America's Corporate Debt Bubble is About to Burst
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In 1964, Rollins Broadcasting bought Orkin, the country’s leading pest control services company.
What happened next was, at the time, the greatest creation of wealth in American corporate history.
Even today, almost 60 years later, the deal for Orkin remains one of Wall Street’s greatest secrets. It was the very first leveraged buyout.
Rollins purchased one of America’s best businesses – with zero money down.
At the time of the deal, Orkin was earning about $3 million a year on sales of close to $40 million. Rollins Broadcasting, which was a pioneer in African American radio stations (it owned ten stations) and African American-focused cosmetics, was earning about half a million dollars on sales of $8 million. Rollins’ radio stations provided some of the most important programming in the country to Black audiences, including virtually every leader of the rapidly growing civil rights movement. It was a brilliant business strategy: the company’s radio revenues were growing 40% a year faster than the industry’s average.
Otto Orkin (“Orkin the Rat Man”) started his business in 1901, selling rat poison door- to-door from a horse-drawn wagon. A Latvian immigrant, Orkin was a hard worker. He launched his company when he was 14 years old. But his family members, sadly, were worthless. One son, “Fat Bill,” hired someone to kill his wife and ended up in jail. And Otto’s new – much younger – wife wanted him to sell the company for cash that she could spend -- never mind that Otto himself was approaching 80 years old at this point.
Rollins Broadcasting founders Wayne and John Rollins had experience in radio, car dealerships, and billboards. Approached by the bankers selling Orkin, they made a careful study (hiring McKinsey consultants) of the pest-control market. What they saw in Orkin was a very poorly managed business that had wonderful economics: Customers generally signed long-term pest control management contracts that produced high-margin, repeat revenue.
The Rollins brothers knew the company would grow rapidly – if they simply used their radio stations to advertise and expand the business into larger markets.
But… where were they going to get the money to buy Orkin?
The Orkins and their bankers and lawyers weren’t dumb: they were asking $62.4 million, which was 20 times earnings for the business. The amount was more than 100 times what Rollins Broadcasting was earning at the time.
BORROWING $62.4 MILLION – WITH NO MONEY DOWN
During the summer of 1964, the Rollins brothers took their business plan to Wall Street, seeking loans. None of the major banks were willing to finance the deal, which entailed making a high-risk, long-term loan to a company that had almost no collateral.
Life insurance companies, on the other hand, understood that the collateral underlying the loans was the company being acquired and, with its long and successful operating history and high cash margins, the loans were safe. Prudential Insurance Company was willing to finance the deal and agreed to lend $40 million at 5.75% interest. Equitable Life and Chase Manhattan then decided they’d join the financing, lending $10 million.
But the lending syndicate offer was predicated on the Rollins brothers having skin in the game too. They had to come up with at least $10 million on their own. Where did they get the money? From the Orkin family! The final amount of cash ($2.4 million) came from the company’s own treasury.
The Rollinses structured the deal so that none of these debts encumbered any of Rollins Broadcasting’s core assets, the radio stations. The loans were tied only to Orkin’s revenue streams. They borrowed $60 million to finance the deal – but they didn’t put up any of their own money, and none of the collateral.
No one had ever done this type of deal in America before… and the results were shocking.
In early 1964, shares of Rollins were trading around $12. By mid-June, when the letter of intent to buy Orkin was signed, the shares jumped up to $16. By the time the deal closed, in September, the stock was trading at $50. A year later, with Rollins Broadcasting revenues up 363% in a year – without any new shares being issued – the stock price was over $150.
Investors in Rollins made almost 1,000% in a year.