Valhi, Inc.

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Valhi, Inc.

Three Lincoln Centre
5430 LBJ Freeway
Suite 1700
Dallas, Texas 75240-2697
U.S.A.
(972) 233-1700
Fax: (972) 385-0586

Public Subsidiary of Contran
Corporation Incorporated: 1932
Employees: 7,950
Sales: $1.1 billion (1996)
Stock Exchanges: New York
SICs: 2063 Beet Sugar; 2493 Reconstituted Wood Products; 3429 Hardware, Not Elsewhere Classified; 5812 Eating Places

Valhi, Inc. is one of the least known, but most successful, multinational conglomerates located in the United States. With just less than 8,000 employees, the company has continuing operations in four primary businesses, including component products, chemicals, hazardous waste management, and fast food. Valhi’s four operating subsidiaries include: CompX Inter-national, Inc., one of the leading American manufacturers of ergonomic office workstation supplies and components, precision ball bearing drawer slides, and mechanical locks; NL Industries, Inc., ranked the fourth largest producer of titanium dioxide pigments in the world in 1996, with a reported 11 percent share of the worldwide sales volume of titanium dioxide pigments; Sybra, Inc. (which spells “Arby’s” backwards), a franchisee of more than 150 Arby’s restaurants in Florida, Texas, Pennsylvania, and Michigan; and Waste Control Specialists LLC, one of the fastest growing firms in the processing, treatment, storage, and disposal of hazardous waste materials in the United States.

Early History

Valhi, Inc. was a sleepy agricultural company with land holdings in California and Louisiana and sales totaling $21 million per year before it was transformed by Harold Clark Simmons into one of the most successful conglomerates within the United States. Simmons is one of those few people who knows how to read a financial report; in 1974 he skillfully negotiated the purchase of Valhi for approximately $8 million, although the assets turned out to be worth more than $100 million. With the purchase of Valhi, Simmons was on his way to becoming a billionaire.

Born in Golden, Texas, about 80 miles east of Dallas, Harold Simmons was raised by his schoolteacher parents in the midst of the Great Depression. Hardened by his experiences on the edge of the notorious dustbowls of the 1930s, Simmons was determined to make his fortune in the world. A lackadaisical student, yet with a photographic memory, he graduated from the University of Texas at Austin with a Bachelor’s degree and Master’s degree in Economics, and with his Phi Beta Kappa key dangling around his finger.

Following his graduation, Simmons first worked with the FDIC, and later with the Republic National Bank. The young man was less than ingratiating toward his superiors, however, and conflict arose with his boss at Republic National Bank. When Simmons suddenly quit his job, his wife was so distressed that he had thrown away a stable and lucrative future that she moved out of their home and left him with their two young daughters. Not knowing what to do, on a whim he gathered $5,000 of his own money and, with a note for $95,000, he purchased the University Pharmacy located directly across the way from Southern Methodist University.

While he managed the store and flipped burgers, Simmons also found time to read about James Ling, the force behind the famous conglomerate LTV. Impressed with the acquisition strategy that Ling had implemented to make LTV into the giant that it was, Simmons began to copy Ling’s modus operandi. His first purchase was a 100 percent leveraged buyout for seven drugstores in Waco, Texas, soon followed by the acquisition of 30 more stores in Houston, and another 11 in eastern rural Texas. By the time the 1960s had come to a close, Simmons was managing the equivalent of a Texas oil well.

The Making of a Conglomerate

In 1973, Simmons sold all of his holdings for approximately $50 million to the Jack Eckerd Corporation. With his money, the ambitious but rather careless millionaire began to speculate in the financial services industry. In 1974, Simmons was indicted for mail and securities fraud in relation to one of the insurance companies he had purchased during this time. Al-though he was found not guilty by the judge, most of his money had been eaten up by court costs or spent in lavish living. As a result, his second wife also left him and, once again, he had two more daughters to take care of. Fortunately, he had learned his lessons well and retained just enough confidence to win control over Valhi, Inc.

