Oxbow Carbon vs. Crestview Partners LP and The Oxbow Bill Koch Corporate Coup

I have been following Bill Koch for a number of years on my blog. My last post regarding him discussed if he was getting forced out of the company he founded and if was running out of money and selling assets to finance his lifestyle. It appears Bill Koch is one step closer to being forced to sell Oxbow Carbon.

Most recently in a 178 page court decision from Delaware Chancery Court judge Travis Laster ruled that Bill Koch couldn't block Crestview Partners (a private equity firm) from cashing out its investment in Oxbow Carbon. This decision could put the Oxbow Carbon into a receiver supervised sale.

Originally on May 1, 2007 Oxbow executed a deal that would allow Crestview to have a 23% equity interest in Oxbow for $190 million. Oxbow contributed $483 million which represented a 59% interest. In addition to this Bill Koch's family made contributions too. The Wyatt I. Koch 2000 Trust, the William I. Koch Family Trust (created in 1976 to benefit his daughter Charlotte Koch-who is now in her early 20's), even Koch's ex wife Joan Granlund contribute (he at one point in his past tried to juggle three different women at once). Oxbow along with the Koch family owned 67% of equity in the transaction.The Operating Agreement of Oxbow allowed all Koch members to have participation rights with the issuance of new equity. Below is a table that explains the ownership

In January 2011 when Oxbow would acquire a sulfur company the board would approve offering equity to the Koch family and sulfur executives at $300/share (this would represent only a 1.4% interest in Oxbow). Barry Volpert of Crestview would testify that Oxbow didn't need to issue equity to raise capital and didn't help Oxbow to do anything.

The deal would allow Crestview a "put option" to repurchase the remaining shares at fair market market value. This would allow Crestview to sell its shares back to Oxbow. If however, Oxbow declined to purchase the shares then Crestview had the right to have an exit sale of Oxbow. Crestview believed they could sell shares for $283-$452/share in an exit sale and estimated the company would earn $566 million EBITDA (earnings before income taxes and depreciation). Morgan Stanley believed that Oxbow could perform an IPO for $400/share and ultimately trade for $500/share. Oxbow was a pretty successful company earning $571 million in 2011. However, Koch in this video would say that in 2013 his profits were down 40%.

By 2013 Oxbow employee Brian Bilnoski noted that if Oxbow couldn't buyout minority shareholders with debt Oxbow would be at the mercy of the minority shareholders in terms of timing. At the time Bilnoski believed the shares were worth $217/share. In 2014 Koch tried to find new capital to redeem Crestview's interest. Koch had trusted Christine Wing O'Donnell for this task of finding new capital. She is a graduate of Southern Methodist University and Harvard Business School personally worked at a family office for Bill Koch that consisted of over 60 full time employees. O'Donnell would set the strategy for estate planning, investment management, and charitable giving. She would manage the investments, monitor private trust, create family limited partnerships, and would help create a private trust company. Koch even gave Christine full authority to use his private plane-which other Oxbow executives frowned upon.

In 2014 Steve Fried left Oxbow as Chief Operating Officer and Koch replaced the position with Eric Johnson (who at the time was also on the verge of resigning. Eric Johnson  would then be promoted to President (he started the position in 2015-after having been with the company for 11 years) of Oxbow Carbon and actually worked at Koch Industries from 1990-1998. Actually Johnson liked Crestview and even had a "man crush on the Crestview guys". O'Donnell and Eric Johnson along with Crestview Partners didn't believe Bill Koch was the best person to run Oxbow. Bill Koch who has been through many court battles in his time would use surveillance in his own home and within his Oxbow office to capture evidence on Oxbow executives and Crestview Partners. Koch even hired a former FBI agent to engage in private investigation.

By March 2015 Eric Johnson told Crestview Partners that he believed that $18 million could be cut in annual expenses from Oxbow. The cut in expenses would come from cutting back the reimbursements the company was providing to fund Bill Koch's lifestyle. Koch would have Oxbow reimburse him for his $5.3 Dassault Falcon private jet, private school tuition (Oxbridge Academy-a school he founded), entertainment, wine, liquor, even payments to relatives, former employees, and business associates. Most corporations don't allow this as they don't want to allow company funds to commingle with personal funds.

