The New Life Of O'reilly

Sitting in his Pittsburgh office 60 floors above the Allegheny River, Tony O'Reilly gives a talking tour of the world. The chairman of H.J. Heinz Co. describes being rocked by an earthquake in Calcutta as he recently toasted the purchase of a baby-food business there. He recalls long philosophical discussions in Harare, Zimbabwe, with Robert Mugabe, that country's Marxist leader. At 58, O'Reilly is famous for his entertaining tales of the people he knows and the places he has been. But he suddenly grows testy when asked if reports are accurate that he only spends several days a month at Pittsburgh headquarters. "That's absolutely, grotesquely untrue," he says.

Anthony J.F. O'Reilly has always raised eyebrows with his globe-trotting. But with two years of sluggish sales and earnings depressing Heinz's stock price, some O'Reilly watchers are expressing fears that he's spending too much time on outside interests ranging from newspapers to oil wells. Penny-pinching U.S. consumers have turned away from the company's premium-price brands, slowing domestic sales to the pace of Heinz's famous ketchup. A strategy that relied heavily on Weight Watchers Food Co. for growth has helped put Heinz's once plump profits on a diet (charts).

In the midst of this malaise, one of O'Reilly's largest institutional shareholders complains that the chairman "is too far removed from the day-to-day issues." Fourteen Research Corp. analyst Sally Schaadt says Wall Street worries he is "spread too thin." O'Reilly, who averages 500,000 frequent-flier miles a year (and some years hits 1 million), makes no apologies for his prolonged absences from Pittsburgh. But he concedes that the company's brand-oriented strategy isn't working and that Heinz is in need of a new direction.

SWAN SONG? O'Reilly says he wants to lift the company back to the double-digit earnings growth it enjoyed in the '80s and then retire in two or three years. To get there, he says, the company must slash spending on its mature brands--the same lines that propelled growth through the '80s--while pushing vigorously into faster-growing markets abroad. Already, Heinz has cut advertising outlays to 40% of the $134 million it spent in 1990, according to Competitive Media Reporting in New York. Now it is spending heavily to bolster its international operations--especially in baby food. Meantime, it will also focus on the prosaic but profitable business of supplying those little packets of condiments to fast-food restaurants. The idea, O'Reilly says, is to reduce Heinz's dependence on ultracompetitive, low-margin American supermarkets.

To underscore the urgency of Heinz's situation, O'Reilly in mid-May flew his 40 top managers from around the world to Dromoland Castle in Shannon, Ireland, one of his investments. He wanted to present the new strategy and fire up his troops--especially Heinz's quartet of division managers. An ambitious team of cost-cutters known within Heinz as the Four Horsemen of the Apocalypse, these executives are well aware that success in the next two years could spell millions in Heinz's legendary stock incentives. They also know the race is on among them for the top job when O'Reilly finally retires (table, page 66).

On May 23, however, the whole team got a jolt when it learned that Sandoz Ltd., the Swiss pharmaceutical power, was buying Heinz's chief baby-food competitor, Gerber Products Co., for a stunning $3.7 billion, or 29 times earnings. Whereas Gerber--which controls 70% of the domestic baby-food business--has shied away from the international markets Heinz tends to dominate, cash-rich Sandoz isn't likely to be so bashful. Consequently, O'Reilly spent the next three days phoning and faxing furiously to wrap up two international acquisitions for $210 million: Farley's baby-food business in Britain and the baby-food unit of Glaxo Holdings PLC in India.

The question is: Will this strategy work any better than the last one? Five years ago, while Heinz was relentlessly driving up the prices of its condiments, Ore-Ida potatoes, Star-Kist tuna, and Weight Watchers low-cal dinners, O'Reilly predicted his company would grow from $5.2 billion to $10 billion in sales by 1994. Then he would retire, perhaps to pursue politics in Ireland.

Having already boosted Heinz's market value from $900 million to $9 billion by 1990, O'Reilly was a man to be believed. And his huge compensation package--$75.1 million in salary and stock options in fiscal 1992 alone--reflected how much he had charmed Heinz's board. "You know in your heart he shouldn't get that much money," says one director, asking not to be named. "But it's hard to say no to Tony."

