News: Analysis & Commentary: STRATEGIES
A NEW POWER PLAY AT W.R. GRACE
Who's really running W.R. Grace & Co. these days? The new guy, Albert J. Costello, is chairman and chief executive officer. But behind the scenes, Constantine L. Hampers--whom Costello beat out for the top job--appears to be dictating one of the fractious company's most critical decisions.
Hampers heads National Medical Care Inc., the health-care company he co-founded and then sold to Grace. On May 4, he offered $3.5 billion to buy NMC back. Costello responded to the unsolicited bid by promising shareholders to sell the unit to the highest bidder or consider a spin-off.
Shareholders long have hoped for such a restructuring, and word of Hampers' offer sent Grace shares up 10%. Indeed, the likely breakup ef Grace was viewed widely as a happy consequence of the turmoil that followed the ouster of former CEO J.P. Bolduc in March. Investors hoped Hampers' offer would flush out other interested buyers for NMC, which, while highly profitable, never has fit well with Grace's core chemical operations (chart). Instead, there has been a deafening silence.
Why? One reason is the hefty tax liability that a sale would entail--an estimated $860 million or more. To justify an outright sale of the unit, Grace needs an offer higher than Hampers' $3.5 billion. That's why many of Grace's advisers and investors favor a spin-off. But another reason, say sources close to the company, is the central role in any deal of Hampers himself--a role that may be precluding a competitive auction of the subsidiary.
ULTIMATUM. In lining up backing for his bid, Hampers reportedly has solicited commitments for financial participation from 70 NMC executives. He has informed Grace that if the unit goes to a higher bidder--or even if it is put on the block--he and other top managers will leave, according to numerous sources. Hampers did not respond to calls or faxed questions. His attorney, Paul Brountas, declined to comment on the prospect of such resignations.
Vivra Inc., one company that is interested in bidding on NMC, thinks Hampers' influence extends as well to information flow. Kent J. Thiry, president and CEO of the Burlingame (Calif.) company, complains that he has not had access to the same internal Grace data Hampers has used to line up financing. Brountas says, "my understanding is that information will be made available to all interested bidders," dismissing Vivra's complaint. Thiry responds: "What we're saying is that if you share data...we may have a better deal for [Grace] shareholders."
It may well. Although Vivra is small, with 1994 revenues of $284 million, it has financial backing from Bain Capital, Texas Pacific Group, and Hellman & Friedman, all management buyout firms with solid track records; and Morgan Stanley corporate finance chief Joseph Perella is raising more financing. The group says its bid could be worth an extra $500 million to Grace shareholders.
Grace says it will entertain serious offers for NMC. Until then, it is evaluating Hampers' bid with the aid of Merrill Lynch & Co. and CS First Boston. Most bets, though, are that Costello ultimately will recommend a spin-off to Grace's directors, who are expected to meet on June 14. Investors point out that a spin-off could work in their favor: They'd benefit from the upside potential in separate stocks that Costello, they say, would be hard-pressed to deliver from Grace in its current form. And shedding NMC quickly would free Costello to focus on boosting the chemicals company by cutting costs or selling other units.
Hampers could win with a spin-off, too, likely regaining control of the company he started 27 years ago. He has said he would support a spin-off and "under certain conditions" would serve as CEO. Sources say Hampers is demanding options for as much as 15% of the new company for himself and his managers.
HAMPERING EFFORTS? Some shareholders acknowledge the hand that Hampers holds. With NMC's management talent lean, they say, Hampers is crucial to the unit's continued success. "It's a very delicate task," says one. "It's the fox in the henhouse, and outside parties are going to be frustrated by the process." Charged with returning value to shareholders, Costello and Grace's board have to keep Hampers happy so he stays on long enough to complete the spin-off.
Sources close to the company downplay Hampers' power. "There are a lot of alternatives to Hampers running the company," says one. The board of directors is in the driver's seat." Perhaps. But Hampers appears to be a very compelling backseat driver.By Gail DeGeorge in Miami, with Elizabeth Lesly and Leah Nathans Spiro in New York