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Supply Chain Management of Heekin Can Inc. -
January 10th, 2011
In the early 1990s, Heekin Can Inc. ranked as one of America's largest regional metal can producers. The company had started out as a sideline to James Heekin's nineteenth-century coffee and spice business, but soon evolved into the most important of the family's enterprises. In 1965, after three generations under family ownership and management, Heekin Can was sold to Diamond International Corp., a public packaging conglomerate. When Diamond was acquired in a 1982 hostile takeover, Heekin was spun off in a heavily-leveraged buyout orchestrated by its management and a group of outside investors. Heekin went public for the first time in 1985, and subsequently became a darling of Wall Street. In 1992 the can company agreed to be acquired by Ball Corp., a Fortune 500 manufacturer of glass and metal containers for the food and beverage industries. At that time, Heekin boasted 11 plants in Arkansas, Illinois, Indiana, Ohio, Pennsylvania, Tennessee, West Virginia, and Wisconsin. After the acquisition, Heekin was merged into Ball's Metal Food Container and Specialty Products Group, and the Heekin name was dropped. The $89.1 million exchange of stock consummated in 1993 helped establish Ball as North America's third-largest manufacturer of food containers.
Company founder James Heekin was born December 8, 1843, the eldest son of Irish immigrants who had emigrated to the United States during the mid-nineteenth century potato famine. During the 1850s, the family moved to Cincinnati, where James' father peddled Irish linens along the Ohio River. When the patriarch died on one of these long business trips, 14-year-old James was left to support his family. Although he was "discouraged and disheartened at the prospect" (as he wrote in his diary on his 15th birthday), the youngster did all he could to earn money to support his widowed mother and seven siblings. James first worked in a bakery, then trained as a barrel cooper, and eventually sold clothes and linens in the same manner as his father.
During the Civil War it was a common practice for wealthier draftees to hire unenlisted men as "stand-ins." In 1863 James Heekin accepted $300 in exchange for enlisting in the Union Army in another man's place. It was the only "job" he could find at the time. At war's end in 1865, Heekin took a job as a salesman with a local coffee, tea, and spice dealer.
After gaining five years' experience in the field, Heekin established a partnership with Barney Corbett to acquire a failed coffee brokerage owned by Charles Lewis. The transaction would have been characterized as a leveraged buyout in the 1990s--Heekin and Corbett borrowed the entire purchase price. Heekin later bought out his partner's interest and paid off all the company's liabilities. Unfettered from debt and strategically located in the city that was known as the gateway to the West, James Heekin and Company soon grew into one of the country's largest, most well-known coffee dealers.
By the turn of the century Heekin had established the Heekin Spice Company to sell tea, spice, baking powder, and extracts. He bought packaging--tin cans--from a southern Ohio can company. When the supplier hiked his prices in 1900, Heekin decided to produce his own cans. He subsequently founded the Heekin Can Company. Within a few years, the can company's product lines included packaging for baking powder, tea, extracts, and other foods.
When the founder died in 1904, son James J. Heekin took the helm of the business. The second-generation leader oversaw the adoption of several technological advances, including lithography, which was used to decorate the cans. Heekin also introduced the open-top cylinder can, also known as the "sanitary" or "packers" can, in the early 1900s. This new design soon became an industry standard.
Heavy demand from a fast-growing customer, R.J. Reynolds Company (which sold its then-popular Prince Albert tobacco in tin cans), combined with new technological imperatives, pushed the company to purchase a second manufacturing site in 1915. According to a company history, volume at this new plant grew so much that at one point it was "the largest metal lithographing plant under one roof in the nation."
When James J. Heekin retired in 1928, Albert Heekin, another son of the founder, assumed the presidency. Daniel M. Heekin, yet another of the founder's 15 children, advanced to Heekin Can's presidency in 1948. He had served as president of the Can Manufacturing Institute during World War II, when widespread shortages made production difficult. But pent-up demand for consumer goods drove rapid expansion in the late 1940s and early 1950s, and the company established four new plants in Arkansas and Tennessee.
