Odyssey's Lemons Have Become Lemonade, but Leave Sour Taste
Sep. 26, 1995
Investors who snapped up shares of catalog marketer Black Box last week might want to consider the seller: Odyssey Partners.
Odyssey Partners is the investment partnership launched by Jack Nash and Leon Levy in 1982 with $160 million. Today, it is a $2.2 billion powerhouse, thanks in good measure to its little-known but lucrative buyout business. During the past 20 years, Mr. Nash's son Joshua says, buyouts by the pair have returned an average of 37 percent annually before fees.
But while Odyssey may have excelled, other investors have sometimes been hard-pressed to do as well. Odyssey has sold stock to the public in less than one-fifth of the partnership's 90-odd buyouts. But several of those companies have floundered just a few years after Odyssey's public stock sales.
Last week alone, Caldor Corp. filed for Chapter 11 bankruptcy court protection only 11 months after Odyssey sold the bulk of its holdings at 29 5/8, a price more than five times its acquisition cost. The stock is now selling at 5. And last Friday, Odyssey-controlled Forstmann & Co. also sought protection from creditors.
Odyssey got out at a profit before the stocks cratered on several occasions. Dressmaker Leslie Fay filed for bankruptcy-court protection in 1993, but Odyssey made more than $70 million selling two years before. Archer Resources stock, which Odyssey sold at 15 Canadian dollars, is now C$4.95; Odyssey's net: more than $60 million. Air & Water Technologies, for which Odyssey paid $1 a share, hit a high of 29 7/8 before spiraling down to 5 1/4; Odyssey's take: at least $20 million.
The partnership even damped the effect of a meltdown like Eagle Food Centers, which went public at 20 but now sells for 1 3/4, by selling almost enough shares in the 1989 public offering to recoup its cost.
The firm's partners declined to discuss specifics of the investment record publicly. But people familiar with their strategy say it isn't fair to blame them for trying to do their job, in effect, selling substantial portions of their holdings at attractive prices _ their reward for taking big risks in buyouts.
Still, Odyssey's ability to squeeze lemonade from lemons has been uncanny. Consider Forstmann, the woolens maker Odyssey took public in 1992. While the partnership's 51 percent stake may be rendered worthless in the bankruptcy court proceeding, the public stock offering reduced the partnership's investment by nearly $20 million, to $24 million.
How? Because the funds raised in the public offering were used to buy subordinated debt held by Odyssey itself. In addition to $21.8 million worth of stock holdings, Odyssey got $19.6 million in cash _ in all, $41.4 million in cash and securities for bonds it bought for $25 million mere months before.
Black Box, which markets computer peripheral equipment through catalogs, is already a home run for Odyssey. In addition to $115 million from last week's sale of its 44 percent stake, the partnership still holds $53 million of stock in a Black Box spinoff. Not bad for a $9 million investment, after fees and dividends, that survived a wrenching 1991 debt restructuring. But it may be difficult for the public to equal Odyssey's return in Black Box. While analysts generally laud the company, it is ``really slowing down domestically,'' says Monish Bahl, an analyst with Parker-Hunter in Pittsburgh. Rapid-fire international expansion is boosting sales growth, but it also helped shave operating margins in the first quarter, compared with year-ago results.
The partnership had originally intended to keep half of its seven million Black Box shares _ but agreed to sell out entirely at Wall Street's request. ``The underwriters felt the offering would be even more attractive if there was no stock left overhanging the market,'' says Steven Berger, who heads Odyssey's nine-person buyout team. A week later, Black Box stock remains above the $16.75 offering price, trading around $17.875 on the Nasdaq Stock Market.
The Odyssey partnership dates back to 1951, when Mr. Levy met Mr. Nash at Oppenheimer & Co. Together, they built the brokerage house into an eclectic firm. Prospective employees were given psychological multiple-choice tests. The corporate finance department's main task was to find deals for their private partnership.