Charles Koch actually bought Georgia Pacific while playing golf. According to "Sons of Wichita" Koch was at The Reserve Club in Indian Wells, California playing golf with brother David Koch and friend John Damgard. Charles was constantly using his cell phone. At one point a guard from the club approached Koch to let him know that the guard would have to turn him in and even get a formal letter of reprimand from the club. It was during this afternoon that Charles bought Georgia Pacific.
Koch had Georgia Pacific on their radar for a while and in 2003 met to discuss a possible future together. According to SEC filings in 2003 Georgia Pacific earned a net income of $254 million in 2003 (in the two prior years the company lost $735 million, and $477 million respectively. The company in the first quarter of 2004 earned $147 million. The company in 2004 had a net income of $623 million. Georgia Pacific chairman A.D. "Pete" Carroll was excited that given Koch was a private company they wouldn't be subject to the onerous reporting requirement under the Sarbanes Oxley Act and the 47 other regulatory requirements.
The deal would allow for Koch to increase their revenues from $60 billion to $80 billion. Georgia Pacific had 55,000 employees with 40% who were members of unions). Including debt Koch would purchase Georgia Pacific for $21 billion in December 2005 (the price was a 39% premium for the shares). David Koch was quoted as saying "We are all staggered by the size of it". Koch would grow from 55,000 employees to 85,000 employees with the acquisition. Georgia Pacific was primarily involved in paper products (Brawny paper towel, Dixie cups, paper towels in commercial building restrooms, and toilet paper) construction materials to build homes (plywood and oriented strand board-if you ever see construction you might see a GP label), and packaging (boxes).Georgia Pacific customers included companies like Wal-Mart, Target, Home Depot, and Kroger. David Koch said Koch Industries would reinvest the cash flow into improving and upgrading Georgia Pacific's manufacturing facilities and help Georgia Pacific operate more efficiently.
Koch usually takes on partial ownership before offering to buy full companies. Koch in 2004 purchased the pulp industry business from Georgia Pacific for $610 million (pulp sales in 2004 were $74 million). By the next year Koch would be ready to purchase all of Georgia Pacific for $21 billion (so all in the deal was closer to $22 billion). The $21 billion deal was financed by mostly debt (Citigroup underwrote the loan for $11 billion-JPMorgan and Deutsche Bank helped in the financing too) with Koch only contributing $2.2 billion of cash. The debt deal reduced the underlying credit rating of Georgia Pacific from BB+ to BB- (Georgia Pacific in 2017 had their credit rating upgraded to A3). As mentioned in the ABKO deal (which was done in the late 1970's) Koch also put in little equity (if roughly 10%) and the deal was mostly financed with debt.
Charles Koch in this rare one hour video interview says that he "heard [GP] wanted to get into consumer products and out of the commodity business so their multiple would go up". Koch wanted to buy all the non consumer product businesses however Koch couldn't because Georgia Pacific had asbestos liabilities and the attorneys wouldn't let Koch pick and choose which pieces they purchased (this would be known as fraudulent transfer). Georgia Pacific would only allow the deal if Koch purchased the whole company.
Georgia Pacific would notice changes after Koch acquired them. Koch Industries has a history of reinvesting 90% of the earnings back into a business. Georgia Pacific was not reinvesting much of their profits back into the business. The company would let machines run as long as possible without shutting them down (which was dangerous and led to injuries). Koch would also cut out the dividends that Georgia Pacific was paying investors. In 1Q 2005 Georgia Pacific actually increased their dividend by 40% . Koch believes that paying out small dividends and reinvesting more into the business the business can grow over time.
Charles Koch in Good Profit wrote that when Koch took over Georgia Pacific the company Koch "its safety performance improved under [Market Based Management], lowering the return on the capital to low single digits". Georgia Pacific was an old school company that had many layers of bureaucracy. After Koch took over Georgia Pacific employees were given much more authority to make decisions. When Wesley Jones who ran the Georgia Pacific-pulp mills wanted to install more efficient processing towers at a plant and asked for approval he was surprised when the $35 million capital expenditure was quickly approved (over the phone too). Usually at large companies spending this type of money would need to go through committees with feasibility studies and only certain managers can approve. Companies usually specify the threshold a manager can approve (example: authority to only approve an expenditure up to $1 million). Koch even offers incentives to employees that work at the shop level to improve their efficiency. In addition to also pushing down the level of authority there was also was an emphasis on safety. At the Georgia Pacific Green Bay Broadway Mill after an accident at the mill the number of annual recordable injuries declined from 37 incidents to 7 over a 3 year period, equipment failure dropped by 50%, and productivity increased by 20% per employee.
The Georgia Pacific deal helped moved the needle for Koch Industries. The large acquisition helped Koch add new capabilities that they previously had. Koch bought Georgia Pacific with very little equity-only putting down 10% cash for the deal and borrowing to pay the rest. To be honest I was surprised that Koch used so much debt to purchase companies. Borrowing can help companies grow in good times but in bad times or if interest rates dramatically increase they can be a real issue.
At the time of the Georgia Pacific acquisition Charles and David Koch were each worth roughly $4.5 billion-from Forbes). As I write this Bloomberg Billionaires Index lists the net worth of Charles Koch at roughly $47 billion. Forbes as I write lists his net worth at close to $60 billion. Bloomberg does a good job of breaking out the net worth into different divisions of Koch Industries. Charles and David Koch each own 42% of Koch Industries. The asset breakout on Bloomberg lists $12.5 billion for Georgia Pacific. Assuming the $12.5 billion for Georgia Pacific represents a 42% interest in Koch Industries then it would say 100% of Georgia Pacific would be worth roughly $30 billion. Given Koch paid $22 billion back in 2005 that is now is worth $30 billion isn't bad. However, when looking at the deal from a growth rate perspective the deal isn't as good as it appears. Over a 13 year period this would represent a growth rate of roughly 2.4%/year which is under the normal 6%/year growth on average (Koch tries to double earnings every 6 years).
The moral of this story is Koch purchased Georgia Pacific-changing the culture, investing capital, cutting dividends (as Koch reinvests 90% of their earnings back into the company), and it helped Koch grow. However, Georgia Pacific itself has not grown as quickly as the rest of Koch Industries.
No comments:
Post a Comment