KinderCare’s Problem Child: It’s Portfolio

Excerpt: KinderCare’s Problem Child: It’s Portfolio

  • In 1988, Drexel Burnham Lambert ran a rousing television spot that featured KinderCare Inc., a Montgomery, Ala., company that runs the largest day-care chain in the nation.
  • It was all about how Kinder-Care’s new centers were helping working women everywhere juggle their children and careers thanks to $300 million that the company raised through Drexel for expansion.
  • Richard Grassgreen, who was president of Kinder-Care until last year, testified in U.S. District Court here recently that he and Perry Mendel, the company’s founder, together misappropriated fees due the company.
  • In pre-sentencing hearings for former Drexel financier Michael Milken, Grassgreen told how he invested millions of Kinder-Care’s dollars in corporate buyouts financed by Drexel Burnham. That in itself would not have been illegal. But Grassgreen and Mendel pocketed the commitment fees that Kinder-Care should have received for its investments, according to Grassgreen’s testimony.
  • In one deal, in which Kinder-Care put up $5 million toward the 1985 leveraged buyout of a cable television firm, Storer Communications Inc., Grassgreen and Mendel were rewarded by Drexel through an invitation to join a lucrative investment partnership with senior Drexel executives and clients.
  • The 68-year-old Mendel, who is described by Larry Rader, an analyst at Merrill Lynch & Co., as ”a sweet, grandfatherly man,” retired from day-to-day management at Kinder-Care in February. He remains on the payroll as chairman emeritus and as a consultant. His 10-year contract calls for annual payments of $500,000 that are to continue to his estate if he dies before the contract expires.
  • In 1988, Kinder-Care bought Shoe City Corp. of Montgomery, Ala., a chain of stores in which Mendel and Grassgreen were large shareholders. According to Securities and Exchange Commission documents, Mendel made a profit of $2.8 million and Grassgreen $4.5 million when Kinder-Care bought their stock.
  • During its acquisitive period, Kinder-Care was amassing a portfolio of preferred stocks and junk bonds, many of which were sold by Drexel. The portfolio peaked at $613 million in 1987.
  • Drexel’s traders in Beverly Hills, where Milken was based, would often call Kinder-Care when the investment firm was trying to line up financing for takeovers and buyouts, Grassgreen testified in the Milken hearings.
  • These practices raised eyebrows on Wall Street, particularly from Merrill Lynch, which had sold stock to the public in Kinder-Care in 1981.
  • In 1984, Merrill Lynch squelched a plan by Grassgreen to invest $224 million of Kinder-Care’s money to help raider T. Boone Pickens in a takeover bid for Gulf Oil Co. Merrill Lynch argued that Kinder-Care’s stock price would suffer if shareholders found out the day-care company was investing in hostile takeovers, Grassgreen testified.
  • Nevertheless, in 1985, Kinder-Care agreed to invest in takeovers launched by Coastal Corp., Pantry Pride, GAF Corp., Midcon and Pacific Lumber as well as in the buyout of Storer Communications by Kohlberg Kravis Roberts & Co.
  • Grassgreen and Mendel earlier this year returned to Enstar a total of $879,000 in personal profits they made from an investment partnership after the Storer deal, according to SEC records.
  • As part of his deal with prosecutors, Grassgreen has agreed to make about $600,000 worth of restitution for the allegedly embezzled commitment fees and other profits. (Mendel, who is alleged by Grassgreen to have taken an identical sum, has made no such deal. Kinder-Care is considering suing to recover money, people familiar with the case said.)
  • Kinder-Care is trying to pay off the debt it took on during its buying binge. As of June 29, the most recent date for which data were available, Kinder-Care had $327 million in long-term debt.
  • “Operationally, it is a profitable business. It is, unfortunately . . . laden with debt and heavily invested in junk bonds,” said Napoleon Overton, an analyst with the Memphis securities firm of Morgan, Keegan & Co.
  • Nimrod Frazer, a Montgomery investment banker who became acting chief executive of Enstar upon Grassgreen’s resignation, put up for sale a small fleet of private jets, the hunting magazine and a nearly completed $6 million headquarters building that Grassgreen had commissioned.

Source: Chicago Tribune