Realizing that he needed capital to fend off a possible put option or forced sale Koch then wanted O'Donnell to raise capital (but not talk to Crestview). O'Donnell went behind Koch's back and e-mailed, texted, and called Crestview and did not inform Koch on what she was doing. O'Donnell and Johnson would talk to other firms and would tell firms that Koch was willing to transition his role of CEO to Johnson (which he wasn't) and sell equity to give up control (which he wasn't). O'Donnell didn't believe Koch was the best pitch person and felt that bringing him to possible investor meetings would make investors loose enthusiasm. As O'Donnell ran Koch's family office she even offered to have Quenntin Chu personal expenses for Koch. Chu who holds a CFA (Chartered Financial Analyst) designation became a partner at Crestview in 2012 after starting at the firm in 2005 and graduated from Harvard Business School. Koch picked up that a coup within his own company and by June 2015 told Christina O'Donnell and Eric Johnson they were no longer involved (more on both of their futures at Oxbow later).  By this point Koch was trying to prevent Crestview from exercising their put option. Morgan Stanley recommend that Oxbow in July 2015 would need to raise money immediately and that a if Crestview exercised the put option it would impact the marketability of the shares which would lead to a fire sale of Oxbow Carbon.  During this time Koch would engage in multiple amendments to try to prolong and stall Crestview from exercising their put option.

Well on September 28, 2015 Crestview went ahead and pulled the trigger on their put option and wanted Oxbow to purchase their shares. The appraised value of the shares were only $256.56/share Koch would then hire Goldman (which is interest on many levels because they were brought in for valuations during the Koch vs. Koch trial and they were also the same company that many Crestview partners would come from). Advisors to Koch said he could avoid the put option by taking Oxbow public (brother Charles Koch said Koch Industries would go public literally over his dead body) or merging with another large public company. Also Koch advisors told him the shares were only worth $145/share. Because there was such a difference between Crestview and Oxbow regarding the valuations the agreements stipulated that a third party would have to come in to evaluate the fair market value.

By January 14, 2016 Moelis believed that Oxbow had an enterprise value of $2.65 million which would  be equal to $169/share. A day after this valuation was determined the Oxbow board would meet to discuss their options. Koch wanted to sue or devise a legal strategy to avoid the forced sale. A day after the Oxbow board meeting Crestview went for the whole enchilada by exercising the exit right sale. By this time Christina O'Donnell also was getting fed up with Koch and even sent an e-mail to Eric Johnson stating they should "take his company from him quickly, not a day of relief, put him through the hell he put [them] through, let's find the $30 million of cost savings if he's not running it..."Let's take his plane, his job, and when it's over drink his wine before you taking me dancing". At this point Johnson and O'Donnell would try to ambush Koch and worked with Crestview to do so. O'Donnell would meet with other companies and even provided signed confidentiality agreements to Crestview. Well Koch would then learn of these tactics and fired O'Donnell in February 2016 and remove her from the Oxbow board. Koch also fired Oxbow's general counsel Michael McAuliffe as well.  Crestview then came up with a value of Oxbow of $2.4 billion and worked with another firm (ArcLight) to purchase 100% of Oxbow's equity for $176/share with the offering expiring on March 22, 2016.

In April 6, 2015 Oxbow met with Goldman Sachs and the Oxbow board authorized Goldman to proceed with the broad sales process. Koch would attempt to micromanage Goldman and his own Oxbow executives by not allowing them to talk to any potential investors or provide them with any information (including most importantly gossip). Goldman Sachs would say that it was the "most constrained" process they would ever encounter. Crestview managing director Robert Hurst would say that Koch was paranoid regarding the control of Oxbow. Koch would then tell Oxbow executives to provide a dim future outlook for Oxbow when talking to potential buyers. He even instructed the CFO to tell Oxbow executives to tell certain executives to dampen their forecasts or they would possibly loose their bonuses (at most companies Koch would be fired for ordering this). By June 2016 Koch would fire Eric Johnson just before a board meeting. The best part of the meeting was when Koch told his attorneys to file lawsuits against Crestview and another shareholder (while the meeting was in progress). Potential buyer ArcLight said with an impending lawsuit they would not buy in.

