Vector Group Ltd.

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Vector Group Ltd.

100 S.E. Second Street
32nd Floor
Miami, Florida 33131
U.S.A.
Telephone: (305) 579-8000
Fax: (305) 579-8001
Web site: http://www.brookegroup.com

Public Company
Incorporated: 1980 as Brooke Partners L.P.
Employees: 2,200
Sales: $567 million (1999)
Stock Exchanges: New York
Ticker Symbol: VGR
NAIC: 312221 Cigarette Manufacturing

Known through 1999 as the Brooke Group Ltd., Vector Group Ltd. is a holding company for a variety of companies, the most important being the Liggett Group Inc., the successor of the Liggett & Myers Tobacco Company. Liggett is the fifth largest manufacturer of cigarettes in the United States, producing the branded cigarette Eve, as well as the value-price brand Pyramid. Through its subsidiary Liggett-Ducat Ltd., the company also manufactures and markets cigarettes in Russia. In addition to its tobacco holdings, Vector Group also owns interests in an investment banking and brokerage business in the United States, real estate development businesses in the Russia; and various Internet and software-related companies. These are held through the company’s majority-owned subsidiary, New Valley Corporation.

Early 1980s: LeBow’s Turnaround Candidates

Brooke Partners L.P. was founded in 1980 by financier Bennett S. LeBow as an investment vehicle. Bennett bought troubled companies that he considered undervalued and attempted to turn them around. LeBow had studied engineering, worked as a computer analyst for the U.S. military, and formed his own computer company in 1967. He took that company, DSI Systems Inc., public in 1969, but then pushed too hard to expand and nearly bankrupted the company. After selling DSI in 1971 he became an advisor to high-tech companies, frequently investing in them as well.

LeBow formed Brooke Partners with the assistance of investment firm Drexel Burnham Lambert Inc., which owned 15 percent. Brooke sold one of its early investments, computer display maker Information Displays Inc., in 1984. In 1985 Brooke bought 54 percent of computer maker MAI Basic Four, which sold software and hardware to small companies in highly specific markets like the hotel business. MAI had been losing money. As it usually did, Brooke quickly sent in its own managers and advisors to cut expenses, pare down the firm’s staff, and put a new business strategy in place. MAI was soon making money again.

Brooke also bought the microfilm division of Bell & Howell Co. and Brigham’s Inc., an ice cream business. With its MAI success under its belt and a growing portfolio of companies, Brooke turned to a much bigger target; the Liggett Group, once one of the largest U.S. tobacco companies. At the time it was owned by British firm Metropolitan plc.

Mid-1980s: Liggett Acquisition

Liggett began as a manufacturer of snuff in Belleville, Illinois in 1822. In 1873 John Edmund Liggett, grandson of the firm’s founder, joined with George S. Myers to form Liggett & Myers, which began producing cigarettes. Liggett eventually produced L&M, Chesterfield, and Lark cigarettes, which were some of the best-known brands in the industry for several decades.

While the firm remained profitable, it made many mistakes over the years. In the 1950s, with the use of filters becoming widespread on cigarettes, Liggett put its money into Chesterfields, which were not filtered. The decision cost Liggett market share in ensuing years. The company also missed opportunities related to the marketing potential of packaging changes. When crush-proof, flip-top boxes were introduced, for example, Liggett ignored the innovation. Likewise, with the health risks of cigarettes increasingly on the public’s mind, competitors introduced low-tar cigarettes in 1967. Liggett did nothing as low-tar cigarettes became increasingly prevalent. Finally, in 1976, Liggett introduced Decade, its first low-tar cigarette, nearly ten years after the competition.

Meanwhile, Liggett was diversifying. It bought or created brands in the liquor market including Wild Turkey, a prestigious bourbon put out through its Austin, Nichols & Co. subsidiary. The firm also imported table wines and liqueurs like Campari aperitif from Italy. Its Paddington Corp. subsidiary imported J&B Scotch. Liggett also put out Alpo, the bestselling canned dog food in the United States. Due to the decline of Liggett’s tobacco profits, Alpo was one of the firm’s biggest profit makers. By the early 1970s the company’s president, Raymond J. Mulligan, had come from the Alpo division and had no background in the cigarette business. Liggett had profits of $80.4 million in 1973 on sales of $586 million.

