Onex Corporation History

Address:

161 Bay Street, 49th Floor
P.O. Box 700
Toronto, Ontario M5J 2S1
Canada

Telephone: (416) 362-7711
Fax: (416) 362-5765

Website: www.onexcorp.com

Public Company
Incorporated: 1984
Employees: 98,000
Sales: CAD 17.0 billion ($13.21 billion) (2003)
Stock Exchanges: Toronto
Ticker Symbol: OCX
NAIC: 551112 Offices of Other Holding Companies

Company Perspectives:

Fundamental to our business is an entrepreneurial philosophy based on ownership. Each member of the Onex management team has a meaningful personal financial interest in Onex and the companies we own. Our focus is squarely on building value.

Key Dates:

1983:: Gerald Schwartz forms Onex Capital Corporation with the intention of using it as a holding company.
1987:: The company acquires Beatrice Foods Canada, Ltd.
1995:: In-flight catering company Sky Chefs attains global status.
1996:: The company buys a controlling interest in IBM Canada subsidiary Celestica.
1999:: The Onex name gains notoriety with a failed takeover bid.
2001:: Holdings in the entertainment industry are expanded.
2003:: The company enters the healthcare services business.

Company History:

Onex Corporation, one of Canada's largest companies, operates on a global level. Founder Gerald Schwartz built his empire by making timely acquisitions of struggling businesses. Highly diversified, the investment firm holds ownership in companies involved in businesses ranging from electronics manufacturing and auto products to healthcare services and movie theaters.

Early History: 1970s

The history of Onex Corporation is actually the biography of one man, Gerald Schwartz. A young man with ambition and bold ideas, Schwartz graduated from the University of Manitoba with degrees in commerce and law. Upon graduation, he headed for Harvard University and earned a degree in business administration in 1970. Schwartz then took a job in Europe, working for Bernard Cornfield, a rather eccentric and flamboyant international financier based in Switzerland. When Cornfield's company, Investors Overseas Services, was investigated for fraud and then collapsed in 1973, Schwartz moved on to the United States, seeking work in the financial caverns of Wall Street in New York City. Hired by Bear Stearns & Company, Schwartz learned the intricacies of hostile takeovers and corporate mergers. Two of his most renowned and notorious colleagues included Henry Kravis and Jerome Kohlberg.

After a stint of four years in the United States, Schwartz decided to return to his hometown of Winnipeg. There, he formed a partnership with a lawyer, Israel Asper, an astute and driven entrepreneur, and together they founded CanWest Capital Corporation, the forerunner of CanWest Global Communications Corporation, which would own numerous broadcasting businesses throughout western Canada. The partnership first acquired several small to mid-sized Canadian firms during the late 1970s and early 1980s, and seemed to be heading in a promising direction. Yet Schwartz and Asper began to quarrel about strategic issues surrounding acquisitions, venture capital, and timing, and before long decided to end their partnership.

A New Company: 1980s

In 1983, Schwartz relocated to Toronto and, with the financial backing of former investors at CanWest, formed Onex Capital Corporation, which he intended to use as a holding company for widely diversified acquisitions. The first such acquisition was Onex Packaging, the Canadian subsidiary of the American Can Company based in Connecticut. With a purchase price of approximately $220 million, the acquisition was the largest leveraged buyout in the history of Canada.

Schwartz was not afraid of debt and had learned his lessons well while working at Bear Stearns in New York. His modus operandi was to use debt or other innovative financing to purchase undervalued companies, and then initiate a comprehensive restructuring of the company purchased. He would then sell either parts of the company or the whole at a profit. Onex Packaging, a manufacturer of rigid packing materials, offered an initial public sale of its stock in 1987, to cover the costs of the restructuring and to raise additional funds for the expenses incurred in modernizing the company. Unfortunately, by 1987, Onex Packaging was losing money and Schwartz decided to take the company private once again. Not long afterward, he sold Onex Packaging for less than he had originally anticipated.

