Few companies go into bankruptcy and see their stock prices increase 30-fold, their revenues double and their operations reshaped by 22 acquisitions. Then again, few companies spend 11 years in bankruptcy.
But that's the situation of W.R. Grace & Co., which, despite being a 158-year-old company, has only really found its strategic footing within the protective womb of Chapter 11. Even the company's exit from bankruptcy has defied convention. Despite its reorganization plan's being confirmed on Jan. 31, it has yet to become effective some four months later. So the clock on one of the longest Chapter 11 stays in history keeps on ticking.
W.R. Grace entered Chapter 11 on April 2, 2001, as an asbestos claims-riddled debtor with as colorful a past as any company in U.S. business history. Grace was on its way to being another industrial power in postwar America under the founder's grandson, J. Peter Grace, who took over in 1945 at the age of 32 and then led the company on an acquisition magical mystery tour through the next five decades.
Under his leadership, the company was transformed from a fertilizer maker into a conglomerate thinly disguised as a chemicals manufacturer after a long string of forays in far-flung industries. W.R. Grace became notorious as a polluter even while gaining a trendy reputation for the concave vertical slope of its headquarters, just down the street from the New York Public Library in midtown Manhattan. As a company, Grace became something of a chameleon like its CEO and chairman, a devout Catholic who packed a Beretta pistol, a Democrat whom President Reagan tapped to run a commission on reducing government waste and a CEO who ran his corporation with autocratic authority.
Peter Grace would serve 48 years as the company's CEO, a corporate record. When, in 1992, he stepped down at 79, the task of stripping the company of its grab bag of businesses outside chemicals fell mostly upon his successors. (He died in 1995.) W.R. Grace's bankruptcy stay not only allowed it to deal with its asbestos problem, but gave the company time to regroup.
Is that the real role of Chapter 11, to allow a solvent company (beyond the asbestos liability) to restructure and renovate under its protection? That's how it worked with W.R. Grace, which used a more-than-decade-long stay in bankruptcy to buy and sell assets and generally rationalize the company.
When William Lenhart, the national director of business restructuring at BDO Consulting, says, "Bankruptcy got rid of the unknown" for Grace, he's referring to the billions of dollars in asbestos liabilities that forced the company to file for Chapter 11. But Lenhart's statement could also apply to the company's business mix. Under CEOs Paul J. Norris and Fred Festa during its bankruptcy stay, W.R. Grace not only refocused on chemicals, but expanded that business through acquisition, which is unusual in bankruptcy. "The acquisitions increased the value of the company," says John Altorelli, a DLA Piper LLP M&A lawyer. "You can't be in bankruptcy for 11 years and not be able to run your business."
Today, Grace has three business segments -- catalysts, materials technologies and construction products. According to its 2011 annual report, catalysts accounted for 44% of its sales, followed by construction products (31%) and materials technologies (25%). That mix hardly makes it a pure play, but it's a lot more rational than it was under Peter Grace.
But even in its earliest stages, W.R. Grace didn't rely on just one business. The company traces its start to 1854, when Irish immigrant William R. Grace started selling Peruvian seagull dung, or guano, in New York as fertilizer, eventually expanding to include the sale of agricultural products and manufactured goods. William also became a two-term mayor of New York in 1880, then returned to the company and expanded into shipping, sending its first vessel from New York to the west coast of Africa in 1890.
After William died in 1904, his son Joseph took over the business in 1907 and started a bank (Grace National Bank) in 1916 and an airline, in the form of a joint venture with Pan American Airlines (it was known as Pan American-Grace Airways, otherwise known as Panagra) in 1928. He continued to augment W.R. Grace's shipping and passenger line business, and sent a ship through the newly constructed Panama Canal in 1914.
But it was Joseph's son, Peter, who would take the company to new heights after taking over when his father suffered a stroke. Peter acquired a vermiculite mine in Libby, Mont., in one of his first moves, then ventured further into chemicals by acquiring Davison Chemical Co. and Dewey & Almy Chemical Co. in 1954. Four years later he constructed the Washington Research Center, a large industrial chemicals research center in Maryland.
In the '60s, however, Peter caught the conglomerate bug, which was then raging, and started buying businesses without the slightest connection to chemicals. He acquired everything from a wholesale book distributor (Baker & Taylor Inc.) to a fast-food chain (El Torito-La Fiesta Restaurants Inc.) to National Medical Care Inc., the nation's largest dialysis services company. "For most of his tenure, Peter Grace ran a conglomerate," says W.R. Grace spokesman Greg Euston. "The theory behind most conglomerates at that time was that investors would benefit from owning the right companies at the right time, much the way individual investors might buy and sell a variety of stocks to keep their portfolios relevant. W.R. Grace's history during Peter Grace's leadership is pretty interesting. The stuff he owned!"