Sales of Liggett’s premium brands of alcohol grew at an annual rate of 20 percent over the next five years. In 1978 the company gave up on international cigarette sales, spinning off its foreign cigarette business to Philip Morris for $108 million. Liggett nearly sold its domestic cigarette business too, but could not quite work out a deal. By 1979 cigarettes had shrunk to 20 percent of Liggett’s business, while wine and spirits accounted for 30 percent. The firm held only three percent of the cigarette market. Meanwhile, Alpo continued to grow and the company moved into the growing market for dry dog food. Liggett’s Diversified Products Corp. was pumping up sales as well, becoming the largest maker of barbells and other physical fitness equipment.

Liggett also bought two leading Pepsi Cola bottling companies; one in Fresno, California, and the other in Columbia, South Carolina. Meanwhile, it cut its advertising for cigarettes by 45 percent, causing many industry observers to believe that the company was preparing for the eventual demise of its cigarette business. The following year, however, Liggett introduced generic cigarettes. Considered a risky move because cigarette marketing was so dependant on brand names, it nevertheless proved a successful one. None of its larger rivals produced generic cigarettes, so Liggett captured the market for them.

Also in 1980, Liggett Group was bought by Grand Metropolitan Ltd., the London-based liquor and entertainment company, for $575 million after a long takeover battle. Grand Metropolitan had already owned 9.5 percent of Liggett, and Liggett had imported Grand Met’s J&B Scotch. Liggett initially opposed the purchase, and to dissuade Grand Met sold its Austin, Nichols subsidiary, which made the Wild Turkey bourbon Grand Met wanted to own, for $97.5 million.

With Grand Met, Liggett experienced some success with generic cigarettes over the next several years, but by 1984 larger rivals were challenging it. R.J. Reynolds began selling its Doral brand cigarettes at generic prices, for instance, while Brown & Williamson Tobacco Co. brought out a line of generic and private-label cigarettes. Liggett’s management had been considering buying the firm from Grand Met for $325 million, but when Liggett’s rivals brought out competing generic products, the group’s financing fell through.

Liggett’s sales and profits plummeted until it was bought by Brooke Partners in 1986 for $137 million. Brooke installed LeBow’s partner William Weksel as chairman. Not content with its move into tobacco, Brooke bought 53 percent of telecommunications firm Western Union Corp. in 1987. Founded in 1851, Western Union had once been a communications giant. But the advent of the telephone slowly strangled the firm. By the time Brooke assumed control, the telegraph accounted for less than ten percent of Western Union’s revenue. It made more money from its teletypewriter services, mailgrams, and money order service.

When the British shipbuilding concern that was building LeBow’s private yacht went bankrupt, Brooke bought it for less than $5 million. In 1988, moreover, Brooke proposed a buyout of American Brands. When that didn’t work, LeBow tried to persuade American Brands to buy the Liggett Group. That effort failed as well. In the meantime, Liggett introduced the Pyramid brand of low-cost cigarettes, which proved to be one of the most successful cigarette introductions of the 1980s. Then, in 1989, Brooke Partners started SkyBox International Inc., a sports trading card company.

1990: Corporate Restructuring

In 1990 the Liggett Group changed its name to Brooke Group Ltd. and announced it would emphasize its push to diversify into sports and entertainment products. Liggett already had a small football and basketball card business, and distributed chocolate mints made in Finland. The cards and candy used the same distribution channels used by the cigarette business. At about the same time, William Weksel resigned and LeBow was elected chair. Liggett’s 1989 sales of $572.9 million accounted for the lion’s share of Brooke Partners’ total sales, but smoking was under increasing legal pressure. So, Liggett changed its name to Brooke Group and split into two subsidiaries; Liggett Group Inc. managed the firm’s tobacco business, while Impel Marketing Inc. managed the group’s other activities. Impel specialized in the sales and marketing needed to broaden sales of sports and entertainment products.