Having learned a hard lesson about economies of scale in the North American market with Onex Packaging, Schwartz was not about to make the same mistake twice. During 1987, as Onex Packaging began to flounder, Schwartz acquired both Norex Leasing, a leading leasing company owned and operated by Citibank, and Purolator Courier Ltd., the leading overnight delivery service in Canada. At the same time, Schwartz made a conscious decision to make more acquisitions in the United States and began to decrease his holdings in Canada, although his company would always remain based in his native country. This strategy led him to one of the most important acquisitions during the late 1980s: the purchase of the airline catering company called Sky Chefs.

Growth Through Acquisition: 1990-99

One of the first huge successes of Schwartz's acquisition strategy was Beatrice Foods Canada, Ltd. Purchased in 1987 when its parent firm was in the course of being dismantled in Chicago, Schwartz paid a bargain-basement cash price of $21.9 million for the company, although it was valued at a purchase price of slightly more than $300 million. In 1991, the entrepreneur resold the company for $475 million, after a complicated but productive restructuring plan that involved merging Beatrice Foods Canada with two other Canadian dairy firms. Additional acquisitions followed at a quick pace, including ProSource Distribution, a foodservice distributor in both the United States and Canada, and Dura Automotive Systems and Tower Automotive, two high-quality automotive parts manufacturers.

Schwartz's goal with Sky Chefs was to transform it into a leader in the in-flight catering industry. The first step in this direction was an alliance formed between Sky Chefs and LSG Lufthansa Service in 1993. The alliance was formed to give Sky Chefs access to international airline customers that it did not previously have. Revenues for Sky Chefs remained relatively the same from 1991 through 1994, hovering around $470 million annually. During this time, however, Sky Chefs was transformed into the leading low-cost producer of in-flight meals for the airline industry. A policy of cycle-time reduction was implemented in 1992 and resulted in a 30 percent labor production increase over a three-year period.

Although many innovative alliances and policies had been implemented at Sky Chefs during the early 1990s, it was not until 1995 that the company developed a worldwide reputation. Much of this was due to the takeover of Caterair International Corporation, one of the preeminent in-flight catering companies. Funded entirely by third-party lenders, the acquisition of Caterair International propelled Sky Chefs to the top of the industry with slightly less than 50 percent of the American domestic airline catering market and 30 percent of the international airline catering market. The acquisition of Caterair International and the earlier alliance with LSG Lufthansa gave Sky Chefs access to airline customers around the world, including new contracts in Central and South America, as well as in Australia. As the consolidation of in-flight catering services continued through 1995, additional contracts were signed with British Airways, Delta Airlines, USAir, and Midway. By the end of 1995, Sky Chefs counted more than 250 airline customers located in every part of the world, while revenues shot up to $739 million, an increase of 58 percent over the previous year.

ProSource, Onex Corporation's foodservice distributor for restaurant chains, was the largest in North America. Starting in 1992 with a single customer, Burger King, the company expanded to provide services for more than 22 different types of restaurants and fast-food establishments. In 1993, ProSource acquired Valley Food Services, and in 1994 Malone Products, but the most significant addition was the acquisition of the National Accounts division of the Martin-Brower Company in 1995. These three acquisitions expanded and diversified the ProSource Distribution customer base, so that instead of relying exclusively on quick-serve restaurants, there was more of a balance, with distribution to quick-serve establishments comprising 75 percent and distribution to casual dining restaurants totaling 25 percent of ProSource business. Revenues in 1995 for ProSource were reported at $3.5 billion, compared with the 1994 figure of $1.6 billion. Much of the increased revenue was derived from the acquisition of the National Accounts division of Martin-Brower, but a significant portion of the increase was due to implementing highly successful cost-effective distribution techniques. One such technique involved "rolling shelving," wherein carts used by ProSource delivery trucks could also be used for instant in-store shelving at restaurants. Another cost-effective distribution method involved the company's electronic ordering system, which reduced time and effort. These innovations helped ProSource develop into one of the leading-edge distributors in the foodservice industry.

