Are Les Schwab and Meritage a Good Fit?

Les Schwab Tire Centers is one of the most iconic Northwest based companies, driven by Les’ absolute long term commitment to his employees.

Central Oregon residents hope Les Schwab Tires to stay the same | Business  | bendbulletin.com

Les was kind to me since he worked with my father, who represented one of his major vendors, for more than 40 years. Growing up I probably visited 50 Les Schwab stores and met Norm Nelson, Rudy, Phil Wick, Don Miller and most of the other key employees in Les Schwab’s history.

I’ve never met Les’ four grandchildren yet hope they get a chance to read this post and would be glad to offer a few thoughts on the proposed sale to Meritage.

The key question is whether Schwab’s current CEO Jack Cuniff, previously the CFO, has structured the deal for his and Meritage’s benefit or whether it is truly focused to benefit Les’ grandchildren and the employees. This is a valid question, especially given a hedge fund is a key advisor to its profit sharing plan, now stuffed with opaque partnerships.

So let’s begin by taking a closer look at this proposal by pulling back the curtain on Meritage. Meritage is not owned by Nat Simons, as reported by the Oregonian, but rather his father Jim Simons via a tax exempt Bermuda based family trust.

See ADV filing with the Securities and Exchange Commission below showing Meritage’s ownership structure. Note the “E” code for the Jim Simons family trust, whose tax ID is not a partnership EIN but rather his social security number xxx-xx-xxxx.

Jim Simons is the founder of the most high profile hedge fund, Renassaince Technologies whose primary bank is Deutsche Bank. He and his partner Robert Mercer (now stepped aside) built a $50 billion fund, primarily via its Medallion fund using math based investment speculations.

See related Nov 27, 2019 post for detailed analysis of Simons’ purchase of Columbia Distributing, the West Coast’s largest beer and wine distributor. The post is titled “How Trump Patron Robert Mercer Shifts Assets……. “

Renaissance has built a reputation for brazen tax fraud, owing the IRS more than $7 billion for a fraud so egregious the US Senate held special hearings on how this could happen. This is outlined in the same Nov 27, 2019 post.

Now, observe the Guardian story that revealed Jim Simons’ Bermuda based trust, when it ran a series titled “The Paradise Papers.”

So here is how the hedge fund parlor game is played. A game that risks Schwab’s stellar reputation becoming pariah-like in small communities all across the Northwest if this Meritage deal goes through.

Schwab is being purchased by Meritage, likely using financing arranged by Goldman Sachs or another investment bank, creating staggering investment banking fees. Once the deal closes, the loan will be refinanced and put on Schwab’s books, made at a high interest rate paid to Simons’ tax exempt trust in Bermuda.

This essentially transfers the profit from Les Schwab, via interest expense and other vehicles, to a tax exempt off shore entity, making a huge impact on both the state level and local level tax revenues given Les Schwab’s large footprint.

Les’ Brilliant Real Estate Strategy

Les had a brilliant strategy with respect to the store properties, which included minimizing debt via self financing and also helping employees realize appreciation from the properties via its pension plan. For this reason, Les had the pension plan own several stores and the company pay rent. Technically, these are prohibited transaction per ERISA pension rules, yet Les applied for an exemption and got it.

Advice to Les’ grand kids, don’t sell the land because it is not only grossly undervalued yet if you do, Meritage will jack up the rents making the stores look unprofitable and put the company at risk. A standard, Leveraged Buy-Out (LBO), trick in which partners try to fleece the company as fast as possible.

A beautiful solution for Les’ heirs might be to consider retaining the land and enjoying the rent themselves, the price of which they set. Les was brilliant at picking good locations, most of which are active in their communities and de facto local economic development engines. And if you don’t want to keep the real estate, why not sell it to the Oregon, Washington, and California Public Pension Systems to maintain local control. Would be glad to share some details here.

The rest of the company could be put into a tax exempt foundation to ensure that it won’t be looted. This way the annual 15 percent pension contribution could be continued for employees and the remaining profit could go to a specified charity each year like the OHSU medical center. Meanwhile, the grandkids enjoy rent payments from stellar low risk assets. This may sound ridiculous, yet when penciled out it could be ideal. It has been done and has worked beautifully.

What Goldman wants to do is for the grandkids to invest the proceeds in a mix of private equity and hedge fund partnerships, thereby adding another layer of fees.

Who needs a Wall Street based, smooth talking, fleecing operation like Goldman Sachs, who supposedly represents the family and Meritage? Hiring an excellent manager to run the company and paying them accordingly to run a great company like Schwab should be easy.

Now let’s take a look at some strange activity in the pension plan with respect to its real estate holdings. Just after Les’ hand picked successor Dick Borgman retired, the CFO Jack Cuniff supervised the purchase of 19 out of 21 properties from the pension plan at what appear to be ridiculously low values. Here are two lists that show 21 properties in the plan in 2018 and only 2 in 2019.

If these properties were not purchased from the plan at “fair value” this is a clear violation of ERISA rules because these assets are no longer company assets once they go into the plan but rather belong to the employees. Assets that are required to be valued every year at fair value in the event an employee leaves and takes a distribution.

The values are almost silly, for example the 13,000 foot location in Cascade Park Vancouver is valued at $415,000. You can barely buy a starter home for that. Or wouldn’t you love to buy the two remaining Washington locations for $774,000? Here are a few more details on two of the properties.

Clearly what is driving the real estate values down are below market rents used by the appraiser to establish the fair value, as indicated by the $3,765 per month rent for the 13,000 square foot Cascade Park store. The appraiser chosen by the company should have used “market comps” instead.

Message to Les’ Grandchildren:

Alan, Diana, Julie, and Leslie – Don’t sell the land under any circumstances. If you do, Meritage will raise the rent significantly to transfer profit to a tax haven and start selling off prime locations and closing stores, merging with other tire companies. Massive job losses will follow. Their business is nothing but a “race to the carry” fees, once you pull the curtain back.

You might also take a good look at who is gaining an equity interest in Meritage itself via this deal, usually numerous top execs get access to carry fees and therefore have a short term incentive directly opposite to what Les intended, and your long term interests.

And again, also note that Goldman won’t take long trying to set up trusts for you with the sale proceeds, stuffed with private equity and hedge fund partnership interests. Investments that pale in terms of quality and future return to the real estate.

Les was intensely focused in his business, which achieved great success. Going forward a new manager with creativity could literally turn the branch system into a gold mine via diversifying into new areas off its terrific base.

Please do read the blog on Columbia Distributing twice and also acknowledge that a closer look will reveal the truth about this deal. You can structure a great deal for yourselves and the employees and maintain Les’ vision.

And regarding the potential for a class action lawsuit against the company once the media picks up this post, if indeed these properties were sold from the pension plan back to the company at artificially low values, my sincere apology. This could be remedied in many ways, including transferring the same properties right back to the plan or revaluing them and paying the difference. Whatever you do, don’t let the lawyers and accountants take over. Just think how Les would resolve that.

Good luck and always available for a chat. I really liked your grandfather, and enjoyed his tours in his GMC through the various warehouses in Prineville. Could not believe how well he negotiated some of the tight spots.