Management finally shifted to the third generation of Heekins in 1954, when Albert E. Heekin, Jr., succeeded his uncle as president of Heekin Can. Albert guided the company's acquisition of a modern plant in Newtown, near Cincinnati. The factory soon boasted coating and decorating equipment, coil-cutting (or sheet-metal cutting) lines, two-piece aluminum beverage lines (also known as draw-and-iron lines), welded aerosol lines, and three-piece packer lines. The new plant would long stand as Heekin's flagship factory. In 1962 Heekin commenced construction of a satellite plant in Augusta, Wisconsin, near Bush Brothers & Co., an important Heekin customer.
The Heekins established an emphasis on research and development that would endure long after the family ceased its involvement in the company. Albert, Jr., for example, boosted the company's research budget to an annual sum of over $50 million during the 1950s. Three years of research culminated in the 1959 patent of a plastic embossing process that allowed Heekin to mimic virtually any texture on its cans. This innovation gave Heekin an edge on its larger competitors, American Can Co. and Continental Can Co., for it was able to add plastic caps, closures, and other injection molded products to its offerings during this period.
By 1964 Heekin was America's fifth-largest producer of metal containers, with annual sales of about $30 million and eight Midwestern plants. Faced with intensifying competition and the prospect of a hostile takeover in the midst of industry consolidation, Albert Heekin, Jr., decided to sell the family business on his terms. He began negotiations with Diamond International Corp. Heekin Can was just one of many acquisitions that expanded Diamond International Corp. from a $200 million matchmaker in the late 1950s to a $500 million diversified packaging conglomerate by 1970. Diamond exchanged 480,000 of its own shares, worth about $18 million, for ownership of the can company in 1965.
Heekin was first organized as a division in Diamond's organizational structure, but was later converted to subsidiary status. Business tripled during Heekin's two decades under Diamond's management, as the subsidiary diversified into P.E.T. (polyethylene plastic) bottles and other containers.
British takeover artist Sir James Goldsmith pulled off a leveraged buyout of Diamond in 1982. As one of the conglomerate's healthiest components, Heekin was quickly spun off to raise funds to reduce Goldsmith's leveraged buyout debt. A coalition of private investors--including former U.S. Treasury Secretary William Simon of Wesray Holdings Corp. and Heekin executives&mdash-gineered the $108.8 million deal. Wesray, which accumulated about three-fourths of Heekin's stock, only brought $250,000 in equity to the table. The remaining $108.55 million of the purchase price came from a creative patchwork of sources backed primarily by Heekin's own resources (not Wesray's). A $39.8 million revolving line of credit from Citicorp Industrial Credit was secured by first claim on Heekin's receivables and inventory and second claim on its equipment. A $20 million loan from Manufacturers Hanover Leasing Corp. was guaranteed by first claim to Heekin's equipment and second claim to its receivables and inventory. The can company itself chipped in $14.9 million cash and paid $24.1 million for the sale/leaseback of its own plants and offices. A $9 million note from Heekin to Diamond and a $750,000 loan from Wesray to Heekin completed the financing. Interest expenses on the weighty debt load cut Heekin's pre-tax margins in half, from eight percent in 1982 to four percent in 1984. Nonetheless, the can company's sales increased from $173 million in 1973 to $215 million in 1984, and its profits more than doubled during that time, from $3.1 million to $7.3 million.
In order to pay down its debt, Heekin went public in 1985 with a $44-million offering of 3.25 million shares. The offering included about half of Wesray's holdings. The sale helped reduce the company's debt-to-equity ratio from 24.7 to 1 in 1983 to 2.5 to 1 in 1987. John Haas, who had been with Heekin since the pre-Diamond days, was elected president.
Heekin wasn't the only can manufacturer to experience sweeping change in the 1980s. Within a span of just five years, all three of the industry's top firms--American Can Co., National Can Co., and Continental Packaging Inc.--had been taken over at least once.