Hidden Creek Industries was formed as a partnership by Onex Corporation to manage the operations of Dura Automotive and Tower Automotive. Dura Automotive, purchased in 1990, became the largest supplier of parking-brake systems to original equipment manufacturers (OEMs) in North America. In 1994, Dura acquired the Orscheln Company, to increase its market share of the parking-brake systems industry. With the purchase of Orscheln, Dura achieved its goal; revenues increased 34 percent from 1994 to 1995, jumping from $189.7 million to $253.7 million. Tower Automotive was purchased in 1993 and transformed by management into one of the leading developers and manufacturers of structural metal stampings and various other assemblies for original equipment manufacturers. In 1994, Tower purchased Edgewood Tool and Manufacturing, as well as Kalamazoo Stamping and Die, and the following year added the Trylon Corporation to its holdings. These acquisitions not only increased revenues from 1994 to 1995 by 35 percent, but complemented Tower Automotive's already existing line of products. While Dura Automotive's major customers included Ford, Chrysler, General Motors, and Toyota, Tower Automotive negotiated lucrative contracts with Ford and Honda motor companies.

As a holding company, one of Onex's top priorities was to enhance the value of shareholder equity. During 1995, this goal was pursued by a number of strategic investments, made primarily under the direction of Gerald Schwartz. Onex invested $20 million in Phoenix Pictures, a brand new film production company owned by Onex, Sony Pictures Entertainment, and Britain's Pearson PLC. The company also purchased Vencap Equities Alberta, Ltd., a promising venture capital fund located in western Canada. Finally, management at Onex formed Rippledwood Holdings, an acquisition fund developed to hold the 52 percent of the company's interest in Dayton Superior Corporation. Other continuing strategic investments included a 19 percent share of Purolator Courier (down from majority ownership a few years earlier), 16 percent of Scotsman Industries (a manufacturer of ice machines, freezers, food preparation workstations, and refrigerators), and an 8.1 percent share in Alliance Communications, the leading producer and distributor of television entertainment in Canada.

In the spring of 1995, Gerald Schwartz decided to launch a $2.3 billion hostile takeover of John Labatt Ltd., one of the most prominent brewers in Canada. Located in Toronto, Labatt had a long and distinguished history starting as a brewer of fine beers in London, England, in 1847. Controlling approximately 45 percent of the Canadian beer market in North America, second only to Molson, by 1995, Labatt also had diversified into businesses unrelated to the brewing industry. At the time of Schwartz's attempted takeover, Labatt owned The Sports Network, Le Reseau des Sports, an 80 percent interest in The Discovery Network, a 42 percent interest in Toronto's SkyDome, and a 90 percent stake in the Toronto Blue Jays baseball team.

Unwilling to join the Onex Corporation holdings, management at Labatt began looking for a "white knight" to foil the hostile takeover attempt. After meetings with a number of possible suitors, Labatt finally arranged a deal with Interbrew S.A., a Belgian-based brewery that had been attempting to break into the North American beer market for years. Interbrew cooked up a deal that amounted to $2.7 billion, successfully outbidding Onex Corporation for control of Labatt. After the acquisition was finalized, Interbrew began to sell off Labatt's nonbrewing operations, which had been the sole purpose of Schwartz's attempted takeover of the company.

Although Schwartz was frustrated in his attempt to acquire Labatt, he continued to seek out undervalued companies for acquisition. Although committed to running his company from Canadian headquarters, he was reportedly increasingly interested in looking south toward the United States to expand his operations.

To appease the markets, many conglomerates shed companies to concentrate on core businesses. But Onex stayed the course. In September 1996, the company announced it was buying a controlling interest in a subsidiary of IBM Canada Ltd. Celestica Inc., a maker of electronic components for computer and telecommunications systems, had sales of about CAD 3 billion in 1995. Onex joined forces with Celestica management in the $700 million transaction, putting up $199 million for a 43 percent equity interest and voting control. Celestica's new circumstances put it in position to sell to competitors of IBM and thus broaden its customer base.