After purchasing Valhi in 1974, Simmons established his own holding company, Contran Corporation, which controlled all Valhi’s stock, and then began using Valhi to purchase companies. Soon he had the beginnings of a conglomerate. In 1982, he purchased Keystone Consolidated Industries, Inc. for the bargain price of $25 million. Keystone, a Dallas-based manufacturer of steel, wire, and hardware, was plagued with manufacturing cost overruns, labor problems, and disposing of hazardous waste materials. Simmons kept the management of Keystone, but implemented strict cost-cutting measures. Ever the business iconoclast, he also had no qualms about using approximately $15 million of Keystone’s employee pension fund in his takeover bid for Amalgamated Sugar Company. Amalgamated Sugar, based in Utah, was a refiner and marketer of sugar and, most important to Simmons, had undervalued assets including $100 million in cash. Although Simmons had violated pension fund regulations and was required by the State Court of Utah to sell the Amalgamated shares owned by the fund, he remained undeterred and bought Amalgamated Sugar for $35 million worth of his own money.

The next major acquisition was NL Industries, a mismanaged firm with oil services and a titanium dioxide business worth more than $2 billion in sales annually. To prevent Simmons’s takeover, management at NL Industries devised a poison pill defense that would dilute the shareholders’ equity significantly if Simmons attacked and began buying stock. After studying the situation for approximately one-half hour, Simmons concluded that the poison pill of NL Industries was illegal and began buying the company’s stock. When a federal judge agreed with Simmons that the poison pill was indeed illegal, Simmons rushed to buy the company the very same day. Upon conclusion of the purchase agreement, Simmons immediately split up the company into Baroid, an oilfield services operation, and NL Industries, Inc., a chemical company.

Although most corporate raiders like Simmons purchased companies for the specific reason of selling off their operating divisions at a higher cost than the value of the entire firm itself, thereby reaping a healthy and quick profit, Simmons himself was not a typical raider. In fact, when he purchased a company, he devoted a good deal of his time and energy into rehabilitating its operating divisions. After having acquired Keystone Consolidated Industries, it took him seven years to revitalize it. By 1989, Keystone had opened a brand new steel mill worth $50 million, which boosted profits to $12 million on sales of $306 million. The year before, Keystone had reported a $6 million loss on sales of $257 million. Amalgamated Sugar Company was no different. After a hostile and extremely acrimonious takeover battle for control of the company, Simmons turned about face and asked its management to continue on at the company. For nearly eight years he invested more and more money to buy new sugar-processing equipment. After having spent nearly $70 million, productivity increased by 40 percent. Perhaps what is most impressive is that, although sugar prices increased only four percent from 1983 to 1989, Amalgamated Sugar saw its operating income jump to $38 million, a fourfold increase during those same years.

The best example of how Simmons exhibited an uncanny ability to understand and act upon industry basics was his turnaround of NL Industries. After buying the company in 1986, its oilfield services reported a loss of $324 million that same year since its managers had failed to downsize operations during the oil bust. Simmons immediately reorganized it into an independent company, Baroid, sold four units in the oilfield services that were losing money, including a long-standing oilfield equipment rental business, discontinued perks such as private corporate jets for management travel, and refocused on strengthening the company’s main product of providing oilfield drilling fluids and measurement services. Finally, Simmons directed Baroid management to develop and introduce as quickly as possible new products to capitalize on the increased demand in horizontal drilling. In 1989, Baroid reported an unheralded increase of its operating income by 66 percent, to more than $30 million.

Simmons’s careful and highly methodical analysis of financial statements enabled him to stay far away from the disastrous state of affairs in the oil, real estate, and banking sectors in Texas during the 1980s. By the end of the decade, Valhi owned and operated seven extremely profitable businesses, including NL Industries, which was involved in chemicals production, Baroid, a provider of petroleum services, Amalgamated Sugar, a producer of refined sugar, Medford, Inc., a manufacturer of forest products, Medite Corporation, a fiberboard company, Sybra, a large fast food chain of restaurants, and its Hardware Division, a manufacturer of locks and various metal products. Total revenues for Valhi at the end of fiscal 1989 were reported at $2.2 billion. Simmons had made himself into a billionaire.

