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Wendel Under Fire

The credit crisis exposes the French dynasty to risky leverage and family dissidence.

As patriarch of a family business dynasty that dates back to the days of Louis XIV, Baron Ernest-Antoine Seillière de Laborde knows a thing or two about survival. The Wendel family, which pioneered iron making in the lush valleys of Lorraine in the 1700s, fled France during the revolution of 1789 only to return a generation later and rebuild the business into a European leader in iron and, eventually, steel. Two centuries later in the 1980s, Seillière showed tremendous agility when, after the government nationalized the steel business — the foundation of industry giant ArcelorMittal — he used the family fortune to assemble a technology-based investment firm, now known simply as Wendel.

Today, Seillière, Wendel’s chairman, once again finds himself at a historical crossroads, with the family’s fortune — and its very unity — on the line. When the tech bubble collapsed, denting Wendel’s worth at the start of this decade, Seillière and his protégé, CEO Jean-Bernard Lafonta, borrowed heavily to make a series of bold investments and once more reinvent the company. Wendel teamed up with Kohlberg Kravis Roberts & Co. on the €3.6 billion (then worth $3.5 billion) leveraged buyout of electrical equipment maker Legrand in 2002; late last year the firm turned activist, buying a 21.5 percent stake in French building materials maker Saint-Gobain and pressing for steps to boost returns. But Wendel has been stymied in its attempts to influence Saint-Gobain, and now, worrisomely, the global credit crisis has shredded the value of Wendel’s investments and left the firm looking dangerously overleveraged. Standard & Poor’s last month downgraded Wendel to junk status, dropping it one notch, to BB+, citing its high debt-to-net-asset-value ratio of more than 40 percent. Analysts estimate that Wendel has had to post an additional €1.5 billion ($1.9 billion) in cash and shares as collateral with lenders in recent months because Saint-Gobain’s share price has plummeted 53 percent this year. Wendel announced at the end of August that the “theoretical maximum level of margin calls” it could face was €1.3 billion. Suddenly, some analysts are questioning whether the storied group can survive.

The company needs to reduce its debt levels “as soon as possible,” says Andreas Kindahl, a credit analyst at S&P in Stockholm. The worst-case scenario for the group, he adds, “is that its assets fall below the value of its debt, which would make it hard for the company to continue operating.”

Lafonta insists that the debt downgrade hasn’t put Wendel in peril. The company had €1.6 billion in cash at the end of August and €3 billion of shares, excluding Saint-Gobain; most of its debts come due between 2011 and 2017. “We have self-financed acquisitions worth €3.8 billion over the past six years with €4.1 billion of asset sales,” Lafonta tells Institutional Investor. “We intend to continue to follow the same business model going forward.”

Some of Wendel’s longtime supporters are critical of its recent moves, though. “They got heady after the credit boom,” says Jean-Marie Eveillard, co–chief investment officer of New York–based asset manager Arnhold and S. Bleichroeder Advisers, one of Wendel’s biggest shareholders, with a stake of between 7 and 8 percent. Eveillard says he tried in vain to stop Lafonta from building the Saint-Gobain stake last year. “Like many CEOs, he did not believe those were dangerous times.”

Michel David-Weill, the chairman of private equity group Eurazeo and former Lazard chairman who has been a friend of Seillière’s since childhood, also finds fault with Wendel’s reliance on debt. “Ernest-Antoine has done a wonderful job,” he tells II. “The only thing that has gone wrong is the overleveraging. Unhappily, you only need to be overconfident once and it’s too much.”

Lafonta, a former investment banker, dismisses the attacks, telling II, “It’s easy to be clever after the event.” He defends the Saint-Gobain purchase, stressing that Wendel is a long-term investor.

Yet the sharpest criticism of Seillière’s strategy comes not from outside investors and analysts but from within his own family. Sophie Boegner, a distant cousin and member of the Curel clan, one of three branches of the Wendel family, is a shareholder and former board member of Société Lorraine de Participations Sidérurgiques, or SLPS, the Paris-based family holding company that is Wendel’s biggest shareholder, with a 33.6 percent stake. She is contesting the terms of a complex deal last year that allowed top Wendel management, including Seillière and Lafonta, to buy a 5.0 percent stake in the company at a discount. The Paris public prosecutor dismissed her original criminal complaint in September, but Boegner has since filed a similar complaint with a Paris investigating magistrate, alleging that the share sale was unfair to other shareholders.

