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Category: CAPITAL STRUCTURE MANAGEMENT At Tenneco, Blakely may have once been the last man standing, but now he's having the last laugh.
Ann Monroe, CFO Magazine
September 1, 1998
When Tenneco Inc. CFO Robert Blakely got up to speak at road shows in the early 1990s, he was often introduced as "the last man standing." It was a joke, but one that Blakely took seriously. The company was facing such dire catastrophe that the board of directors had brought in an almost entirely new management team. Of the old regime, only Blakely, who had been with the company since 1981, remained.
"It was very tough," says the 56-year-old Blakely, who also carries the title of executive vice president. "I felt I was guilty until proven innocent, and I just had to put my head down and work. But I felt a tremendous obligation to the creditors."
Actually, the new team thought more highly of Blakely than he realized, says Dana G. Mead, who came in as chief operating officer in 1992 and is now chairman and CEO. "All of us understood that it wasn't the CFO who was responsible for the terrible conditions the company faced, and that, in fact, he had done about as much as he could under the circumstances."
Those "circumstances" were $11 billion of debt against $13 billion of revenue, a $3.5 billion market cap, and an unwieldy assortment of mostly unprofitable businesses. "The old Tenneco was one of the largest and most complex conglomerates in the world," says Mead, who used to keep a chart in his office showing the company's complex net of cross- holdings. One example: a small German subsidiary, through a series of cross- holdings, owned the company's agricultural land in California.
Over the past six years, however, Blakely has spearheaded a series of reorganizations, refinancings, divestitures, and acquisitions that have turned Tenneco, which formerly had seven primary lines of business, into a much more focused company, with a 50 percent debt- to-capital ratio, a $7.3 billion market cap, and a return on assets above 15 percent. In between, the company has endured the death (in 1994) of its chief executive officer, Michael Walsh, shed more than 25,000 jobs, and moved its corporate headquarters from Houston to Greenwich, Connecticut.
It has been, says Blakely, a marathon--and he means that almost literally. Blakely credits his survival to family support and a rigorous exercise program. "You've got to prepare physically, because the environment and the mental stress will tear you apart if you don't," says the former collegiate rower, who regularly jogged, swam, and worked out with free weights during the reorganization ordeal. (He still exercises for a half hour to an hour every day).
The beginnings of the company's restructuring were the $5.4 billion refinancing and ultimate spin-off of Case Equipment, the Racine, Wisconsin-based farm-and-construction- equipment manufacturer; the $700 million sale of Albright & Wilson, a specialty chemical company in Birmingham, England; and the doubling, through acquisitions, of the company's packaging business. Its consummation was the split-up of the resultant entity into three businesses--the "new" Tenneco, which has since been renamed Tenneco Inc. (the automotive and packaging businesses); Newport News Shipbuilding; and Tenneco Energy (a merger of Tenneco's energy business with El Paso Energy Corp.). The split-up, which involved a $3.5 billion recapitalization, $9.1 billion of new financing, and a complicated tax ruling, was accomplished in just nine months.
"To be CFO at Tenneco, you had to have a strong background in capital markets," says Blakely--a former Morgan Stanley & Co. partner in charge of the bank's energy group--in what has to be a considerable understatement. Mead attributes much of the reorganization's success to Blakely's ability to pull a disparate bunch of people together. "He has such excellent relationships with banks, owners, rating agencies, and others," he says. "He carries a lot of credibility."
Adds Richard Bott, managing director of Credit Suisse First Boston, "Bob also had the advantage of having worked both sides of the street. Because of his experience at Morgan Stanley, he understood what investment bankers needed to do, but he could also sort out what was best for his company."
A Tangled Web Unwoven
The whole process involved two major and ongoing problems, says Blakely. The first was the incredible complexity of Tenneco's structure. "Nothing had been done in a neat and organized way, so the legal and tax architecture was very complicated. We had to do the tax reorganization very carefully to get in a position where we could do the spin- offs and avoid substantial taxes." The solution involved what Blakely calls a "very innovative" use of a Morris Trust structure for the sale of the energy business to El Paso, as well as a tax-free spin-off of Newport News to its shareholders in 1996.
The second problem was the almost continuous refinancing of the company's debt that the restructuring required. Virtually all the debt on Tenneco's books was guaranteed by the parent, and the company couldn't be split up until those guarantees were unwound. "We had debt at Tenneco Inc., Tenneco Holding, Case, and four Case finance subsidiaries, all guaranteed by the parent," Blakely recalls. "We had to reorganize the debt for every major transaction, and untangling it all and figuring out a rational way to reposition it was a very complex exercise."
The final nine-month haul in 1996 had so many moving parts that Blakely decided the only way to handle it was for Tenneco to serve, in effect, as its own lead bank, coordinating and structuring the bank syndications itself. "My judgment at the end of the day was that this provided an opportunity for us to spread the business a bit more broadly to get maximum support from the banking community," Blakely says.
Throughout the reorganization, the board relied on Blakely's judgment and capital- markets experience. "Our debt instruments didn't permit the spin-off of Newport News Shipbuilding and the sale of El Paso Energy," he says, "and there was no way we could call the debt. We had to go through a very complicated tender offer and exchange offer." In the end, it was Blakely's assurance that the deal could be done that persuaded the board to go ahead.
With the end of the restructuring in 1996, Blakely finally had what he considers a traditional CFO job. "Nineteen ninety-seven was the first year," he says, "that I could focus on the operations of the business rather than restructuring and repositioning it."
Unfortunately, the many moves had not unlocked all the value Blakely and the rest of the management team had hoped for--the company's stock price has continued to lag both its industry-sector peers and the Standard & Poor's 500. Consequently, Blakely's respite was short-lived. In July, Tenneco announced its intention to consider breaking up its remaining operations into as many as three separate companies--the former conglomerate's final split. While the new configuration won't be announced until sometime this fall, Blakely says this last move will finally create the value shareholders have been waiting for.