment single-digit returns. Despite never exiting Owens, the 1987 fund has returned 26% to its investors from investments in Beatrice Cos. and Safeway Stores, Inc.”
Closings of Plants
While the closing of two of Clarion County’s employers can’t be directly linked to Bain and KKR, the efforts to increase profitability through changes in operation and sale of assets did have an impact in the long run.
Sealy officially announced Aug. 4, 2008, that it would close its Clarion, Pa., bedding plant in October. Sealy operated the facility since 1981.
The Former Sealy Factory in Clarion is currently being used as a storage facility by Tarkett USA Inc.
“In light of current economic conditions and continued softness in the retail mattress environment, we determined that closing this plant is the best decision for the company,” said Larry Rogers, Sealy CEO.
“We remain focused on managing those areas of our business that we can control, and we are better aligning capacity to meet our current manufacturing needs,” said Rogers, “We regret that this decision will impact a number of Sealy employees. This action is part of our strategic plan that includes streamlining our cost structure to become a leaner organization. I am confident that these actions will help position Sealy for even stronger growth potential over the long term.”
“Production at the Clarion facility would shift to other plants in the region,” Sealy officials said.
Owens-Illinois closed its Clarion plant on July 1, 2011. It had been one of the top area employers for 105 years and affected 420 employers.
The plant closure “has nothing to do with the employees or their performance,” said company spokesperson Kristie Martin.
The former Owens-Illinois plant in Clarion remains for sale.
In 2007, Owens-Illinois established a “strategic footprint initiative,” which resulted in consolidation of operations. Other plants have also been closed, including one in Charlotte, Michigan, that employed 140 people, and a furnace plant in Oakland, California, that eliminated 200 of 400 positions. The company said the Clarion facility is one of its most expensive due to dated infrastructure.
The plant remains for sale.