“I want the financial interests of the company to be protected,” says Boegner, 56, a project manager in the property division of the Ministry of Defense. If management is found guilty of wrongdoing, she adds “they should suffer the consequences” and be dismissed. The impact of the credit crisis on Wendel also concerns her. “We are in a very worrying situation, and we have no information about the real dangers,” Boegner says. With pressure mounting, SLPS has called a meeting of the family shareholders on December 3.

The attack has clearly put Seillière, 70, on the defensive. He resigned as chairman of SLPS last month and turned the post over to François de Wendel, a member of Wendel’s supervisory board. But he insists that the firm’s compensation plan and strategy are sound. Boegner, who was voted off the SLPS board by family shareholders in June, is “totally isolated, totally malicious and totally wrong,” he says, and has “a lack of understanding about the business world.” With clear irritation he adds, “This is a family affair that should have stayed within the family.”

Seillière, Lafonta and the firm’s’s executive managing director, Bernard Gautier, are countersuing Boegner for libel, seeking €6 million in damages. The case is to be heard in a Paris court later this month. “We can’t accept people saying things about us that are not true,” says Lafonta, 46.

Boegner, who with her husband and two sons owns about 6,000 shares in the privately held SLPS worth about €3.2 million last month, down from €5.4 million in November 2007, makes it clear that she’s determined to prevail. “They are trying to destabilize me,” she tells II. “But Seillière has underestimated my willingness to fight.”

The soured investments and the family feud have taken a heavy toll on Wendel. It had used leverage to grow rapidly — by last year it had become Europe’s second-largest listed investment company, behind Sweden’s Investor. Wendel’s share price grew more than fourfold from the start of 2004 to a peak of €145.25 in July 2007, giving it a market capitalization of €7 billion.

“It was a huge change of culture for us,” recalls Seillière during an interview in Wendel’s stylish offices in a 19th-century town house in central Paris, near the Gare Saint-Lazare train station. “We took on lots of debts and big risks — the results were staggering.”

Most of Wendel’s portfolio companies performed well through the first half of this year, and the firm reported a 31 percent rise in net income for the period, to €238 million. But the rout on global stock markets has hammered the value of most of the investments and, consequently, Wendel’s stock. The plunge in Saint-Gobain’s stock price has given Wendel a paper loss of €3 billion on its 21.5 percent stake, which it paid €5.5 billion to acquire between September 2007 and April. Wendel’s stock was trading at €39.46 early this month, down 72.8 percent from its peak level; the shares traded as low as €26.50 in late October. Seillière acknowledges the difficulties but insists, “Wendel is solid in an exceptionally difficult economic environment.”

Activist investors are increasingly common in the corporate world, but it’s rare for an investor in an activist fund to turn activist against the fund’s own managers. That’s especially true for a tight-knit dynasty like Wendel, where the 950 family shareholders have rarely said much in public about the firm’s management. “Uncle” Seillière, as the Wendel patriarch is known to the younger members of the family, enjoyed “unanimous support,” says Baron Nicolas de Schonen, head of Parisian stock market news service Cercle Finance, who now supports Boegner. “We trusted him totally.”

Seillière still enjoys the backing of most family members. “I regret that Sophie has made these baseless accusations,” says Josselin de Rohan, a 70-year-old senator from President Nicolas Sarkozy’s Union for Popular Movement party and chairman of the Senate foreign affairs committee, who is married to Boegner’s sister, Antoinette. Boegner’s complaint, he says, “has divided a family that used to be very united.”

The confrontation at Wendel is emblematic of a broader malaise among activist investors, who make big bets on individual companies and press for measures to improve shareholder returns. With stock markets plummeting, many activists are struggling to make their investments pay off. Pardus Capital Management, a New York–based hedge fund with about $2 billion in assets, closed all five funds in its Pardus Special Opportunities Fund to investor withdrawals in March. The Pardus fund had targeted French car parts maker Valeo and software services group Atos Origin, whose shares have fallen 48 percent and 42 percent, respectively, since the end of 2007. “There is so much juice in our book,” says Karim Samii, the founder and president of Pardus. “The share prices of these companies are very unfortunate.”

