Chemical warfare and car bombings are just a few of the hazards working in war-torn countries such as Iraq and Syria. For Supreme Group BV, it’s the cost of doing business.
Dubai-based Supreme delivers fuel and food -- 100,000 meals a day -- to troops stationed in some of the most inhospitable parts of the world, including Liberia, Mali and Sudan. The perilous business, where contractors dodge bullets fired by the Taliban and explosives set by insurgents, has made the company’s majority owner, Stephen Orenstein, a billionaire.
“Our mantra is to provide the same quality of service in Rwanda or Somalia as we do for restaurant chains in Germany,” Orenstein, 49, said in a phone interview from his office in Dubai. “We took a developed world standard and brought it to the developing world.”
Orenstein’s biggest business has been supplying military personnel in Afghanistan. Since the start of the war there in 2001, Supreme’s revenue has increased more than 50-fold to $5.5 billion in 2011. According to Supreme’s chief financial officer, Mike Thorne, more than 90 percent of the company’s revenue is derived from its Afghanistan operations.
That’s about to change. With the withdrawal of NATO and American troops and the impending loss of a $10 billion food contract with the U.S. military, the company is projecting it will lose more than 75 percent of its sales by the end of 2014.
“We’re still a financially sound company, so I don’t view it as a collapse,” Thorne said by phone. “But we’re going to be a much smaller company.”
The company’s largest contract -- an exclusive deal to distribute food to U.S. military personnel in Afghanistan -- has been riddled with lawsuits and accusations, including the Department of Defense’s assertion that Supreme overcharged it by $757 million.
“The Pentagon lost control of this contract from the beginning and even today may be unable to recover hundreds of millions of dollars in potential overpayments,” said U.S. Representative John Tierney, the ranking Democratic member on the House Government Reform & Oversight Subcommittee on National Security, in a statement to Bloomberg News. “By keeping the money flowing to Supreme through noncompetitive contract extensions, the Defense Department unwisely and unnecessarily put U.S. taxpayers on the hook.”
The bickering has spilled over to new business. In April, Supreme sued the U.S. government in the Court of Federal Claims in Washington after the Defense Logistics Agency awarded a new five-year, $10 billion food contract in June 2011 to Dubai-based competitor Anham FZCO LLC, which also supplies food to the U.S. military in Iraq, Kuwait and Jordan.
Orenstein disputes the U.S. overpaid for Supreme’s services. The company said it’s owed an additional $1.8 billion.
“The Pentagon used the word overcharging and it’s not justified,” said Orenstein. “We agreed on preliminary rates. They decided to unilaterally apply new rates based on the costs as they see them, and tried to recoup the difference between the two.”
At the peak of the military campaign in Afghanistan, the U.S. Department of Defense operated about 800 bases that housed and fed as many as 100,000 soldiers a day. According to Michelle McCaskill, a spokeswoman for the Defense Logistics Agency, which awards and manages defense contracts, the Pentagon has spent at least $24 billion on food, fuel and other supplies in support of the war since January 2002. By February 2014, 34,000 American soldiers will be stationed in the country.
Supreme started delivering food to the British army in Afghanistan in 2002. Three years later, it was awarded the U.S. military food contract, an agreement that has paid it $9.1 billion to date, according to data compiled by the DLA. A series of fuel contracts, first established in 2007, has paid the company almost $1.4 billion.
Food, fuel and other supplies are delivered to U.S. troops at more than 250 locations in Afghanistan by airplanes, helicopters and trucks, Michael Schuster, a managing director of logistics at Supreme, said in testimony before the House Oversight Subcommittee on National Security in April.
It’s dangerous work. According to Schuster’s testimony, at least 312 civilian contractors were killed through April working for Supreme in Afghanistan, mostly due to attacks by insurgents. That’s the second-highest number of deaths of any private contractor working on behalf of the Pentagon since September 2001, according to data compiled by the U.S. Department of Labor under the Defense Base Act. New York-based L-3 Communications Holdings Inc. (LLL:US) and its subsidiaries had 408 fatalities.
“Afghanistan is the most complex country to operate in of all the missions in all the countries that we’ve ever done,” Orenstein said.
Accusations of Supreme overcharging the DLA first surfaced in a March 2011 audit report by then-Pentagon Inspector General Gordon Heddell.
According to the report, the DLA overpaid Supreme $124.3 million for transportation and corrugated-packing boxes. In addition, Pentagon personnel had no assurance that billings for another $103 million in boxes were accurate or “even chargeable to the contract,” the report said.
The company was also paid about $455 million for airlifting fresh fruits and vegetables from storage areas in the U.A.E. to Afghanistan, without the DLA ensuring the prices were “fair and reasonable,” according to the audit.
Supreme was further said to be overpaid $98.4 million from 2005 to 2008 for transportation costs, in part because reimbursement rates “were significantly higher than the rates needed to reimburse the vendor for costs and associated profits,” the report said.
The audit disclosed that DLA personnel overseeing the Supreme contracts failed to prevent overpayments and potentially incorrect charges.
In March 2012, the DLA began recouping $21.8 million per month through administrative offsets, said Matthew Beebe, the agency’s deputy director for acquisition, in a hearing before the subcommittee in April.