In light of its new ownership status and the changed industry imperatives, Heekin's management reorganized its capital and research strategy. In a late 1980s "back to basics" movement, the company sold its aluminum can interests to Reynolds Metal Co. and returned its emphasis to food cans. But this was not a regressive action; the company also boosted its research and development efforts in order to stay ahead of competitors in the food can and plastic container industries. By 1987 nearly three-fourths of Heekin's revenues were generated by food-can sales--triple the industry standard. Five years later this share had increased to about 90 percent, with the remainder in aerosol and metal decorating. President Haas felt that concentrating on a specialized niche would bolster Heekin's position as the country's largest regional can manufacturer. He asserted in a 1988 interview with the Cincinnati Business Courier that "its the only way a company like ours can survive."
But while Heekin Can was strong in the realm of food-can manufacturing, observers noted that the vast majority of Heekin's sales were concentrated in just 20 accounts. In fact, the company's three largest customers--Kal Kan Foods, Bush Brothers & Co., and Allen Canning&mdashcounted for at least 50 percent of Heekin's annual revenues by the mid-1980s. That dependency was considered a serious vulnerability during this period.
Another major industry transition in the late 1980s afforded Heekin Can the opportunity to embark upon the most ambitious acquisition program in the company's history. Prior to this time, approximately half of America's food manufacturers made their own cans, just as Heekin Tea and Spice had at the turn of the century. But in the late 1980s, several major food producers began divesting their can-making subsidiaries. As Heekin President John Haas noted in the Cincinnati Business Courier in 1987, "can-making was a sideline for the food makers. They are starting to sell plants and leave the business because of the capital and the risk involved." Heekin was an active buyer of these facilities. The company acquired plants from Stokley USA Inc., Quaker Oats Co., and Pittsburgh Metal Lithographing Co., and opened a new Ohio factory in 1987, thereby increasing its manufacturing capacity by well over 20 percent. The deals with Stokley and Quaker Oats also gave Heekin "instant customers," for the contracts included multi-year supply agreements with the food companies.
Those acquisitions also shifted Heekin's customer base from Cincinnati to Indianapolis. When two of three unions representing workers at the company's Newtown factory rejected the company's demands for concessions that would bring costs in line with their new business imperatives, management simply began moving jobs and equipment to the new plants. Employment at Newtown dropped from 720 to 380 in 1988.
Heekin's annual sales increased from $207.5 million in 1986 to $336 million in 1989, and net income nearly doubled, from $7 million to $13 million. Called "a sleepy survivor in a tumultuous industry" in a 1990 Cincinnati Business Courier feature, Heekin's performance and its management were extolled by several industry observers. H. Edward Schollmeyer, a top analyst with PaineWebber Inc., praised Heekin's management as "topnotch" in a 1987 Cincinnati Business Courier piece. John Doss, an executive of Thomson McKinnon Securities, concurred, pointing to Heekin's administration and its niche in the industry as keys to its success. In 1987 the Wall Street Transcript named Haas one of the container industry's three best executives. The combination of praise and performance promoted Heekin's stock price from less than $14 in 1985 to $40 early in 1990. Despite its speedy appreciation, however, Heekin's stock was considered undervalued. The stock price was viewed by some as an invitation to attempt a takeover of the company.
In fact, Julian H. Robertson of Tiger Management Associates took a 5.5 percent equity position in Heekin "for investment purposes" in 1989. Soon afterward, the can company's management adopted a poison-pill provision and "supermajority" clause during this period to deter any hostile raiders.
Nonetheless, in 1992 Heekin agreed to be acquired by Ball Corp., a $2.3-billion manufacturer of glass and metal containers for the food and beverage industries. Ball's William A. Lincoln praised Heekin as "probably one of the lowest-cost producers of metal food containers" in a 1993 corporate publication. The $89.1 million exchange of stock, consummated in 1993, made Ball, which already has significant food container operations in Canada, the third-largest manufacturer of food containers in North America.
John Haas was appointed president of Ball's metal food container and specialty products group in 1993. (Ironically, Haas had worked at Ball for a short time in the late 1970s, but returned to Heekin by the early 1980s.) The new parent hoped that Heekin, which became part of Ball's Metal Food Container and Specialty Products Group, would be a catalyst for international expansion in the years to come.