Christopher Hohn’s $15 billion the Children’s Investment Fund Management (UK) reportedly fell by just over 15 percent in September, leaving it down about 25 percent since the start of the year. A spokesman for TCI declined to comment.

The hunters are now the hunted. Just as Wendel is challenging Saint-Gobain’s management, which could benefit other investors if it raises the group’s performance, so Boegner is asking tough questions of Wendel “that could concern other shareholders,” says Colette Neuville, head of the shareholders’ group Association pour la Défense des Actionnaires Minoritaires in Chartres.

Although Seillière stepped down as chairman of SLPS, it remains to be seen if that move will prompt a change in strategy at Wendel, where he remains chairman. His successor at SLPS, François de Wendel, has shown nothing but support for him publicly. “Ernest-Antoine’s honor is our honor,” de Wendel told family shareholders at their annual general meeting in June.

Jean-Martin Wendel founded his family’s industrial dynasty in 1704, when he acquired the Hayange iron forges in Lorraine in northeastern France. The business prospered by introducing in France such inventions as coke smelting, blast furnaces and rolling mills, and it became a supplier of bullets to the Sun King’s regime. The family fled during the revolution in 1789, leaving the business to be auctioned by the state. In 1815, François de Wendel, the great-grandson of Jean-Martin and great-great-great-grandfather of Seillière, took the family back into French industry with the acquisition of the Moyeuvre iron forge in Lorraine.

The business, which shifted to steel late in the 19th century, survived annexation by Germany in 1870 and the deprivations of two world wars, then merged with other producers to become a European leader in the 1950s and ’60s under the name Société des Aciéries de Lorraine, or Sacilor. Demand for steel collapsed following the first oil crisis in 1973, and three years later, when Seillière joined as head of industrial policy, Sacilor was deep in the red. In 1978 the conservative government of then–prime minister Raymond Barre transformed state loans to the steel industry into equity, thereby gaining 90 percent control of Sacilor; it later squeezed out the remaining 10 percent without paying any compensation to the Wendels. “The family did not get a penny of indemnity,” says Seillière. The government merged the Wendel business with rival Usinor to create Usinor-Sacilor, then privatized the business in 1995. After acquiring producers in Luxembourg and Spain to become Arcelor, the business was bought out by India’s Mittal family in 2006 to create Luxembourg-based ArcelorMittal, the world’s largest steelmaker.

The Wendel dynasty today consists of three clans: the Wendels, of which Seillière is a member, the Curels and the Gargans. At family shareholder meetings, members of the three branches are identified by badges with their names and the Wendel coat of arms — red for Wendel, blue for Curel and green for Gargan.

The family has long played a high-profile role in politics as well as business. Prominent members today include Yves Guéna, a famed resistance fighter close to Charles de Gaulle and former head of France’s constitutional council, and Françoise de Panafieu, a National Assembly deputy and this year’s failed UMP candidate for mayor of Paris.

The son of Jean Seillière de Laborde and Renée de Wendel, the great-great-granddaughter of François de Wendel, who restored the family business in the early 19th century, Ernest-Antoine Seillière grew up in his parents’ sumptuous town house across the Seine from the Eiffel Tower and spent summers at his grandparents’ home of Château de Brouchetière in the town of Joeuf, overlooking the family’s iron mines and steel factories in the Orne valley. Tall with thick swept-back hair, he combines the elegance and easy manners of a French aristocrat with the straight-talking style of a man who has run the show for three decades.

He avoided the family business at first. After graduating from France’s elite Ecole Nationale d’Administration in 1965, Seillière worked as a diplomat on European affairs in Paris and Brussels and then served as a top foreign affairs adviser to then–prime minister Jacques Chaban-Delmas in the late 1960s and early ’70s. After a stint lecturing on European integration at Harvard University in 1975, he joined Wendel in 1976. When most of the group was nationalized two years later, Seillière worked with his uncle, Count Pierre Celier, to reshape the holding company as an investment firm. “I had to prepare the future with leftovers,” he recalls.