Former Pentagon Inspector Heddell said that the original Supreme contract was “an example of just how bad it can get.” The contract “wasn’t well-designed” or “well-thought out,” he said at a hearing before the subcommittee in December 2011.
In response, Schuster told the subcommittee that the Pentagon’s audits of Supreme were “fundamentally flawed.”
As of Sept. 1, the DLA had recouped more than $390 million, more than half of the sum it says were overpayments made to Supreme, according to agency spokeswoman Mimi Schirmacher.
“The discrepancy in the amount Supreme and DLA claim to be owed is based on a contract modification regarding delivery to additional customer locations,” Schirmacher said in an e-mail. “DLA and Supreme utilized different methodologies to calculate the appropriate price for transportation to these additional locations.”
In a report filed in July, the Pentagon concluded that the agency still fails to ensure that Supreme is billed the correct amount and that it hasn’t established controls to manage refunds from overpayments.
“This is a case study for what not to do in government contracting,” Scott Amey, general counsel for the Washington-based Project on Government Oversight, said by phone.
Supreme has appealed the agency’s recouping efforts with the U.S. Armed Services Board of Contract Appeals, and the case is scheduled to be heard in April 2014.
For all the danger, Supreme’s business is a profitable one when the world’s at war. According to its annual reports, Supreme had net income margins that ranged from 15 percent to 23 percent between 2008 and 2011.
“That’s a fairly large profit margin when it comes to federal government contracts,” said Amey. “Most contractors claim that their profit margins are zero to 5 percent.”
Orenstein confirmed that Supreme’s food distribution fee to the U.S. military in 2010 was “in the range of 18 to 21 percent” and could go as high as 50 percent, according to a transcript of testimony he gave in a 2010 lawsuit.
He also testified that it was “very common that the percentage of total revenue, the service fee percentage, exceeded 75 percent,” when the distribution of food and other supplies flown into Afghanistan by airplanes and helicopters accelerated in 2006.
According to its latest annual report, the company had earnings before interest, taxes, depreciation and amortization of $953 million in 2011 on revenue of $5.5 billion. With the loss of the Afghanistan food contract and the withdrawal of military personnel, Supreme CFO Thorne projects revenue of $1.2 billion to $1.5 billion in 2014, with an Ebitda margin of 8 percent to 12 percent.
Supreme is valued at about $650 million, according to data compiled by Bloomberg, based on the company’s lowest 2014 revenue and Ebitda projections and the average enterprise value-to-Ebitda multiple of three publicly traded peers: Issy-les-Moulineaux, France-based Sodexo (SW) and Chertsey, U.K.-based Compass Group Plc (CPG), and Houston-based Sysco Corp. (SYY:US)
A liquidity discount of 25 percent is applied to account for the company’s operations in high-risk areas and uncertain business prospects. Enterprise value is defined as market capitalization plus total debt minus cash.
Orenstein confirmed that he and his family control 75 percent of the company. His partner, Michael Gans, holds the rest with his wife. They control the business through holding companies based in Luxembourg, Cyprus, Germany and the U.K.
Including almost $1 billion in dividends he has collected since 2008, Orenstein has a fortune valued at least $1.1 billion, according to the Bloomberg Billionaires Index.
“As a privately-owned company, we do not disclose personal financial data of shareholders,” Victoria Frost, a spokeswoman for Supreme, said in an e-mail.
A U.S. citizen, Orenstein was born in Frankfurt, where he still lives with his wife, Petra. His father, Alfred, was a soldier in the U.S. Navy and Army who settled in Germany following World War II. He left the service in 1957, and started supplying food to military bases across Europe.
Orenstein attended boarding school at Kimball Union Academy in Meriden, New Hampshire, before enrolling at Lehigh University in Bethlehem, Pennsylvania. He dropped out following the death of his father in July 1985.
“I took over as the only family member that was interested in the business,” he said. “It was a very difficult, very challenging first five years.”
The billionaire said he started looking for opportunities on other continents in the early 1990s, after the fall of the Berlin Wall and the outbreak of the Gulf War in Iraq spurred the Pentagon to reduce the number of U.S. soldiers based in Europe.
He enlisted the help of Gans, a childhood friend whom he’d met in kindergarten in Oberursel, Germany, to write proposals getting overseas business. Their first contract provided logistics services to the United Nations peacekeeping operation in Mozambique in 1993. The company has worked on more than 10 UN missions since then, and operates more than 25 food-service and dry-goods storage warehouses in nine countries. It also supplies food to restaurant chains such as Subway, Kentucky Fried Chicken and Pizza Hut.
“My strength has always been the execution and procurement, and Michael’s strength is in writing,” said Orenstein. He made Gans a co-owner in 1993. “Our relationship is so strong that it initially was a handshake agreement.”
Gans, who is a citizen of Luxembourg and lives in Baech, Switzerland, received a bachelor’s degree in political science from Vassar College in Poughkeepsie, New York, and a law degree from George Washington University in Washington. He races and collects vintage Bugatti cars, and owns multiple apartments on Fifth Avenue in Manhattan, according to Acris, the city’s property records database.
“We’ve had a very long-standing friendship,” said Orenstein. “Today, we’re business partners. The business then becomes more central to the relationship than the friendship does.”
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