That's the nice way to put it. By the '70s, most conglomerates were frantically divesting and restructuring. W.R. Grace hung on longer, but toward the end of his tenure even Peter Grace was forced to start unloading businesses unrelated to chemicals.
The CEO who succeeded him, J.P. Bolduc, was the first non-Grace to run the company and pressed Grace's renewed focus on chemicals. Bolduc, however, suddenly resigned on March 2, 1995, after charges of sexual harassment. He denied the allegations and cited philosophical and other differences for his exit. Albert J. Costello served as CEO from 1995 to 1998, continuing the chemicals refocus; in 1997 Grace merged its Cryovac plastic-packaging business with Sealed Air Corp. in a tax-free transaction valued at more than $6 billion.
Still, Peter Grace's early foray into chemicals would come back to haunt the company. Vermiculite is a natural material used in home insulation. According to the website of the federal Environmental Protection Agency, more than 70% of all the vermiculite sold in the U.S. between 1919 and 1990 came from Grace's Libby mine. The problem: There was also a deposit of asbestos in the Libby mine, the EPA reports, which contaminated the vermiculite. By 2001, under Norris, Grace had received more than 325,000 asbestos personal-injury claims and had paid out $1.9 billion to resolve litigation. And the claims kept coming. In the first quarter of 2001 alone, the company experienced an 81% increase in claims from the previous year. Bankruptcy seemed the only way out.
"This company would not have survived the tort system," says Roger Frankel of Orrick, Herrington & Sutcliffe LLP, who represents the future asbestos claimants in the bankruptcy case.
The Chapter 11 filing, in the U.S. Bankruptcy Court for the District of Delaware in Wilmington, put it in the company of USG Corp., Armstrong World Industries Inc., Owens Corning Inc. and Federal-Mogul Corp. as the Big Five asbestos debtors. (All but Grace have since exited.) And yet, right after its bankruptcy filing, Grace announced that its second-quarter 2001 revenue increased from the previous quarter, during which the company's finances were being drained by litigation. At the time, the company had $1.7 billion or so in annual revenue, but its share price was only $1.52 on the day it filed for bankruptcy.
The W.R. Grace bankruptcy case was complex and sprawling and, of course, lengthy. Over its 11 years, the case sucked in any number of lawyers and financial advisers, including debtor counsels Kirkland & Ellis LLP and Pachulski Stang Ziehl & Jones LLP.
This hasn't come cheap. W.R. Grace spent some $110 million in 2009, the year the asbestos litigation finally settled, but $44.7 million last year as the case wound down. W.R. Grace has had to deal with three different judges, including Judge Judith Fitzgerald, who oversaw the case in bankruptcy court. Fitzgerald, a judge in the U.S. Bankruptcy Court for the Western District of Pennsylvania in Pittsburgh, was assigned to Delaware because the Wilmington court needed help dealing with a clogged docket. Judge Alfred M. Wolin of the Newark District Court in New Jersey presided over asbestos matters until the 3rd Circuit issued a writ of mandamus in 2004 asking him to recuse himself because of a conflict. Judge Ronald Buckwalter of the Delaware District Court then replaced Wolin. Over the long and winding case, W.R. Grace submitted four reorganization plans and extended its $250 million debtor-in-possession financing five times and its exclusivity agreement nine times. During its stay, the company even arrived at a $250 million settlement with the EPA and the Department of Justice over environmental damage.
From the start of its Chapter 11 stay, Grace waged war with asbestos claimants, trying to prove its asbestos liabilities hovered around $400 million, while claimants estimated over $6 billion. Frankel says W.R. Grace "very aggressively" fought with all constituencies regarding the scope of its liabilities. He believes W.R. Grace's dormancy in bankruptcy following this initial combativeness was mainly caused by the complexity of the issues and the company's reluctance to negotiate with asbestos claimants early in the case. "At the end of the day, they all settle," he says. "It's just a question of timing."
Strategically, however, Norris didn't miss a beat. He had been made CEO, COO and president in 1998, and he moved the company's headquarters to Columbia, Md., from New York. He also oversaw the formation of Grace's performance chemical unit and Darex Container Products, which makes container sealant. He expanded globally, acquiring in March 2001 Separations Group, a manufacturer of chromatography columns and chemical separation products, through Grace's German silicas business, Akzo-PQ Silicas.