He renamed the holding company Générale d’Industrie et de Participations and sold most of the 20-odd companies remaining in the portfolio, ranging from a pots and pans maker to a packaging group. On the advice of Lazard’s David-Weill, he aimed to “do little and big.”

In 1983, Seillière made his first major bet — a shrewd one, as it turned out — paying Ff215 million ($28 million) for 34 percent of the young computer services and consulting outfit Cap Gemini Sogeti, now Capgemini. The company expanded rapidly, growing from sales of $179 million in 1984 to $7.5 billion in 2001. Seillière also merged Wendel’s packaging group Carnaud with the U.K.’s Metal Box to form Europe’s biggest packaging company, Carnaud Metalbox, in 1988. Crown Cork & Seal Co., the U.S. packaging company now known as Crown Holdings, bought the business in 1995 for $5.2 billion.

Meanwhile, the ambitious family leader was also forging a career in public life. As head of Medef, the French employers’ association, from 1997 to 2005, Seillière earned a reputation as an aggressive defender of industry. He fought unsuccessfully against the imposition of the 35-hour workweek by the Socialist government of then–prime minister Lionel Jospin in the late 1990s, famously staging a mass rally of 30,000 corporate executives in Paris.

By 2001, Seillière felt he was battling on too many fronts. Shares in Capgemini slumped after the technology bubble burst; car parts maker Valeo, in which Seillière purchased a stake in 1996, also saw its stock tumble. And the upstart French airlines AOM and Air Liberté went bankrupt in 2001, two years after Seillière invested in them. Wendel’s shares plummeted from a high of an adjusted €56.75 in January 2000 to €16.46 in October 2002.

Searching for fresh talent to restore the group’s luster, Seillière went outside the family and tapped Lafonta, then head of the online business of French bank BNP Paribas. Lafonta, whose parents were both engineers, was born in the wealthy Parisian suburb of Neuilly-sur-Seine. He studied engineering at the Ecole Polytechnique and obtained a postgraduate degree in the field from the prestigious Ecole des Mines. He then entered the civil service in the Industry Ministry, serving as an adviser on the Ff2 billion ($355 million) recapitalization of Air France in 1991 and later advising then–Environment minister Ségolène Royale, who ran as the Socialist presidential candidate against Sarkozy last year.

In 1993, Lafonta joined Lazard as a mergers and acquisitions banker. The following year he capitalized on his civil service background to advise the government on a fresh Ff20 billion recapitalization and restructuring of Air France.

In 1996 the CEO of Banque Nationale de Paris, Michel Pébereau, hired Lafonta as head of strategy and then made him head of capital markets. After the merger between BNP and Paribas in 1999, Lafonta became head of Banque Directe, the bank’s online venture, which is now part of French insurance group AXA.

Lafonta started as deputy managing director of Compagnie Générale d’Industrie et des Participations on September 11, 2001, when terrorist attacks in New York and Washington rocked financial markets. He says Seillière gave him carte blanche to boost returns. “It was an opportunity to build something within a group where everything was possible,” says Lafonta, a keen chess player. In one of his first moves he replaced his five-member senior management team, all of whom were close to retirement age, with a group of under-45-year-olds such as Gautier, a former partner at venture capital firm Atlas Venture.

Lafonta set about ridding his portfolio of loss-making minority holdings in groups like Capgemini and Valeo, in which Wendel had limited influence. Instead, he and Seillière moved the firm into private equity and leveraged investing. “Our strength is to be long-term investors,” Lafonta says. In June 2002, Seillière utilized his friendship with Henry Kravis to join forces with KKR and buy Legrand from Schneider Electric for €3.6 billion; Wendel took a 37.5 percent stake. In 2004, Lafonta bought publishing group Editis for €600 million; Wendel sold the business to Spanish publisher Planeta earlier this year, booking a net gain of €500 million.

After taking over from Seillière as chairman of the executive board in 2005, the initial nonfamily member to hold the post, Lafonta spearheaded Wendel’s forays outside France, buying 89 percent of U.S. speciality connectors group Deutsch for €300 million in 2006 and taking a 48 percent stake in Dutch specialty chemicals group Stahl and 8 percent of Dutch waste management outfit AVR Global. Wendel profited from booming private equity markets in Europe and the U.S., which pushed its net asset value per share from €45 in December 2003 to €130 in December 2007. With private-equity-style investing came private-equity-style incentive schemes, like the 2007 payout contested by Boegner.