Key Dates:

1980:: Bennett LeBow forms Brooke Partners L.P.
1986:: Brooke Partners acquires the Liggett Group.
1990:: Company restructures, changes its name to Brooke Group Ltd.
1993:: A group of shareholders file suit against LeBow.
1996:: Liggett becomes first tobacco company ever to settle health-related lawsuits.
1997:: LeBow testifies in court that cigarettes are addictive and dangerous to health.
1998:: Liggett sells three of its cigarette brands to Phillip Morris Inc.
2000:: Company changes its name to Vector Group Ltd.

Later in 1990, LeBow restructured his companies. Brooke Group became the parent of Brooke Partners, which was suffering from the heavy debt it acquired as the result of its many leveraged buyouts. As a result, Brooke Group (formerly Liggett Group) became responsible for Brooke Partners’ $300 million debt. The interest on the bonds paying for Brooke Partners’ acquisition of MAI and Western Union came to $45 million a year, severely limiting Brooke Group’s cash flow. Some investors were outraged. One portfolio manager told the Wall Street Journal that LeBow “took an equity investment and turned it into a junk bond.” The price of Brooke Group’s shares plummeted.

Brooke Group had been managed by a nominally independent company called Brooke Management Inc., which was owned by LeBow and whose sole client was Brooke Group. In 1991 Brooke Group paid Brooke Management $10.2 million for services and expenses. LeBow decided to fold Brooke Management into Brooke Group, and in 1992 Brooke Group paid LeBow $12 million for Brooke Management, a firm whose assets comprised the managerial expertise of LeBow and his associates. LeBow had not drawn a salary as president of Brooke Group, but he did after the buyout.

In 1992 Brooke Group took a charge to restructure MAI and SkyBox International, its sports and trading card subsidiary. SkyBox lost $80 million in 1991. Brooke Group lost $149.6 million in 1991 and $75.8 million in 1992. Furthermore, its English boat yard, renamed Brooke Yachts International Ltd., went under in 1992, leaving Brooke with a $4.8 million writeoff. Liggett’s sales were declining, meanwhile, partly because of a decision to place more emphasis on its full-price brands of cigarettes like Chesterfield, Eve, and L&M. Liggett’s cigarette market share had sunk to three percent from six percent since its 1986 takeover by Brooke.

Liggett named Edward Horrigan chairman and CEO in 1993. Horrigan, the former chairman of R.J. Reynolds Tobacco, said that Liggett would look again to the overseas market, try to hold market share of its branded cigarettes, and try to expand the market share of its discount cigarettes. At the same time, Philip Morris and RJR were announcing discounts on their leading brands, thus putting pressure on the discount cigarette market. Liggett restructured its headquarters and manufacturing operations in 1993. In 1994 it reduced its sales force by 150, using 300 part time sales people instead. It also cut employee benefits.

In 1993 the Western Union subsidiary (later renamed New Valley) entered Chapter 11 bankruptcy. One of its last remaining profit makers, its telex business, had gone sour as fax technology made it obsolete. Brooke fought with New Valley’s debt holders to keep control of New Valley’s one remaining profitable business; money transfer. With its U.S. operations in turmoil, Brooke sought to invest in the former Soviet Union. One venture, a joint venture with the Ducat tobacco company in Moscow, took years to produce a cigarette because of disagreements with the Russian government and other problems.

Fed up with the company’s problems, a group of shareholders filed suit against LeBow and four other Brooke officers alleging that they had enriched themselves at the expense of the company, which had been stripped of assets. Soon thereafter, the Wall Street Journal published an intensely critical article about Brooke Group in which it claimed that LeBow “has increasingly used the company as a kind of personal bank.” The shareholder suit was settled in 1994 after LeBow repaid much of the $20 million that the lawsuit alleged he owed the company. The settlement linked LeBow’s future salary to company performance, and required approval by outside directors of any transaction of more than $100,000 between Brooke Group and LeBow.

