Olmsted: the successful venture
On May 14, 1999, in the largest union-led buyout in the country since 1994, employees and the KPS Special Situations Fund together bought a paper mill, an extruding plant, and five converting plants from Champion International for $200 million.
The new company, Blue Ridge Paper Products, has 2200 new employee owners who work in the paper mill in Canton, North Carolina, in the extruding mill in Waynesville, NC, and in five Dairy Pak converting plants in Georgia, Iowa, Texas, New Jersey & Olmsted Falls, Ohio.
"This is a great business deal," said Dave Shapiro, one of the principals in the KPS Fund. "The timing is perfect. We had the opportunity to purchase some high quality assets at a very good price. We have an excellent management team, a strong and dedicated work force, and strong market shares in all of our product lines. There’s been a lot of investment in the mill over the past ten years. By going into partnership with the employees, Blue Ridge Paper has become one of the most cost-competitive mills in the country. We expect Blue Ridge to be a tremendous success."
"This is a real victory for workers," commented Paper, Allied-Industrial, Chemical & Energy (PACE) Workers International Union President Boyd Young. "We look forward to the development of a relationship that can be a good example both within and beyond the pulp and paper industry."
Champion’s downsizing creates employees opportunity
In October 1997, Champion put the Canton mill and Dairy Pak division up for sale as part of its downsizing effort. Though Champion hired Goldman Sachs to sell the facilities, no serious bidders emerged. The reasons were three: the current overcapacity in the paper industry, a declining market for paper cartons for packaging milk and juice, and the checkered environmental history of the Canton, North Carolina mill.
What kind of buyer would invest in this situation?
The answer? The employees, who work there and want to preserve their livelihoods, and KPS, a fund organized by Eugene Keilin, Michael Psaros, and David Shapiro to invest in just this kind of difficult situation.
"Where other investors took a quick look and saw nothing but problems, we and the employees were willing to look a little harder," explained KPS’s Shapiro. "What we found was a great opportunity: a business with strong market shares in its primary products and an excellent workforce. The only question was, at what price?"
In November 1997, an employee buyout effort was initiated by PACE Smoky Mountain Local 507 which organizes the two North Carolina facilities. The Southern Appalachian Center for Cooperative Ownership (SACCO) in North Carolina played a key role in helping Local 507 get the buyout effort off the ground. Public sector support from the state and affected counties in North Carolina and from the Ohio Bureau of Employment Services’ Preliminary Feasibility Fund helped.
The Paperworkers, whose merger with the Oil, Chemical and Atomic Workers, have been in the forefront of American unions in exploring employee ownership in industry divestitures. Heretofore, however, their only major buyout was in Pine Falls, Manitoba. The Canadian Communications, Energy and Paperworkers Union also completed two very successful paper industry buyouts, both with the advice of Keilin & Co. (Keilin, Psaros, and Shapiro of KPS are also principals of Keilin & Co, the investment banking firm that did the United Airlines buyout.)
It quickly became apparent that if the Canton employees bought the mill, they also needed to buy the converting plants it supplied. Consequently, the buyout became a multiplant, multistate project. All the plants but one were organized by PACE, so coordination was relatively easy; the other plant was organized by the United Autoworkers.
"The Paperworkers invited us to take a look at the Canton System in May 1998," recollects Shapiro. "We were immediately impressed with the ESOP committee members; their interest in saving the jobs throughout the Canton System as well as their comprehension of the difficulties and complexities involved in actually pulling off a large acquisition."
"I can’t say enough good things about the great work done by all the locals," said Bob Smith, PACE Vice President and Region IV director who was deeply involved in seeing the deal through. "These guys stepped up to the plate. They carried the ball everyday. You couldn’t ask for a better bunch."
The Smoky Mountains come to Cleveland
The oldest of the Champion converting plants is located in the Cleveland, Ohio suburb of Olmsted Falls. This plant, which opened 51 years ago, prints coated paper and converts it into liquid packaging cartons of the sort that you buy milk or juice in at the grocery store. Plastic jugs have been making heavy inroads into part of this business, and the industry has been going through a consolidation. International Paper, Champion’s main competitor in this market, was rumored to be interested in acquiring the three northern plants and to be interested in keeping their customers and consolidating their business into IP’s existing northern plants.
The Champion plant was the largest employer in the City of Olmsted Falls. It now employs 165, down from more than 200 a few years ago. Today, it is still a key part of the community’s economy.
"This buyout was our only choice," said Pete Dagostino, who started work at the plant in 1955, and who led the Olmsted Falls buyout effort as President of PACE Local 673. "Nobody likes the concessions we had to take."
"You never can tell what will happen when a plant like this goes up for sale," Olmsted Falls Mayor Tom Jones commented. "I applaud the employees for having the confidence to purchase it. I’m delighted that the plant will remain here."
"There’s always been a good relationship between the company and the city. As a matter of fact, the Board of Education has its offices in the plant," Jones continued. "I anticipate that will continue. I’m pleased the employees bought the plant!"
How do you raise $200 million for a buyout?
Paper mills cost money and two hundred million is a fair chunk of change. The practicality of large buyouts has been dramatically improved by the development of new venture capital funds which specialize in union-initiated buyouts.
The largest of these is the KPS Special Situation Fund, capitalized at $205 million last year. The fund will ultimately leverage perhaps as much as $1 billion in employee buyouts. This was its first completed transaction. The KPS Fund provided $35 million in equity on the purchase price of $200 million; the rest was borrowed through a syndicate led by G.E. Capital, Wachovia, PNC Bank, and Bank of Montreal. The employees and KPS paid Champion $170 million in cash and a $30 million note, far less than the price rumored in the financial press.