The stock market liked the move and drove up Onex's price per share. The company had spent more time than not trading at a level below its initial asking price. Despite the positive outlook, Onex's earnings were being dragged down by the continued integration of purchases by ProSource and Sky Chefs.

In 1997, Onex broadened its vehicle business with the acquisition of Trim Systems. Additional purchases in the interior components supply segment of the OEM heavy truck market were made the following year.

Celestica completed its initial public offering (IPO) in 1998. With a total value of $610 million, it was the largest offering by an electronics manufacturing services (EMS) company and the largest IPO by a technology company in Canadian history.

In another 1998 deal, Onex purchased Sofbank Services Group Inc., an American outsourced customer care and fulfillment company. Joining with Canadian contact center North Direct Response, Onex would form ClientLogic.

During 1999, Celestica expanded its capabilities in Europe and South America. With 18 acquisitions over three years and a spate of new global customers, Celestica was the fastest growing EMS provider in its industry. Onex purchased J.L. French Automotive Castings, a leading supplier of aluminum die-cast components to the automotive industry. In addition, Onex established MAGNATRAX as a growth platform, following the purchase of American Building Company, the third largest U.S. producer of metal building systems. At year end, Onex and several of Canada's largest pension funds and financial institutions joined together to form ONCAP, to support small- to mid-cap investments.

All in all, 1999 was a stellar year for growth. Revenues climbed 69 percent to $14.9 billion. Earnings were up 66 percent to $293.9 million. But it was a failed deal that planted the name Onex in the mind of the public. Schwartz bid $1.2 billion to take over and merge Canada's two national airlines--Air Canada and Canadian Airlines. The move was contentious, pulling the Canadian government into the row. Ultimately, the courts assisted Air Canada in blocking the Onex purchase.

New Challenges Arising: 2000-04

In order to sustain returns Schwartz had to up the ante dealwise. "Net of fees, Onex's annual returns on its 17 deals have averaged 35% over the past 15 years. That's double the average rate of all private equity outfits and better than KKRs," wrote Bernard Condon for Forbes in March 2000.

Onex differed from other buyout companies in some significant ways, such as reliance on public capital to fund deals and retention of purchased companies as a base for consolidation. Onex still held 47 percent of Sky Chefs 13 years after buying into the company. Over the nine years it held Dura Automotive, 13 car parts businesses had been added to the fold.

Moreover, ten top managers put their money where their mouths were when it came to investment. "They not only own 21% of Onex but must personally contribute up to 9% of whatever the company agrees to invest in deals. Each of them has been anteing up between two and six times his salary each year for years. So the grilling over proposed buyouts at Monday meetings at Onex's headquarters overlooking Lake Ontario occasionally turns fierce," wrote Condon.

Although the company remained headquartered in Canada, the majority of its revenues were generated elsewhere. Due to its nature, Onex had no true counterpart in Canada. Furthermore, since Onex purchased businesses in a number of industries, the competition shifted from deal to deal.

In April 2000, Onex withdrew a planned IPO of ClientLogic, citing market instability. Onex and the Ontario Municipal Employees Retirement System (OMERS) took part in a $105 million equity financing of the company in September. ClientLogic had 36 facilities in nine North American and European countries. Revenues for the customer management services provider had been growing from new business and through acquisitions, but the company's net in 2000 was hurt by infrastructure investment, particularly in Europe.

Other businesses needed some tweaking. In the building sector, MAGNATRAX was not getting expected results from its early 2000 acquisition of Jannock Limited. J.L. French's integration of Nelson Metal Products--an aluminum casting company purchased in late 1999--also failed to go as hoped.

The commercial vehicle sector was expanded with the addition of Bostrom, a leading North American and European producer of seat systems for heavy truck, bus, and worldwide construction and agricultural markets.

Celestica, though, set new earnings and revenue records in 2000. In addition, the acquisition of home meal replacement businesses boosted Sky Chefs' results. This helped Onex's revenues climb 65 percent to $24.5 billion, placing it among the largest Canadian companies. The company posted net earnings of $188 million, its second best on record.