As it turned out, Heinz has grown to only $7 billion in worldwide sales, much of that through acquisitions. O'Reilly now admits that he failed to react quickly enough as a spendthrift market turned miserly in the 1990s and turned increasingly to private-label products. As recently as last year, when Philip Morris Cos. slashed its premium cigarette prices on so-called "Marlboro Friday," O'Reilly pooh-poohed the idea that name brands would continue to struggle against private labels. It was only after announcing a 20% fall in third-quarter earnings last January that O'Reilly vowed to find a better strategy--and to stick around long enough to see it through.

O'Reilly now contends that nobody has a bigger vested interest in a Heinz rebound than he does. His 1.28% of the company's stock is worth about $108 million. As the company's largest individual stockholder, "I suppose I have the largest individual reason for wanting to stay around to ensure that the recovery is sustained," he says.

But he certainly does have distractions. During his 25 years at Heinz, 15 of them running the company, O'Reilly has constructed twin careers spanning the Atlantic and has piled up a personal fortune of about $500 million. For all O'Reilly's success raking in the dough, however, his ventures have had their troubles.

He originally envisioned his Irish holding company, Fitzwilton, as a high-powered leveraged-buyout firm ("We will be the front office for the guys who revolutionize Europe," he predicted in 1988). But its biggest deal has been the lackluster acquisition of crystalmaker Waterford Wedgwood PLC, a money-loser its first three years under Fitzwilton's control. Waterford turned a profit last year, chiefly by shipping out production to factories in Germany and Eastern Europe. But while this nudged Fitzwilton into the black, the holding company is hardly the power that O'Reilly had hoped for.

At the same time, his attempts to make it into the big leagues of newspaper publishing have fallen short. Two years ago, his Dublin-based newspaper chain, Independent Newspapers PLC, lost a bitter fight with Canadian Conrad Black for control of Australia's John Fairfax Group newspaper empire. Then just last winter, O'Reilly's group tried to buy control of Britain's The Independent--and got beaten by Mirror Group Newspapers PLC, the company once controlled by the late Robert Maxwell. O'Reilly was left with 29% of the shares but no board seat. He has had to content himself with this year's purchase of a 31% stake in South Africa's largest newspaper group, Argus Newspapers.

O'Reilly maintains that his only executive job is at Heinz and that his other holdings are merely investments. "In all those non-Heinz activities, there are highly paid, highly motivated, and highly irritated CEOs," he says. "They do not like being told that this distant figure bought this, sold that, and appears to be in nine different places at once--when they're actually doing all the work."

TALK OF ESCAPE. In fact, O'Reilly spends about half of his time outside the U.S., flying with seven or eight thick portfolios, a virtual traveling office. His Heinz travels take him to Europe, Southern Africa, and Australia, which is convenient, since those regions contain many of his non-Heinz holdings. With modern communications, he says, he can keep in touch no matter where he is. But his Irish holdings also require a physical presence. "Even if he just attended board meetings--and he does more than that--he'd be spending time here," says O'Reilly's Ireland spokesman, James Milton.

O'Reilly complains that people take one look at his vast holdings and immediately conclude that he's "a bionic man." Well, talk to his colleagues at Heinz, and that's the image that emerges. They describe a speed-reader with a photographic memory--one who needs little sleep and stays up late piling through history books on Africa and biographies of his hero, Winston Churchill, and the gritty Pittsburgh boxer, Billy Conn. At the meeting in Ireland with his 40 lieutenants, O'Reilly's dinner table was always the last to break up as the chairman discussed world affairs or told stories about his early days as an Irish rugby hero.

The main point of the meeting, however, was Heinz's "breakout strategy"--a plan that focuses squarely on the places Heinz thinks it can grow. With name brands getting killed by private labels, the biggest U.S. growth market is the deadly dull, but high-margin, food-service business. Packets of ketchup and mayonnaise produce annual sales of more than $1.4 billion and an operating profit of more than $200 million. And in April, Heinz acquired Borden Inc.'s troubled food-service business to broaden its market strength. O'Reilly, calling food service "an unsung hero," thinks that it can grow from 20% of Heinz's overall sales to 25% in five years.

A SELLING PLATFORM. For real growth, however, O'Reilly is betting on overseas markets--particularly those on the other side of the Pacific. That's why, in 1992, Heinz spent $300 million on Wattie's Ltd., a New Zealand food conglomerate O'Reilly is turning into a platform for selling into Asia. Boosted by Wattie's, Heinz's Asia sales have nearly doubled in two years, to about $750 million. "The whole [upcoming] annual report," says O'Reilly, "is going to be about Wattie's."