The bankruptcy filing didn't temper Norris' desire to engage in M&A. Debtors who buy companies are rare. But Grace's circumstances -- it was financially sound and had liquidity despite the asbestos claims -- made it an odd bird in Chapter 11 to begin with. One of the only other companies to make an acquisition in bankruptcy is Lehman Brothers Holdings Inc., which purchased a 26.5% stake in real estate venture Archstone Enterprise LP for $1.325 billion (it recently bought the rest of Archstone after exiting Chapter 11).
Grace's filing didn't slow Norris down. Just months after making the Chapter 11 petition, W.R. Grace's French subsidiary in July 2001 purchased Pieri SA, a supplier of specialty construction chemicals in Europe. In January 2002, the company's Swedish subsidiary acquired the assets of catalyst maker Borealis A/S. (None of Grace's foreign or domestic subsidiaries filed for Chapter 11 along with the parent; thus acquisitions by the subsidiaries were not subject to court approval.)
Norris' first domestic acquisition while in bankruptcy didn't come until March 2002, when Grace bought Addiment Inc., which supplies specialty chemicals to concrete pavers and to the U.S. and Canadian masonry industries. Norris then used Separations Group to obtain MODcol Corp., a maker of preparative chromatography columns and column packaging services, and Argonaut Technologies Inc., another chromatography company, in April 2003 and June 2003, respectively.
Norris stepped down from two of his positions in October 2003, naming Festa, whom he had worked with at AlliedSignal Inc., as president and COO. Norris retained the CEO job and focused on the bankruptcy, while Festa concentrated on the company's financial performance and core business. (Norris left W.R. Grace in February 2010 and now serves as a chemicals adviser for SK Capital Partners and sits on the boards of FMC Corp., Nalco Co. and Sealy Corp.)
Festa succeeded Norris as CEO in 2005 -- he added the chairman's post three years later -- and put Grace's acquisition efforts into overdrive. A buyout veteran -- he had been a partner at Chicago's Morgenthaler Private Equity -- Festa in October 2003 oversaw the acquisition of Tricosal Beton-Chemie GmbH & Co. KG, a leading supplier of specialty chemicals and materials in the European construction market, by a Grace subsidiary in Germany.
The following year, Festa kept up the M&A momentum in Europe. In July 2004, Grace purchased Grom Analytik + HPLC GmbH, a column-packing company with technology for high-performance small-molecule separations. The next month, it gobbled up Alltech International Holdings Inc., a maker of chromatography products, and Pieri Benelux NV, which had been the exclusive distributor of W.R. Grace's Pieri architectural concrete products in Benelux. Festa finished the year by buying Triflex, a line of synthetic-roofing underlayments, from Flexia Corp. in December.
The M&A wave continued in 2005, with the acquisitions of Midland Dexter Venezuela SA, a supplier of coating and sealants for rigid packaging in Latin America, in February; the assets of Perstorp Peramin AB, a supplier of specialty chemicals and materials in Sweden and other Northern European construction markets, in March; and both Single-Site Catalysts LLC, an organometallic catalysts supplier in Chester, Pa., and Flexit Laboratories Pvt. Ltd. in November.
After a six-month break, Festa resumed dealmaking by buying custom catalysts manufacturer Basell USA in June 2006. He waited more than a year to collect Grupo Sistiaga SL, a Hernani, Spain, supplier of coatings for aluminum containers, in July 2007.
As Grace's bankruptcy crept into its eighth year, a settlement was reached. On April 7, 2008, the company came to terms with all present and future asbestos personal-injury claimants. The settlement changed the tone of the bankruptcy proceedings, Frankel says, adding, "We then became aligned with the debtor."
To be sure, since the settlement, the creditor constituencies have generally backed decisions made by Grace. Almost all impaired classes overwhelmingly voted in favor of the reorganization plan. General unsecured creditors voted 92.54% in favor, and at least 75% of claimants that would be repaid from W.R. Grace's 524(g) trust, which holds funds for asbestos victims, voted to accept the plan. (The Libby claimants did try to assert their rights to insurance settlements, but their request was overruled by the order confirming Grace's plan.) "We have a lot of confidence in the management of W.R. Grace," says Frankel.
With various bankruptcy legalities still being worked out, Festa didn't make another deal until July 2010, when W.R. Grace bought Chryso Brazil, an admixtures and additives technologies maker. Following that came the November 2010 pickups of Wuhan Meilixin New Building Materials & Co. Ltd., a Chinese maker of waterproofing membranes and coatings; and Albany, Ore., chemicals maker Synthetech Inc. Then in December it landed RS Solutions LLC, a West Chester, Ohio, maker of quality-control systems for ready-mix concrete trucks.