Despite Horrigan’s efforts, the cigarette market share of Liggett continued to decline, falling to 2.3 percent of the U.S. market in 1994; Liggett held .9 percent of the branded market and 5.4 percent of the discount market. Liggett also sold 750 million cigarettes in the Middle East and Eastern Europe, and produced over 300 combinations of brands, lengths, styles and packages. Overall, Brooke had profits of $110.1 million in 1994 on sales of $479.3 million.

In November 1994, New Valley was forced to sell its money transfer services as part of its Chapter 11 bankruptcy reorganization. After it emerged from bankruptcy in 1995, it bought a 28.2 percent interest in Brazilian airplane manufacturer Empresa Brasileira de Aeronautica, S.A., for $12.8 million. In March 1995, Brooke sold its remaining 15 percent stake in SkyBox International. The firm also purchased 6.4 percent of the ShowBiz Pizza Time chain, and Ladenburg Thalmann, a 119-year-old New York securities firm that cost it $26.8 million. By mid-1995 Brooke had improved enough for Business Week to conclude that LeBow was “finally paying attention to beefing up Brooke’s quarterly performance and bottom-line results.”

Late 1990s: Media Attention

In late 1995, LeBow teamed up with Carl Icahn—a former adversary who was known for corporate takeovers—to make a highly publicized effort to take over RJR Nabisco. After purchasing substantial amounts of Nabisco’s stock, the two men made repeated attempts to force the company to split into two parts: R.J. Reynolds Tobacco, which produced Winston and Camel brand cigarettes; and the Nabisco Brands division, which produced a variety of foods. Despite encountering some early support among RJR Nabisco shareholders, the would-be corporate raiders failed to effect their plan.

Brooke Group caught the media’s attention again in 1996 and 1997—as well as the ire of the tobacco industry. In 1996, LeBow agreed to settle several health-related lawsuits brought by smokers—a first for any cigarette manufacturers. This decision spelled trouble for other cigarette makers, depressing their stock prices and setting a precedent for future settlements and concessions. Again in 1997, LeBow enraged the tobacco industry by testifying in court, as part of another settlement agreement, that smoking was addictive and that it could lead to serious illness. He also agreed to turn over documents providing evidence of tobacco industry duplicity and fraud. LeBow’s admitted reasons for cooperating were practical rather than ethical; he merely wanted to avoid lengthy litigation and costly legal fees.

Subsequently, Liggett became the first domestic cigarette maker to place a warning on cigarette packages stating that, “Nicotine is addictive,” and to disclose all the ingredients of one of its cigarette brands.

In 1998, Brooke Group agreed to sell three of Liggett Group’s cigarette brands to Phillip Morris Inc. The sale of the three brands—L&M, Chesterfield, and Lark—generated $300 million in cash for the company. The agreement included only domestic rights; Phillip Morris already owned international rights to the three brands, which it had purchased in the late 1970s.

On May 24, 2000, the company changed its name to Vector Group Ltd. The following month, Vector announced that it was selling its Russian tobacco subsidiary, Liggett-Ducat Ltd., to Gallaher Group plc for $400 million. The company planned to use the proceeds to retire a portion of its debt.

What’s Ahead for Vector Group?

In 1999, a Florida jury found cigarette makers liable for conspiracy, fraud, and the illnesses of 500,000 or more smokers. Liggett, along with several other U.S. cigarette manufacturers, faced potentially massive punitive penalties related to this verdict. Such penalties, if severe enough, were highly likely to drive the company into liquidation. In addition, a substantial number of other individual lawsuits, class action suits, and third-party recovery actions were pending in which Liggett was named a defendant. The outcomes of these cases were likely to have a significant impact upon the company’s operations.

If this did not come to pass, it seemed likely that LeBow would continue to pilot his company through the murky and troubled waters of the tobacco industry. In a June 2000 interview with Reuters, LeBow said that he planned to stay in the cigarette business, even while cooperating with anti-tobacco lobbyists. He explained this seemingly contradictory stance by saying, “It’s very important that we stay in the business, that we be the maverick of the industry, so we can beat up on the rest of the industry and make them do the right thing.”