The 1990s and Beyond

At the beginning of the 1990s, the trend toward takeovers and leveraged buyouts within the corporate world seemed to have run its course. Junk bonds, one of the ways enormously priced leverage buyouts were arranged throughout the 1980s, had been discredited as a long-term viable business strategy. Unfortunately, Harold Simmons, a man who was at his best during the takeover years, turned ice cold as an investor just when he most needed to infuse Valhi share earnings with another promising acquisition. In fact, during 1991 and 1992, Simmons saw the value of his stock market holdings decline precipitously, to almost $1 billion in total value.

The one bright spot in his portfolio of companies was NL Industries, one of the country’s leaders in the manufacture of titanium dioxide, or TiO2, a specialty chemical used as a brightener in paints, paper, fibers, ceramics, and also on the surface of many consumer appliances. Demand for titanium dioxide was growing at a much faster rate than could be supplied, especially in America where consumers wanted their appliances to have a “clean look.” As demand continued to grow during the mid-1990s, NL Industries established its own subsidiary, Kronos, Inc., which constructed four new production facilities in Western Europe and one in Canada. By the end of 1995, Kronos had captured 18 percent of the total market share for titanium dioxide in Europe.

The success of NL Industries was not enough for Simmons, however, and in the mid-1990s he began to sell off companies he had previously purchased, to increase Valhi’s liquidity and thereby concentrate on new investment opportunities. The first company to go was Baroid, the oilfield services firm that never reached the level of profitability Simmons desired. Quick to follow was Medite Corporation and Medford, Inc. Selling the fiberboard and lumber companies for $240 million gave Simmons some of the capital to begin looking for new investments. Yet the amount still was not enough to acquire a high quality firm. Consequently, Simmons disposed of Amalgamated Sugar Company for approximately $200 million in a deal with Snake River Sugar Company, an Oregon-based agricultural co-operative.

Satisfied that he had some of the funds needed for new investments, Simmons created Waste Control Specialists in November of 1995, to enter the rapidly growing market for the processing, treatment, storage, and disposal of hazardous waste materials in Texas. Money was provided for the construction of a facility in west Texas, which accepted its first waste materials for disposal in the winter of 1997. In the spring of 1997, Waste Control Specialists applied for authorization to treat, store, and dispose of low-level radioactive waste materials. In addition to the promise of high revenues from Waste Control Specialists, Simmons also reaped rewards from CompX, his components products company, created out of Valhi’s Hardware Division. Having captured a well-defined niche market, CompX has grown into the largest supplier of ergonomic office workstation products in North America.

Simmons’s fascination with the fast food industry had also run its course by the beginning of 1997. Sybra operated more than 150 Arby’s restaurants over a four state area, including Michigan, Texas, Pennsylvania, and Florida. In fact, Sybra was the third biggest franchisee within Arby’s operational network. A niche segment in the fast food industry, Arby’s sells roast beef sandwiches, chicken sandwiches, and soft drinks. Yet sales increased only two percent from 1995 to 1996, primarily be-cause of the highly competitive nature of the fast food industry. As a result of this disappointing performance, Simmons decided to dispose of his Sybra holdings and sold part of it to ICH Corporation and the remainder to Restaurant Property Master for a total of $84.7 million.

Valhi, Inc. will continue to act as a holding company for Harold Simmons. Simmons seems to be leaning toward a re-structuring of Valhi’s operations, with selloffs of companies that he has owned for years, and possible replacement firms undergoing intense financial scrutiny. Whether Simmons can keep the magic touch he had during the heyday of the takeover years and lead Valhi back to the preeminence it had during the 1980s still remains to be seen.