Both Lafonta and Seillière deny any wrongdoing. “Management bought options,” says Lafonta. In June, Jean-Marc Janodet, the chairman of Wendel’s audit committee, estimated the value of the share package at close to €150 million; Boegner puts it at €324 million. Lafonta was reported as the biggest participant in the share scheme, followed by Seillière. Wendel did not disclose how many shares the two executives had acquired individually.

“It was an incentive program but no free lunch,” Lafonta asserts, stressing that 15 top managers paid €83 million to acquire 5 percent of Wendel’s share capital at a price fixed in 2004. They paid about €29 a share on average, he notes.

Still, some shareholders find the sums hard to swallow. “This is a family business, which means taking a long-term view,” says family shareholder de Schonen. “Lafonta is a banker who wants to make money quickly.” Arnaud de Louvencourt, another family member, adds, “We are beginning to understand that the model of a highly leveraged fund is not sustainable.”

The Legrand acquisition is a success by many measures and shows the kind of changes Lafonta likes to make. The company has moved 54 percent of production to low-cost countries and doubled its product range to 100; new products accounted for 38 percent of the group’s €4.1 billion in sales last year. Sales in emerging markets have grown to about 25 percent of revenue. Net profits rose 66 percent, to €423 million, in 2007.

By contrast, the investment in Saint-Gobain, the world’s largest maker of building materials by sales, has been a big drain. The company’s chairman, Jean-Louis Beffa, has put up stiff resistance to its new activist investor. A heavyweight in corporate France, Beffa is often referred to as “the pope” of French industry; he served as CEO of the company for more than two decades before moving up to the chairman’s post in June 2007. Beffa resisted Lafonta’s calls for board seats for months, giving way in June only after Wendel agreed on a governance contract pledging to support Saint-Gobain’s strategy.

“A single shareholder cannot control a listed company even if it holds, as is the case for Wendel, a significant stake in the company,” Beffa said at Saint-Gobain’s annual general meeting in June.

Wendel won two seats on the 16-member board and the promise of a third in June 2009, but Seillière will have to battle to fulfill his objective of “having a say in the strategy, finances and management” of Saint-Gobain.

The company more than doubled earnings in the first half of this year, to €1.1 billion, and sales were up 2.5 percent in the first nine months of the year, but fears that the global economic slowdown will hurt business have sent its stock price — and the value of Wendel’s investment — plummeting. As if that wasn’t bad enough, the Autorité des Marchés Financiers, the stock market regulator, is investigating whether Wendel violated disclosure rules in building its stake, which could lead to a hefty fine. An AMF spokeswoman declined to comment on the status of the investigation.

Lafonta defends the investment, saying Saint-Gobain has “significant potential” to improve its performance. He’s betting on growth in energy-saving products, such as insulation, which generate for about 40 percent of profits, as well as expansion in emerging markets and Asia, which together accounted for 15 percent of sales last year. He also sees potential for more cost-cutting; Saint-Gobain has already announced plans to lower costs by €435 million by slashing 6,000 of its 210,000 jobs, mostly in the U.S., the U.K. and Spain.

In the short term it’s unlikely Saint-Gobain’s shares will come to Wendel’s rescue. In July, CEO Pierre-André de Chalendar admitted his profit target for 2010 depended on a “big turnaround” in the U.S., where one in every five homes has Saint-Gobain insulation.

Wendel borrowed €4.4 billion to finance its Saint-Gobain stake, and the credit crunch has left the firm stretched thin. In the middle of last month, Wendel’s loan-to-value ratio was “much higher” than 40 percent, says S&P credit analyst Kindahl, making it by far the most highly leveraged of the eight or so investment holding groups in Europe rated by Standard & Poor’s. Sweden’s Investor, for example, has a net cash position.

Lafonta insists that Wendel’s finances are strong enough to ride out the crisis. And he still enjoys the confidence of the Wendel and SLPS boards. “In challenging circumstances, we are totally supportive of him and the management team,” says Seillière. Now Lafonta will have to find ways to ensure nervous investors, including family members, keep faith.