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Tuesday, November 6, 2012

THE WALL STREET JOURNAL: Trinket-Seller Rides Out Turbulence

Talk about a grand prize.

After years of struggling to avoid default on loans from two private-equity buyouts, Oriental Trading Co.'s chief executive last month found himself in Warren Buffett's office discussing a $500 million takeover bid.
The agreement announced Friday by Berkshire Hathaway Inc. BRKB -0.08% to buy the seller of party supplies and tchotchkes—including hundreds of varieties of rubber ducks—is a happy ending for many employees to more than a decade of tumultuous, revolving-door ownership at Oriental Trading.

Starting with a sale in 2000 by the founder's son, the catalog and online merchant passed through the hands of two private-equity owners and tumbled into bankruptcy after defaulting on hundreds of millions in loans associated with the buyouts. A recent rebound set it up for the all-cash sale to Berkshire, a conglomerate renowned for its commitment to its businesses.

Oriental has "a permanent home with Berkshire Hathaway," Mr. Buffett said in a statement.
That "is huge, especially for a company that has been on the private-equity treadmill for 12 years," says Sam Taylor, the 51-year-old chief executive of Oriental Trading.

Employees at the Omaha, Neb., firm cheered when they found out about the pending sale to Berkshire, also based in Omaha. Better than most people, Mr. Taylor says, the employees "know what it means not to have any debt."

Some companies thrive under private-equity ownership, benefiting from an infusion of operational wisdom and the discipline and belt-tightening needed to keep up with the debt often loaded onto companies by those behind the buyouts.

For years, Oriental Trading was a reminder of what can go wrong. "We were so levered up…that we were forced to make short-term cost cuts that hurt in the long term," Mr. Taylor says. The company's relationship also soured with employees, who doubted the owners' motives.

"There started to be a barrier between executive management and the rest of us," says Beth Diekman, an employee since 1995 who runs Oriental Trading's marketing media operations.
Oriental Trading sells rubber ducks, toys and other novelties. The company struggled through revolving-door ownership the past 12 years.
Japanese immigrant Harry Watanabe started Oriental Trading in 1932, finding a niche selling trinkets of the kind given away at carnivals and fundraisers. He passed the business to his son, Terrance, in the late 1970s. By 2000, when it was sold to private-equity firm Brentwood Associates for an undisclosed amount, the company had $300 million in annual revenue. Brentwood declined to comment.

In 2006, Brentwood sold a 75% stake in the company to Carlyle Group LP CG +0.96% for $750 million. The leveraged buyout increased Oriental Trading's leverage, a measurement of a company's financial risk, to seven times earnings before interest, taxes, depreciation and amortization, up from five times previously, according to S&P Capital IQ LCD. A Carlyle spokesman declined to comment.

Such leverage was common in buyouts at the time but is rare now. The sale left Oriental Trading with $720 million in debt.

Mr. Taylor was brought in by Carlyle and Brentwood in 2008 and soon found that employees "had no idea how the company was doing financially. There was zero communication and no empowerment," he says. An employee engagement survey conducted by Gallup Consulting that year ranked the company in the sixth percentile nationally, he adds. He also bristled under what he saw as micromanagement by shareholders.
Sales declined amid the recession and Oriental Trading cut 20% of salaried jobs and halted many catalog mailings to meet targets required by loans, Mr. Taylor says. It also was squeezed by higher mailing rates.
The company defaulted on loan terms in early 2009 but received a temporary waiver. A group of hedge funds bought the loans at a discount to face value, later swapping them for shares of the company in bankruptcy.

In February 2011, at the end of its seven-month bankruptcy, Oriental Trading had shrunk its debt level by 70%.

Mr. Taylor says the new owners, led by Crescent Capital Group, Par-Four Investment Management and KKR KKR 0.00% Asset Management, a unit of KKR & Co., gave him more room to operate. He focused on developing new products, reaching more prospective customers and improving employee relations—even working incognito in Oriental Trading's warehouse in 2011 with the "Undercover Boss" television show to better understand employee concerns.


Derek McMains/ADM Video
Sam Taylor, CEO of Oriental Trading Co., was hired in 2008 and found 'zero communication.'
Oriental Trading exceeded targets in its first six months out of bankruptcy and by mid-2012, the shareholders again sought to sell the company.

When auction bidders didn't hit the minimum price, said people familiar with the process, the funds decided with Mr. Taylor to reach out to Mr. Buffett. The investor owns a number of businesses in Berkshire's home city, including the Omaha World-Herald newspaper, which his conglomerate purchased last year.
Oriental Trading's chief financial officer Steve Mendlik sent an email in October to his counterpart at Berkshire suggesting a sale, according to Mr. Taylor. Days later Messrs. Mendlik and Taylor found themselves walking down a long hallway in Berkshire's office to meet Mr. Buffett and his lieutenants, including Todd Combs and Ted Weschler.

Mr. Buffett quizzed the executives on everything from performance to product mix to customer retention. Two hours later, a deal was struck, says Mr. Taylor, who had never met Mr. Buffett before. "It was surreal."
Ms. Diekman, the longtime employee, says, "There's a sense of relief that our future is certain now."

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