Sky Chefs mid-managers become millionaires

Fifteen years of overseeing carrot cutting and chicken trimming has turned into a lottery-scale win for managers of Sky Chefs Inc., the airline catering company sold last week by leveraged buyout firm Onex Corp.

Veteran kitchen supervisors -- the ones making sure jets take off with fresh buns and crisp salads -- got $3-million.

The widow of a Sky Chefs vice-president who died of cancer last year at age 50 just received $6-million.

The company's top 25 executives averaged $10.9-million each, with the biggest payday clocking in at more than $60-million.

Onex bought Sky Chefs in 1986, when it was a one-customer company with $200-million in annual sales, and promptly offered 30 senior executives a chance to share in ownership.

As Sky Chefs took off, so did the number of employees who were shareholders.

The scheme was pushed down the ranks, so wage slaves such as shift supervisors and kitchen managers could buy in.

When Onex sold the company last week to Deutsche Lufthansa AG, Sky Chefs was selling $2.6-billion worth of meals a year, and 299 managers owned stakes in their company, which employs a total of 33,000 people.

Lufthansa handed Onex $1.8-billion for Sky Chefs. Then the German airline cut $403-million worth of cheques to those 299 managers, an average of $1.34-million each.

Sky Chefs made multimillionaires out of middle managers.

Two weeks ago, Onex chairman and chief executive officer Gerald Schwartz was at Los Angeles airport, and one of those middle managers took him aside.

"One of our kitchen managers, his name is Charlie, made a point of telling me how grateful he was to have been able to own a bit of Sky Chefs," Mr. Schwartz said. "Charlie said it changed his life, that there was no other way a guy like him could have ever achieved financial independence."

"There's a Winnipeg socialist in me who took huge satisfaction from what this company has meant to people's lives," said Mr. Schwartz, a Manitoba native who now sits among the continent's capitalist elite.

But the CEO quickly added that having managers who own stock, rather than just stock options, helps attract top talent and build a culture that worships shareholder value.

"Employee ownership was the only reason I came over," said Pat Tolbert, recruited to Atlanta-based Sky Chefs in 1991 as its chief financial officer after executive stints on a number of other leveraged buyouts, including Sara Lee Corp. He said: "Gerry's philosophy, which I agree with, is that nothing so focuses management as having their own cash on the table."

Mr. Tolbert says his original investment in Sky Chefs has increased 50-fold over the past decade; CEO Michael Kay came aboard at the same time, and he posted similar eye-popping results. But the real winners were folks who worked at Sky Chefs when Onex took over in 1986. Mr. Tolbert said: "Colleagues who were here from the start are up more than 200 times on their original investment."

At privately owned Sky Chefs, management had an opportunity to buy stock at book value -- public companies normally change hands at a premium to their book value. For every $3 of equity they bought, managers had to put up $1 themselves.

Onex then helped arrange a bank loan for the other $2. Annual bonus payments were structured in part to cover interest payments on the loan. Handed this incentive, Sky Chefs management underwent a fundamental change in attitude.

"In the early nineties, this wasn't a sophisticated management group, in that they didn't understand how operating decisions related to creating shareholder value," Mr. Tolbert said. "We were able to start talking about what our day-to-day decisions meant to the price of their shares, and the team got very sophisticated."

The Sky Chef's team took a company that was entirely dependent on servicing U.S. flights for American Airlines and forged ties to 230 airlines, which they served from 138 flight kitchens in 29 countries. As part of three major acquisitions, Sky Chefs also branched into making simple meals for grocery and convenience stores -- it puts sandwiches on shelves at the 7-11 chain.

"What makes Onex different from most buyout firms is its long time horizon," Mr. Tolbert said. "Most buyout firms are structured to be in and out within about five years. Onex backed us for 16 years, which meant they realized on the creation of much more value."

Compensation experts say what Sky Chefs did is somewhat unusual, but effective.

"Manufacturing companies tend to make less use of employee ownership than sectors such as high tech or banking," said Bonnie Flatt, a principal in William M. Mercer Ltd. in Toronto. She added that most companies prefer share options to having employees take out loans to buy equity.

"Having said that, if old-line manufacturing companies come up with plans that are well designed and communicated, they tend to enjoy enormous support," Ms. Flatt said. "There's usually a strong desire among employees to align themselves with the company through stock ownership."

While Sky Chefs and its wealthy executives are now part of Lufthansa, the Onex stable still features more than a dozen companies with more than 60,000 employees. All these companies feature share ownership -- at publicly traded computer parts maker Celestica Inc., 1,200 employees hold a stake. There are lots of potential millionaires still in the management ranks.