The recent February 18, 2018 decision from judge Travis Laster approved the possibility of an exit sale of Oxbow. This could leave Oxbow in a position where a receiver is appointed to oversee the process between the two parties. Laster pointed out that Oxbow had taken advantage of unfair gaps and didn't follow certain procedures for covering lapses in the agreements signed. Back in November 2017 Laster said "Is this likely to end anytime soon?" The next step is to allow both parties until the mid March 2018 to allow the parties involved to submit a joint letter to inform the court of any other matters that need to be addressed to bring the case to a close.

I plan to update this post for future developments.

Case Study: Koch Industries ABKO Deal with Chrysler

Koch Industries today is a diversified company that is involved in oil/gas refining, paper products, technology, even has their own private investment group to evaluate providing capital to companies. Many people may not know but Koch Industries was actually in the car dealership business back in the 1970's. Chrysler back in the late 1970's decided that it wanted to sell Chrysler Realty Corporation. As part of the Koch vs. Koch lawsuit the Chrysler deal is mentioned in the testimony and the summary can be found here. (The photo above is Bill Koch, Charles Koch, and David Koch).

In September 1979 Koch Industries and George Ablah a land developer from Wichita, Kansas formed a partnership called ABKO. George Ablah who was known as a real estate magnate in the Wichita area and known for constructing shopping malls and developing commercial real estate. George knew Charles Koch (who at that time was only 43 years old) and  ABKO Realty was structured to be 50% /50% deal between Ablah and Koch Industries. The name came from from the first two letters of Ablah and well the KO came from a well known oil and company. Charles Koch is known to be a good negotiator and it was even commented that he will negotiate the hyphen in a 50-50 deal. One of the reasons for using the name was a named that could be used in all 50 states. According to Ablah the purpose of the deal was "an opportunity in our eyes to accumulate a lot of real estate in one purchase, and use it as a base to grow". The concept of ABKO was to sell the dealerships that they purchased from Chrysler realty, reduce the overall debt, and then attempt to diversify out of the real estate holdings. ABKO would establish a grade for each property purchased and rate the properties between a grade of A-D to decide which properties to sell and which properties to keep.Actually George was able to start his real estate career when he used the name of Fred Koch of a reference on a bank loan. Charles Koch would refer to Ablah as the second best business partner he ever had (the first was his wife).

The ABKO partnership would allow Koch Industries and George Ablah to purchase Chrysler Realty stock for a cash price of $70 million (after credits) in September 1979. In the late 1970's Chrysler owned 4,730 dealerships throughout the United States and by Chrysler Realty in 1978 earned about $13 million. However by 1979 the Chrysler was in financial trouble and on the verge of bankruptcy needed a $1 billion from the U.S. federal government. What Koch purchased was 556 Chrysler dealerships and 245 leased Chrysler dealerships. The $70 million deal was financed mostly with debt as Koch contributed only $7 million and the remainder of the monies were financed either by Koch Industries financing or from money borrowed from The First National Bank of Chicago. George Ablah personally guaranteed $29 million of the loan in the deal. 

ABKO would trade 26 Chrysler dealerships for an office building called "Blue Hill". Blue Hill was an office building in New York that only had a occupancy rate of 19% (typically buildings with an occupancy rate of less than 80% are in trouble). The swap for the Blue Hill office building was roughly $25 million. Blue Hill later  would be sold by George Ablah in June 1985 for $100 million. Ablah took on more debt from First Chicago and Chemical bank to make massive capital improvements into Blue Hill and increased the occupancy level to the highest it had ever been. Selling Blue Hill would give Ablah a net gain of $29 million. Taking on debt would catch up to George though. In 1992 George and his wife would file for bankruptcy after changes in federal and state tax rules in the 1980's and early 1990's.