Grace bought Belgium's De Neef Conchem Group, a waterproofing products company, in July 2011, before taking a break of nearly a year, but it had tried to buy another. Grace's latest acquisition, and perhaps its last while in bankruptcy, was completed May 30: Noblestar Catalyst Co. Ltd., a fluid catalytic cracking manufacturer in Qingdao, China.
The result of all of this dealmaking is a company consisting of three businesses -- catalysts and related technologies used in refining, petrochemical and other chemical manufacturing applications (2011 revenue of $1.4 billion); engineered materials, coatings and sealants used in consumer, industrial, packaging and pharmaceutical applications ($800 million); and specialty construction chemicals and specialty building materials used in commercial, infrastructure and residential construction ($1 billion).
Grace spokesman Euston says that the three segments taken together put the company in the specialty chemicals business. And while Grace serves a wide range of industries, from oil refining to can making to pharmaceuticals development to construction, the company's businesses share common DNA -- they all improve manufacturing processes. "In the end," Euston says, "all of their products are ingredients that improve the performance of the finished product."
Expectations were that Grace would exit bankruptcy in June, but that looks unlikely. Appellants have until July 11 to file appeals to Grace's confirmation. The window to file began a month earlier when the court reissued its confirmation ruling after another bankrupt company, Garlock Sealing Technologies LLC, named as a defendant alongside W.R. Grace in lawsuits claiming asbestos-related injuries, sought to appeal Grace's confirmation. Buckwalter affirmed that Garlock does not have standing in the case (see sidebar, page 47).
At this point, however, Grace's exit appears largely symbolic. The company's annual revenue, at nearly $3.2 billion, is almost twice what it was when it entered bankruptcy. And the price its stock fetches, recently at $50.09, is more than 30 times what it was selling for pre-Chapter 11. On April 25, the company announced its first-quarter earnings -- $60.9 million, or 80 cents per diluted share. That's up from $54.2 million, or 72 cents per diluted share, in the first quarter of 2011. "We are off to a good start in 2012," Festa said in an April 25 statement. "We are performing in line with our plan, led by strong results in our catalysts and construction products businesses. We are well positioned to take advantage of new opportunities to move our business forward and deliver another year of solid earnings growth."
Grace expects to keep growing even beyond its bankruptcy proceedings. The company predicts its adjusted Ebitda for 2012 will be between $630 million and $650 million, compared with its $598.6 million Ebitda in 2011. By 2014, Grace anticipates its Ebitda will be $850 million.
Steven Silton, a bankruptcy lawyer at Hinshaw & Culbertson LLP who is not involved in Grace's bankruptcy, isn't surprised by how much its equity value has risen. Equity is usually wiped out in bankruptcies, but Grace shareholders kept their stock throughout the company's Chapter 11 stay. "They kept making a big deal about it being a 100% plan," he says, referring to Grace's public relations effort to tout the fact that it will make all creditors in the bankruptcy whole.
But equity holders aren't the only ones getting in on the trading fun. Grace's unsecured claims, which total $826.3 million, have been trading at prices significantly higher than their original amount due to the 6.09% interest accruing from the petition date through Dec. 31, 2005, and then at a floating prime rate compounded quarterly thereafter, through the effective date of the plan.
The creditors' committees have become so enamored of Grace's management that they didn't even object to its attempt to participate in a "secret" auction last summer. In June 2011, Grace notified the court that it wanted to bid in an auction, but declined to disclose details involving target, seller or purchase price. Creditor constituencies were given limited details, and the court allowed Grace to participate. The company ended up losing the auction but won court approval in September to erase all evidence of the failed acquisition.
"Bankruptcy is a womb," says Silton. "It provides a lot of protection, but it is quite restricting."
Again, there's the contradiction with Grace. Bankruptcy has provided a protective chamber, but it certainly wasn't so hard-shelled as to hinder the company in its dealmaking aplomb.
Upon its 150th anniversary on May 10, 2004, Grace even celebrated its ability to keep on going. "Grace has survived all these years because of an inherent willingness to change, because of the strength of our people and because we pursue businesses that make a difference in the lives of our customers and the community at large," Norris said in a statement on that date. "Through it all, the company remains agile and focused on growing in smart and strategic ways. If we continue to do all of these things well, Grace can look forward to another productive 150 years."
The key to that for W.R. Grace will be learning from its past and not letting its business composition wander too far afield -- and, of course, not relying on a bankruptcy stay again to go on an acquisition binge to improve its stock and operating performance.