Within these new distribution channels, along with those acquired from Farley's and Glaxo, O'Reilly believes that baby food is the growth engine of the future. Jars of mashed carrots and peas already earn a 25% margin on $631 million in sales, and the new acquisitions will boost sales to nearly $750 million--about the same size as Gerber's. Gerber is indomitable in the U.S., but its share drops to 17% internationally. Heinz, meanwhile, weighs in with 29% of the market overseas.

In some respects, baby food seems custom-made for Heinz. Virtually no private labels weigh down the market, and entrance costs are high--keeping out small-timers. What's more, enormous potential markets exist in Asia, Eastern Europe, and Latin America, where population rates are high and where mothers who traditionally have not bought any packaged baby food are starting to insist upon such modern conveniences. "We should be over $1 billion shortly," predicts Brian Ruder, Heinz's baby-food chief. With "virgin markets" such as China doubling within 24 months, Ruder predicts the business will grow 10% to 15% a year.

But now Gerber has Sandoz, and suddenly, Heinz faces a tough global competitor. The Swiss company has strong operations in Asia and Europe and a cash horde of $4.4 billion--money Sandoz says it will spend liberally on Gerber. Heinz will likely feel the heat first in Sandoz' home territory--countries such as Switzerland and France, where baby food is sold in the pharmacies that already do a lot of business with Sandoz.

Moreover, Heinz has stumbled over bold predictions about the future before. Take Weight Watchers, a business O'Reilly said would top $3.3 billion by 1994. In fact, it posted sales of only $1.6 billion. With the growing popularity of diet foods, Weight Watchers found itself in a devastating price war with

ConAgra Inc.'s Healthy Choice and Nestle's Lean Cuisine. Heinz responded with massive R&D, turning out a blitz of exotic low-cal products, from stir-fry dishes to ice-cream pie.

But while Heinz counted on strong attendance at Weight Watchers classes to prop up the new products, the craze for dieting cooled. "America is now the fattest country in the world and getting fatter each day," complains a frustrated David W. Sculley, the Heinz vice-president who has been overseeing Weight Watchers. A much ballyhooed advertising campaign featuring an on-the-air diet by former CBS This Morning anchor Kathleen Sullivan bombed, and now O'Reilly is cutting back the budget, shifting from television to direct-mail and telephone marketing.

GOLDEN COUPLE. Whether O'Reilly can do better than that with his new strategy is an open question. But his appeals to Wall Street for patience and an announcement that Heinz would buy back as much as 6% of its own stock seem to have stabilized the share price. "You're guaranteed to have more babies than dieters," says Nomi Ghez, a food industry analyst at Goldman, Sachs & Co.

When in 1991, O'Reilly married 44-year-old Christina Goulandris, an heiress to a Greek shipping fortune, some thought he might soon retire from Heinz and drift off to tend to his European interests. The couple certainly wouldn't be wanting. Chryss, as she's known, breeds horses in Normandy and is one of the top five racehorse owners in France. Her own net worth is estimated at $450 million.

O'Reilly, however, says that was just a lot of talk. And each of the Four Horsemen figure their boss is too much of a competitor to back out while Heinz is anything less than it could be. "I'd like to continue to be a transatlantic person," O'Reilly says. That's fine, as long as he can keep his focus on restoring growth at Heinz.


INDEPENDENT NEWSPAPERS Largest investor in Ireland's largest newspaper chain. Based in Dublin, it also owns small papers in Australia and this year bought large stakes in the Argus Newspapers of South Africa and Britain's Newspaper Publishing. Revenues: $255 million.

FITZWILTON Investor in and chairman of this $450 million Irish holding company with stakes in various food and industrial assets. Chinamaker Waterford Wedgwood is biggest asset. O'Reilly is chairman of that, too.


Arcon, an Irish oil-exploration company; two castle-hotels in Ireland; a stud farm.

BOARDS Chairman of the

Ireland Funds, a worldwide philanthropic organization promoting peace in Ireland. Board member of General Electric, the New York Stock Exchange, and Georgetown University.


Before it's here, it's on the Bloomberg Terminal.