By year end 1981 ABKO was showing results. The entity was able to sell 250 dealerships and realized an after tax income of $34 million ($28 million was paid out as a dividend) and paid down a large portion of the debt owed. Realizing that the economic situation had improved by 1981 Chrysler was interested in repurchasing some of the dealerships owned by ABKO. In 1982 Chrysler and ABKO negotiated a purchase price of $119 million. By this time there were 521 dealerships remaining and Chrysler would purchase 336 of the remaining dealerships from ABKO and sign a 15 year lease on 110 dealerships. The rental income that was generated from the 110 properties had been $11.5 million . The early 1980's were good to Koch Industries.  Koch Industries in 1981 had roughly $17 billion in revenue and earn $309 million (a 20% increase from the prior year in earnings). In 1982 Koch Industries would have $309 million in net earnings.

However, by April 1982 George Ablah was getting worried about the future of ABKO due to the controversy between Koch Industries and the lawsuit between the Koch brothers. Ablah in a 7 page memo felt it was hard to do any type of future planning for ABKO due to the lawsuit (he even mentioned he believed he didn't believe William Koch and the other dissenter shareholders liked him). It was at this point that a split up between Koch Industries and ABKO would occur

On September 20, 1982 Ablah and Charles Koch met to discuss the liquidation of ABKO. It was believed that the after-tax value of the company would be worth $90 million (remember the purchase was $70 million).  In addition to this, Blue Hill would be worth another $26 million. These of course were preliminary talks and estimates. Charles felt the Ablah should stay until most of the properties had been sold. Also Charles felt it was too early to come to a final agreement since he felt the evaluation of ABKO wasn't complete. By October 1982 (this would be the month Bill Koch and other dissenter shareholders would file a lawsuit) Koch had finalized a proposed transaction and bought out George Ablah's 50% interest in ABKO for $45 million.

The analysis of the possible deal was completed in early October and then proposed at the October 19, 1982 board of meeting.  Koch board of directors meeting included Charles Koch, David Koch, Sterling Varner, and Howard Marshall III.  A 30 page executive report was created that outlined the proposal, the history of ABKO, and other pertinent financial information.   When taking into account the present value of the properties the executive committee report came up with a value between $84-$89 million. The deal would have Koch Industries purchase Ablah's 50% interest in ABKO for roughly $45 million. In last minute revisions of the deal Koch would give Ablah two airplanes (a Lear and Citation jet debt free-however this would reduce the cash he would receive).

The Koch Industries board approved the deal November 6, 1982 (this would be a Saturday-in this Wichita Eagle article it is discussed how Koch Industries executives were expected would work all day Saturday-even into Saturday night). During that Saturday meeting William Koch would testify that the calculations and the outcome of the ABKO deal weren't obvious from the report provided from the 30 page executive report). William would end up retaining evidence of what Koch Industries was doing by keeping files on meeting notes, exploration maps, and files on 37 different subject matters.William asked older brother Charles what the future plans were and Charles responded that there were no final plans and they would probably sell the "bad" properties and keep the good properties for the income stream and continue to evaluate in the future.

Between 1982-1985 with the economy improving Chrysler was also improving and Chrysler was more interested in the remaining dealerships increased. The stock price of Chrysler increased from $11/share in 1982 to $37/share in 1985. Between 1982-1983 Koch would sell 30 more dealership properties for $30 million. For the 1Q 1983 ABKO (which was under Koch Properties) had annualized cash flow of $2 billion. By early 1984 Koch believed that the remaining properties should be sold for an amount equal to what Koch Industries could earn on other investments (Koch believed this was 8%/after taxes/after debt). In October 1985 Chrysler agreed to purchase 56 properties from ABKO for $110 million (Koch believed the properties were worth $98 million (based on report shown to the Koch Industries board of directors) so asked for $135 million). The $110 million was paid to Koch over a 10 year period using a long term note paying 12%.

This case study is a great example of how Koch Industries evaluates their deal making process. Honestly it was shocking to me how much little equity Koch had in the ABKO deal. Koch's capital contributions were only $7 million out a $70 million deal. $63 million of the deal was either financed by Koch Industries or by banks. The deal overall turned out to be good for Koch Industries and George Ablah. Koch purchased Chrysler Realty stock for $70 million in 1979 and then sold properties over time earning $34 million in after-tax profits in 1982, sold properties for $30 million between 1982-1983 and then selling the remainder of the properties for $110 million in 1985. It is hard to know exactly how much money was made on the deal however it is clear that Koch Industries and George Ablah clearly did well on the ABKO deal.