Ralston Purina: A Public LBO by Broyhill , below are some excerpts on Bill Stiritz and the story of a company he turned around
In our last post, we highlighted a few lessons from Thorndike’s Capital Surgeons. With this sound advice in mind, we’ll take a closer look at one Outsider’s history of success before analyzing the platform he is constructing today.
Ralston Purina was a fairly typical packaged food company during the 1970s. Led by CEO Hal Dean, the company invested mountains of cash flow into a jumbled collection of operating businesses until Dean’s retirement in 1980.
The stock hadn’t budged in a decade, when Bill Stiritz earned the top job by providing the board with a detailed strategy for the company. He wasted little time in implementing his plan, restructuring the company by divesting less profitable businesses, and positioning Ralston as a focused branded products company.
Stiritz only pursued opportunities that presented compelling returns under conservative assumptions and he disdained the false precision of detailed financial models (so do we). “I really only cared about the key assumptions going into the model. First, I wanted to know about the underlying trends in the market: its growth and competitive dynamics.” The approach featured a single sheet of paper and an intense scrutiny on only the most important variables, not a laundry list of projections.
Stiritz leveraged (no pun intended) a private equity mindset. He appreciated that businesses with highly predictable cash flows could employ debt to enhance returns. As such, Ralston consistently maintained industry-high debt ratios. He financed two large acquisitions in the 1980s by taking on debt totaling 30% of the company’s value before making his largest purchase ever, buying Energizer from a motivated seller.
In 1981, it would have been impossible to predict the transformation Bill Stiritz would achieve at Ralston or the remarkable impact he would have on the company’s shares. Pretax margins grew from 9% to 15% and ROE more than doubled under his stewardship. When combined with a shrinking share base, this produced exceptional growth in earnings per share. A dollar invested with Stiritz when he stepped into the driver’s seat at Ralston was worth $57 nineteen years later.
Full article via Broyhill