"We were able to negotiate an excellent purchase price," explained Shapiro. "Most paper industry analysts expected the Canton System to sell for over $300 million. However, we were able to take advantage of a confluence of events and circumstances: a highly motivated seller, a failed auction, a very difficult financing market and very low prices on paper products."
The structure of ownership at Blue Ridge is that the employees have a 40 percent stake, KPS holds 55 percent, and 5 percent is reserved to attract and incentivize senior management. When KPS chooses to exit, ideally in about five years, the employees have the right to bid on KPS’s shares. "I’d really like to see us exercise our option to buy their shares," says PACE’s Smith.
Employees are paying for their stock with a 15% reduction in their wage and benefit package over the seven year term of the contract. Over 80 percent of union employees turned out to vote on the contract. Overall, 60 percent voted in favor, with all plants except the Georgia converting plant voting in favor; Olmsted Falls ratified with a 74 percent "yes" vote. White collar employees took similar cuts, but had no opportunity to vote.
Once the company is profitable, however, profit sharing kicks in. Ten percent of pretax profits will be shared equally among all the employees, blue collar and white collar alike.
Making the new company a success
"Our union isn’t just about preserving jobs," Young continued. "It’s about enhancing jobs. Our new partnership with Blue Ridge gives us the opportunity to do just that."
"I’ve always believed in the concept of employee ownership," said Joe Ramsey, the International Union Representative for the Olmsted Falls plant and long-time OEOC Advisory Board member. "I am very tickled to see this buyout go through. It means a future for these folks in all these locations."
"The Olmsted Falls union committee really worked hard on this," added Ramsey. "They’ve done a great job for the members. Despite the unending frustrations of this long, drawn out process, they’ve demonstrated real leadership both in the plant and, I think, among all the converting plants. It was a long, hard road, and they deserve a lot of credit."
"It’s still going to be a rocky road," Dagostino predicts. "To make it work, we need to come together and all pull in the same direction. We’ve got a great workforce, and we take a lot of pride in our work — in our quality. But we really need to learn to communicate better. We’ve got to get the salary people into the loop. They got hit with the concessions, but they didn’t get to vote on them." Dagostino is now a member of Blue Ridge’s Board of Directors, so he can do something about it.
Smith, who is also a member of the new board, traces white collar resentment to being kept in the dark because Champion required strict confidentiality during the buyout.
"The confidentiality situation did create some resentment among middle managers. Our local union leadership knew what was going on, but their supervisors didn’t. That resentment continues. Some of it is directed toward the union, but much more is toward their former employer," says Smith. "We’ll get past it, though."
"I’m very excited about Blue Ridge Paper and the opportunities it presents," comments Gordon Jones, Blue Ridge Paper’s new CEO. "I haven’t seen anything this exciting in the 23 years I have worked in the paper industry." Jones came to Blue Ridge from Smurfit-Stone Container Corporation, and had been a senior executive at Stone Container before the merger.
"It’s the excitement of having everyone pull in the same direction. Let me give you an example. Our Transition Committee is a mixture of hourly and salaried employees; we just roll up our sleeves and work together. You would be amazed by the phenomenal suggestions coming from the people: on how to improve our production, quality, and interface with customers."
"I want to see this buyout a success," concurs Dagostino. "I’ve only got a couple of years left before retirement myself, but there’s a real opportunity here for the young people. There’s money to be made in liquid packaging. I want to see our members have a secure future."
"The transition seems to be going exceptionally well," continues Smith. "Gordon Jones, our new CEO, is a good man. He’s a real people person. We’ve got some other people we are trying to bring on board, and we should have a good team in place. I look for Blue Ridge to be one of the country’s real success stories, like Harley Davidson."
"When our customers visit the plant, we take them out to meet the people, and they walk away really impressed with how people feel to own the business," Jones adds. "They are talking to owners. You are going to see some phenomenal results from the people owning this business."
This article is an excerpt from the Ohio Employee Ownership Center newsletter, Owners at Work (Summer 1999).
About KPS Capital Partners
KPS, through its affiliated management entities, is the manager of the KPS Special Situations Funds, a family of investment funds with approximately $21.4 billion of assets under management (as of December 31, 2023). For nearly three decades, the Partners of KPS have worked exclusively to realize significant capital appreciation by making controlling equity investments in manufacturing and industrial companies across a diverse array of industries, including basic materials, branded consumer, healthcare and luxury products, automotive parts, capital equipment and general manufacturing. KPS creates value for its investors by working constructively with talented management teams to make businesses better, and generates investment returns by structurally improving the strategic position, competitiveness and profitability of its portfolio companies, rather than primarily relying on financial leverage. The KPS Funds’ portfolio companies generate aggregate annual revenues of approximately $20.3 billion, operate 222 manufacturing facilities in 26 countries, and have approximately 48,000 employees, directly and through joint ventures worldwide (as of December 31, 2023). The KPS investment strategy and portfolio companies are described in detail at www.kpsfund.com.
KPS Mid-Cap focuses on investments in the lower end of the middle market that require up to $200 million of initial equity capital. KPS Mid-Cap targets the same type of investment opportunities and utilizes the same investment strategy that KPS’ flagship funds have for nearly three decades. KPS Mid-Cap leverages and benefits from KPS’ global platform, reputation, track record, infrastructure, best practices, knowledge and experience. The KPS Mid-Cap investment team is managed by Partners Pierre de Villeméjane and Ryan Harrison, who lead a team of experienced and talented professionals.
