Union bosses want action over the 'rodeo capitalism' of private equity
By Susie Mesure,
February 9, 2007
"Rodeo capitalism" was the blunt verdict of the takeover frenzy gripping J Sainsbury from a global workers' movement yesterday. Trade unionists have been tripping over themselves this week to denounce a potential £10bn-plus bid for the supermarket chain by a quartet of private-equity firms.
The GMB wants MPs to "rein in" the industry, amid fears that Sainsbury's will be the next victim of a private-equity boom that the union believes is "destroying household-name companies by saddling them with massive debts".
It blames the UK's tax code, which lets the industry heap up debt to fund its deals cheaply and then claim tax relief on the interest payments on loans. This starves the Exchequer of cash, so its argument goes, although this fails to recognise the tax that does make its way back to Gordon Brown via, for example, the pay cheques of staff employed by private equity-owned firms.
Philip Jennings, general secretary of United Network International (UNI), a global union that speaks for 15 million workers in 150 countries, said yesterday: "How long does a cowboy stay on a bucking bronco? A minute and a half. It's the same deal with private-equity owners of companies. Rodeo capitalism rewards the speculators and punishes decent companies and their workers with uncertainty." He added: "The Sainsbury's sweepstake should stop right now."
Mr Jennings' great fear is the one outlined by the City's very own watchdog just weeks ago. The Financial Services Authority, which has placed the private-equity industry under its magnifying glass, warned that the collapse of a private equity-backed company was "inevitable" due to the mountains of debt their acquisitions are forced to carry on their balance sheets.
To be clear, the debt in question is not your ordinary "oh-whoops-I'm-in-the-red-this-month variety". It's barely even the equivalent of your average mortgage. Rather, to the private-equity industry, debt is the equivalent of a magician's wand. It lets the private-equity boys - those infamous Barbarians of the corporate world - buy companies for their equivalent of petty cash, borrow stacks more money from the bank, and then use the cash generated by their new purchases to pay back their loans, thus leaving them owning something that is worth vastly more than they paid in the first place.
Analysts estimate that the CVC, Kohlberg Kravis Roberts, Blackstone and Texas Pacific consortium stalking Sainsbury's would barely need to put in £3bn of equity to buy a group that is valued at £9.5bn by the stock market. The rest they would borrow from a mixture of banks and hedge funds. After a semi-decent length of time has passed - private-equity firms tend to own businesses for between three and five years - Sainsbury's private-equity owners would either sell the business on or try to refloat it on the stock market, pocketing vast sums in the process.
Or so the theory goes. And it is that theory that has so enraged trade unionists, fearful for the job security of tens of thousands of Sainsbury's staff, particularly if in practice the business ends up struggling under the weight of its new debts.
"Is this business model too short term?" Mr Jennings asked a panel of private-equity heavyweights including Blackstone's chairman and chief executive Stephen Schwarzman at the World Economic Forum in Davos last month. "'Buy it, strip it, flip it' seems to be the motto."
The UNI is worried about the potential threat to the trillions of dollars tied up in pension funds that are swelling private-equity warchests around the world in the event that one of their investments goes wrong.
It also laments the lack of regulation forcing the industry to be accountable. With the exception of private equity-owned companies that have issued bonds, the industry is not required to dish the dirt on its investments. It doesn't even have to reveal how well (or badly) its investments have performed, although some firms do indeed choose to do so.
Mr Jennings wants other national regulators as well as the FSA to investigate what he dubbed a "feeding frenzy" sparked by the $500bn (£255bn) of cash that the global private-equity industry has burning a hole in its pocket. He is hopeful that a private-equity debate will be on the agenda for the G8 at its June meeting in Berlin; the German chancellor, Angela Merkel, has already let slip that she feels little sympathy for the industry.
Closer to home, the Transport and General Workers' Union, which has 25,000 members at Sainsbury's, has said it plans to write to the Department of Trade and Industry to express growing fears on the shopfloor about the potential £10bn takeover.
And last month, the Prime Minister himself was asked by Barry Sheerman, the Labour MP for Huddersfield, whether he was worried that private-equity companies starve firms of investment and "asset-strip ... in pursuit of a quick buck and quick profit". (Tony Blair, on the whole, wasn't. Yet even this only added grist to the mill of conspiracy theorists who think the Government is tucked up so snug in bed with the industry that any tax perks are here to stay.)
The attack from trade unionists has not gone unnoticed by private-equity insiders. Many are furious at what they perceive as underhand tactics to criticise an industry that more than pulls its economic weight. The British Venture Capitalists Association, a lobbying group, has figures showing that companies backed by private-equity firms created jobs at a rate way in advance of their FTSE 250 peers.
"Trade unionists have skipped the debate. They have decided they don't like private equity and they are not even interested in discussing whether it brings any benefits to the economy," said one industry insider. Regarding the GMB's tax attack, he added: "Trade unions have not historically been concerned about the tax regime per se. They have identified this as a potential vulnerability, rightly or wrongly. Yet debt is a legitimate business expense. Pretty much every company uses it to finance its business."
A 3i spokesman concedes that the industry hasn't invested much time in letting the outside world know what it is up to. But he says investors get all the information - and more - that they require.
Perhaps the greatest defence of the tactics used by the industry came from Donald Gogel, president and chief executive of Clayton, Dubilier & Rice, a big US player, out in Davos. "We all have children. Do you think we'd go home and say: 'We flip, we dip, we strip'."
As for what this all means for Sainsbury's, well right now it's anyone's guess. Although the founding Sainsbury family no longer has a controlling stake, their views still count, and from later this month Lord Sainsbury of Turville, the former Science minister, will be able to make his known.
Mr Jennings said: "Now he is free of his political responsibilities, as a true lord he should ride to the rescue and calm speculation about what he will do with his shares. He should issue a statement saying that the Sainsbury family is happy with the situation as it is."
As a flip side, he hopes that the spotlight on Sainsbury's will thrust the darker side of private equity into the open. "People have to wake up to the reality. Maybe this is the tipping point in the public's acceptance of these deals and the public's understanding of the downside of the private-equity business model."
The darker side of private equity
The AA, Roadside Assistance Group
* Was bought from Centrica by CVC Partners;
* Was geared up with £1.9bn of debt yet has virtually no assets; has sacked 4,000 of 10,000 staff; response times have since plunged, according to 'Which?';
* Will lose the Volkswagen contract to its rival, the RAC, from April.
Hertz, Car Rental
* Was bought by a private- equity consortium in early 2006 from the ailing Ford for $14bn (£7.15bn);
* Less than 11 months later, it was "flipped" in the form of a stock market flotation;
* Clayton, Dubilier & Rice, Carlyle Group and Merrill Lynch Global Private Equity pocketed millions of dollars from the deal.
Gate Gourmet, Catering Company
* Owned by the US private-equity firm, Texas Pacific Group;
* Was embroiled in one of the worst labour disputes in recent decades
* Was accused of sacking staff to bring in cheaper seasonal - and non-unionised - workers.
Monday, July 28, 2008
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