Onex bought LeBlanc Ltd. and BMS Communications Services Ltd. in February 2001. Combined, the pair was the largest full-service provider of wireless infrastructure in Canada. Onex formed Radian Communication in the wake of the acquisitions.

Other deals in 2001 included the sale of Sky Chefs to Lufthansa--Onex sold Lufthansa 23.5 percent of the business in 1999 with a promise to sell the remainder before 2003. Onex achieved a compound annual return of 30 percent over its 16 years of ownership.

Troubled economies hurt some of Onex's business segments in 2001. North American car and light truck as well as building construction industries declined. The high-tech sector also was in trouble. Celestica's growth slid dramatically due to a steep decline in customer demand. In response, the company eliminated jobs and manufacturing plants and turned to low-cost regions for its new acquisitions.

During 2001, Onex prepared for an expansion in the entertainment industry. The company invested in the debt of and developed a restructuring plan for one of the largest owners of movie theaters in North America. Onex and partner Oaktree Capital completed the acquisition of Loews Cineplex following its emergence from bankruptcy in 2002. Onex and Oaktree also purchased a leading theater exhibition company in Mexico, engaged in a Spanish joint venture, and made theatrical purchases in South Korea and Michigan.

Although economic conditions dogged Onex businesses, the company Schwartz founded earned high marks. "Indeed, when it comes to smartly timed acquisitions, no other Canadian private equity player can hold a candle to Onex, which has made billions in a wide range of industries, including auto parts, airline catering, sugar and electronics, running companies such as Celestica, Sky Chefs and Lantic Sugar," wrote Thomas Watson for Canadian Business in May 2003.

Lantic Sugar was the largest sugar refiner and marketer in Canada. Onex entered the industry in 1997 with a $74 million investment in BC Sugar. As it had in other businesses it entered, Onex worked to build the value of the companies it bought. Thus, in the case of the sugar business, Onex poured in capital to cut production costs. The expansion and modernization of Lantic Sugar's Montreal refinery took more time and cost more than expected and disrupted production in 2000. During 2002, Lantic Sugar merged with Rogers Sugar and operated under Rogers Sugar Income Fund.

Onex moved into a new line of business in 2003. Maryland-based Magellan Health Services, market leader in behavioral managed healthcare, needed a bailout. Onex Partners LP, a new Onex fund, invested $101 million for approximately 24 percent ownership and controlling interest in the company. Magellan's 2002 revenue was approximately $2.8 billion. Customers included health plans, corporations, unions, and government agencies. Magellan offered administrative services, risk-based services, and employee assistance program services.

Other activity in 2003 included the merging of Loews Cineplex Group with another Onex entity, Galaxy Entertainment. Under a new income fund, the pair would account for 30 percent of Canada's box office revenues.

Onex exited two business areas in 2003, bringing in $230 million in earnings for discontinued operations. Of that, $66 million was from the sale of Rogers Sugar Income Fund trust units. A $164 million accounting gain came from the disposition of MAGNATRAX, which had gone into bankruptcy.

Onex posted a net loss of CAD 332 million for 2003, compared with a net loss of CAD 145 million in 2002. Revenues for the year were CAD 17 billion, down from CAD 21 billion the previous year. The decrease in revenues was primarily due to continuing weak demand for Celestica's products, but some areas of the automotive business also contributed to the declining numbers.

Principal Subsidiaries: Celestica Inc.; ClientLogic Corporation; Magellan Health Services, Inc.; Dura Automotive Systems, Inc.; J.L. French Automotive Castings, Inc.; Performance Logistics Group, Inc.; Bostrom Holdings, Inc.; Radian Communication Services Corporation; InsLogic Corporation; Loews Cineplex Entertainment Corporation.

Principal Competitors: Counsel Corporation; HEICO Corporation; Thomas H. Lee Co.

Onex Corporation History

Company Perspectives:

Key Dates:

Company History:

Further Reading: