Nasty Encounter Of The '90s Kind

On Wall Street, friendships have a way of vanishing with the turning of a market cycle. Consider Leon D. Black, the former merger-and-acquisition chief at Drexel Burnham Lambert Inc., and his erstwhile client and poker buddy Carl C. Icahn, the raider who controls Trans World Airlines Inc. Over the past four years, Black and Icahn have taken five family vacations together. But not this summer. Allies in the takeover wars of the '80s, Black and Icahn are antagonists in the restructuring battles of the '90s.

Black and Icahn are widely entangled, with overlapping--though not always competing--interests in a half-dozen companies (table). The focal point of their conflict is Gillett Holdings Inc., a Colorado ski-resort operator in Chapter 11. Over the year-and-a-half that Black has been maneuvering to gain control of Gillett, he has negotiated every mogul but one: Icahn, who has responded to each of Black's concessions by demanding new ones. Now, a showdown looms. On Apr. 30, Gillett was expected to file a revised plan of reorganization that grants most but not all of Icahn's latest demands. Black has let it be known that he's through making concessions. If Icahn doesn't capitulate, a bare-knuckles court battle is likely.

No one fights nastier than friends turned enemies. Both Black and Icahn insist privately that their dustup over Gillett isn't personal--just business as usual in the bruising restructuring field. But many of their fellow "vulture" investors suspect otherwise. "The feeling I get from talking to Icahn's people is that Carl would take great pleasure in screwing up Apollo Investment," says one veteran speculator, referring to Black's principal investing vehicle.

At 56, Icahn has been speculating profitably in troubled companies since before the 40-year-old Black got out of Harvard business school. Recently, though, the term "bankruptcy play" has taken on a painful dual meaning for Icahn. On Jan. 31, he suffered the worst setback of his long career in putting TWA into Chapter 11. Once a billionaire, Icahn is now thought to be worth around $600 million.

VULTURE CAPITAL. It can't have escaped Icahn's notice that Black's fortunes have been heading rapidly in the opposite direction. In less than two years, Black has transformed himself from an out-of-work investment banker into America's best-capitalized vulture investor. His $100 million net worth is eclipsed by Icahn's, but Black boasts an unmatched bankroll of $4.5 billion, most of it supplied by Altus Finance, a subsidiary of French banking giant Credit Lyonnais. In recent months, Black and his new partners have pulled off one coup after another. "At this point," concedes one rival, "to call Leon Black the king of restructuring is an understatement."

Black clinched predominance in March, when Apollo assumed control of a huge junk-bond portfolio that Altus bought from defunct First Executive Corp. for $3.25 billion. Included were holdings that Apollo has already parlayed into nominally controlling equity stakes in Memorex Telex Corp. and Cole National Corp. In Black's estimation, the 300-company portfolio contains an additional two dozen similarly promising positions, half of which Apollo is pursuing.

In none of its other restructuring plays has Apollo put its prestige as squarely on the line as it has with Gillett. For one thing, the company's renowned Vail Mountain and Beaver Creek Mountain ski resorts give it a high-profile glamour that the likes of such other Black targets as Interco Inc. and E-II Holdings Inc. can't touch. Then, too, the battle over Gillett turns on the most distinctive element of Black's approach to bankruptcy investing: his willingness to ally himself with the execs who got a troubled company into trouble in the first place. In Gillett's case, Black's involvement is even more controversial because he is not without blame for its woes.

As Drexel's M&A chief, Black advised founder George N. Gillett Jr. on his company's disastrous diversification into television in 1987. Having overpaid both for the TV stations it acquired and for the financing provided by Drexel, Gillett was so strapped by mid-1990 that it defaulted on several junk-bond issues. Gillett's initial, grudging attempts at restructuring so annoyed its junior creditors that in March, 1991, three of them took the unusual step of filing a petition in federal court to force the company into involuntary bankruptcy.

Enter Black, who well understood the value of the lucrative ski business that lay buried under all that debt. Black was so keen on making a play for Gillett that he couldn't wait for the negotiations with First Executive to run their course. In a separate transaction with First Exec completed a year ago, Apollo bought senior Gillett securities with a face value of $185 million.

Apollo augmented its Gillett holdings with purchases from other sources, giving the firm multiple blocking positions. Typically, a sweeping financial restructuring requires two-thirds approval from each of a company's creditor classes, no matter how lowly. Thus, investors who accumulate more than one-third ownership of any class can singlehandedly block a plan, but not indefinitely. Because companies tend to expire in protracted captivity, bankruptcy judges can impose terms on recalcitrant companies and warring creditors--a move known as a cram-down.

Other bankruptcy investors generally welcome Black's involvement. As a rule, Apollo usually maximizes its clout by buying a company's highest-priority claims, yet it's more flexible than the banks and other creditors it replaces. "If Leon comes in, that's wonderful news, because he's willing to compromise and get things moving," says Hubert Stiles Jr., who runs The Recovery Fund for T. Rowe Price Associates Inc. "He doesn't fight over the last nickel."

By contrast, Icahn usually builds lower-cost blocking positions in junior securities. In Gillett, for example, Icahn owns $65 million, or about one-third, of its lowest-ranking junk bonds. And whereas Black holds himself out as a peacemaker, Icahn most often assumes the role of wily guerrilla fighter. Disdaining membership on official committees, he surfaces unpredictably to harangue a company's management and file dissident motions. While Icahn's aim is to extract that last nickel for himself and fellow bondholders, the broadsides he aims at self-serving executives are often on target.

By February of this year, lengthy negotiations involving Apollo, the company's other debtors, and George Gillett produced a plan acceptable to the creditors' committee. Apollo would inject $40 million in cash and receive about 60% of the stock in the restructured company. For $1.5 million a year in salary plus other inducements, Gillett would stay on as CEO while surrendering all but 5% of his equity ownership. In exchange for newly issued notes and stock, the creditors (Apollo included) would cut their claims to $600 million from $1 billion.

PUBLIC BLAST. Largely in response to complaints from Icahn, the payout to Icahn's class was raised to nearly 16 from 10 on the dollar, and its members got the option of receiving cash or stock. The response: Icahn not only balked but publicly blasted Black for coddling George Gillett. After Gillett went ahead and filed its plan anyway, Black privately claimed that Icahn had agreed to terms but reneged at the last minute. Icahn denied it, implying that he was misled about the contents of the plan. Black vowed to "take off the gloves," presumably by inviting a cram-down.

Black was bluffing. Over the past few months, the creditors' committee capitulated to more of Icahn's demands in revising the plan. Under the Apr. 30 version, senior creditors would shoulder more investment risk by taking relatively more stock and less secured debt in the restructured company, which, as a result, would emerge from Chapter 11 carrying $75 million less debt. In addition, the new plan diminishes George Gillett's hopes of restoring his vanished fortune by rescinding the CEO's options to repurchase stock issued to bondholders and to buy back certain corporate assets. Even some creditors who supported the first plan applaud the latter modifications.

Two critical provisions of the previous plan remain, however: Icahn and the other junk-bond holders would still get 16 on the dollar, and Apollo would still emerge with a controlling equity stake. Is Black's refusal to make further concessions another bluff? Is it cram-down time at last? The next move will be Icahn's.

      GILLETTE HOLDINGS The latest restructuring plan calls for Black's Apollo 
      Investors to swap some $300 million in senior securities for a majority of the 
      new stock. Icahn owns one-third of the most junior class of debt and has been 
      holding out for more than the 16  on the dollar offered him for his $65 million 
      INTERCO Under a plan O.K.'d by the creditors' committee, Apollo would parlay 
      its $200 million in bank loans into a controlling equity interest. With $80 
      million in several classes of debt, Icahn is spread too thin to block Black on 
      his own. He is looking for allies
      MEMOREX TELEX  Black and Icahn cooperated in a remarkably swift Chapter 11 
      reorganization completed in February. But peace may not prevail much longer. 
      Apollo emerged as the largest shareholder, with a 25% stake. Icahn owns 13% of 
      the stock and has said he will buy more shares
      E-II HOLDINGS With some $300 million in bonds, Apollo is the largest creditor. 
      Icahn, too, is a major holder. So far, no signs of conflict, but it's still 
      early. The first stab at a reorganization plan is expected by yearend
      TWA Included in the $3 billion portfolio that Apollo acquired in March from 
      First Executive were $31 million in TWA bonds. Black didn't particularly want 
      the bonds and has no interest in making a play for TWA
      ACF INDUSTRIES This Icahn-controlled company is performing well. Apollo will 
      hang on to the $66 million in ACF bonds from First Executive and watch to see 
      that Icahn doesn't transfer assets from ACF to prop up TWA
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