Alan L. Mundt, a former mechanic at the Simmons Co. plant in Janesville, Wis., thought he could relax with a pretty safe nest egg. When the mattress manufacturer announced in January, 1989, that it was being sold to an employee stock ownership plan, Mundt recalls, "they told us that someone earning $20,000 a year could make $100,000 on the deal in 10 years' time." Things didn't work out that way. Mundt and his fellow employees were dismayed to see the company newsletter report that their stock in Simmons plummeted from an initial value of $4.10 a share to 50~, based on the company's net worth (table). Recently, Mundt left Simmons for a better-paying job, but he still has plenty of retirement savings tied up there. And now he and Jennifer A. Florin, a Simmons quilt operator, are suing executives involved in the deal for breach of fiduciary duty.
MESSY DEAL. The suit, filed in U. S. District Court in Madison, Wis., alleges that Simmons executives overvalued the company before selling it to the ESOP. Among the defendants: former Treasury Secretary William E. Simon and Wesray Capital Corp., a well-known LBO boutique that helped engineer the ESOP. If the lawsuit gains class-action status, Simmons employees could ask that more than $100 million be returned to the ESOP.
Details from court documents and other sources show how Wesray, which is known for such successful LBOs as Gibson Greetings Inc. and such ESOPs as Avis Inc., got caught in such a messy deal. Wesray first showed up on the scene in 1986, when it helped a management group buy Simmons from Wickes Cos. for $120 million. Healthy growth in the mattress market and profitable asset sales allowed Simmons, maker of Beautyrest and Maxipedic mattresses, to pay off most of the debt within two years. That's when Wesray and Simmons management decided it was time for them to cash out. They sold Simmons in 1989 to the ESOP for $241 million--a lofty 11 times operating income. Simmons Chief Financial Officer Harlan B. Smith says the hefty price was justified: "We were just coming off our best year ever," he says. "The value of all companies in the industry went down the next year." The reason: The home furnishings market took a pummeling as homebuilding slowed down.
Simmons workers were vulnerable. Although the employees didn't have to put up any cash, and money in Simmons workers' retirement accounts wasn't used to finance the ESOP takeover, the ESOP stock was intended as the retirement vehicle, so the company stopped making contributions to the pension fund. Like most such '80s-era deals, the Simmons ESOP was financed with bank debt--in this case, $149 million worth--and various grades of privately placed debt and preferred stock.
Falling profits made it difficult to make payments on the debt, and Simmons managers couldn't sell assets at the fancy prices they had been counting on. Less than a year after the ESOP, Simmons defaulted on a $15 million loan from Chemical Bank.
Simmons managers persuaded Merrill Lynch Capital Partners Inc. last March to buy 61% of Simmons for $32 million. That left managers with 7% and slashed the ESOP's 70% stake to 32%. Workers weren't the only ones to take a haircut. Before Merrill would touch the deal, it insisted that Wesray and Simmons management partners forgive all of the senior and junior subordinated debt still owed them by the ESOP. In addition, Ray Chambers, a Wesray co-founder--who, like Simon, is no longer with the company--invested $5.5 million in the Merrill deal. Neither Simon nor Chambers could be reached for comment.
ROSY FUTURE? Mundt and his lawyers are hoping to convince the court that Wesray and Simmons management acted in their own self-interest, not in the interest of Simmons employees, which the federal law governing pension funds demands. Some Simmons managers dismiss the suit as nothing more than harassment by the Amalgamated Clothing & Textile Workers Union, which recently lost a vote at the Janesville plant. The union is helping Mundt and Florin sue the company.
Smith and Merrill Lynch execs are satisfied that Simmons' healthier balance sheet and its moves to cut costs position it well for the future. That's little consolation for Mundt. "They took a great company and ruined it with debt," he says. And even if Simmons now enjoys a strong turnaround, employees only get a third of the action.
SIMMONS' WOES 1986 Wesray Capital and a management group buy Simmons from Wickes in a $120 million leveraged buyout 1989 Management and Wesray sell Simmons to an employee stock-ownership plan for $241 million. ESOP shares are valued at $4.10 JANUARY, 1991 Share price dips as low as 50 cents, as reported in company documents. Simmons suffers in a weak mattress market MARCH, 1991 Merrill Lynch Capital Partners invests $32 million in the mattress maker after Simmons defaults on one of its many loans. Shares rebound to $1.42 NOVEMBER, 1991 Employees file suit against Wesray and others, alleging breach of fiduciary duty and overvaluing the company DATA: COMPANY REPORTS, BW