" /> The IUF's Private Equity Buyout Watch: March 2007 Archives

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March 27, 2007

'Private equity drives appetite in the European food sector' - FT.com

"Activity in the European food sector is rising with the value of deals completed already well ahead on this time last year, according to PwC. The value of deals in the first quarter of 2007 has hit €6bn (£4.07bn), with a further €6.8bn of deals pending. Total deals for the whole of 2006 reached just €10.6bn. The PwC Food Insights report, published Monday, attributes the pace of activity to consolidation in the food sector alongside increasing interest from private equity and higher demand for healthy products."

Continue reading: Lucy Warwick-Ching, 'Activity rises as market develops a healthy appetitegher demand for healthy products. ', 26 March 2007.

March 26, 2007

Blackstone to use partnership structure to pay almost no tax after flotation

According to Financial News (US), "The Blackstone Group has emerged as one of the world’s largest corporate borrowers after its private equity business took on about $80bn (€60bn) in debt over the past three years." Blackstone's planned IPO appears to be designed to minimise its tax obligaions, "according to the prospectus, Blackstone’s lawyers have advised the company it will qualify for certain exceptions and continue to be treated as a partnership for tax purposes after it goes public."

Continue reading: James Mawson and David Rothnie, 'Blackstone borrows $80bn', Financial News Online, 26 Mar 2007.

March 25, 2007

Teaming up with the Locusts: A New Private Equity Model?

According to an article in The Financial Times (21 March 2007), 'Bertelsmann teams up with private equity':
"Bertelsmann, Europe’s largest media company, is joining forces with private equity groups, to establish a novel €1bn investment partnership which could herald a newly acquisitive growth phase for the owner of RTL and Random House. The family-controlled German group will contribute up to €500m to the new fund over three to four years, with the remaining equity provided equally by Citigroup Private Equity and Morgan Stanley Principal Investments."

The essential point, noted in another FT article given the website title "Bertelsmann makes friends with locusts..." is that if the "strategy works, it should allow Bertelsmann to place small bets – equivalent to 10 per cent of its annual acquisition budget – but give it the option to examine businesses for a few years before deciding whether to take full control or sell out."

This strategy is already being implemented by the US meat transnational Smithfield, which last year bought Sara Lee's European meat operations for 575 USD plus pension costs in a joint venture with Oaktree. Smithfield can thus use Oaktree to carry out a massive restructuring operation and then consider buying them out. Smithfield, which has been paying 24% to investors for the last two decades, operates the worlds largest pork processing facility, in Tar Heel, North Carolina, which has been resisting union organization for many years using the full panoply of anti-union techniques available to US employers. The acquisition of substantial operations in Europe via private eqiuty financing undoubtedly heralds an attempt to implement this industrial relations model in Europe.

March 23, 2007

'McCreevy slammed on private equity defence' - unison.ie

"EU COMMISSIONER Charlie McCreevy - already under fire for taking time out in Cheltenhamn race week - yesterday took on Europe's socialist group by defending private equity and the huge fees paid to its promoters."

The Internal Market Commissioner is looking at ways to reduce national barriers which prevent private equity firms from operating easily across borders, but is against EU-wide regulation of the industry.

He said it was up to national regulators to monitor risk in private equity deals closely but defended the industry, which has been attacked fiercely by trade unions and some politicians for "stripping" assets and destroying jobs in acquired companies.

"The private equity industry is the most critical source of capital for start-up and developing businesses that stimulate innovation, competitiveness and growth," Mr McCreevy said in a speech to British politicians.

"There is a big selling job to be done. The industry must go out and tell the many stories of success," he added.


His comments were immediately attacked by Socialist party president in the European Parliament Poul Nyrup Rasmussen, a former prime minister of Denmark.

"McCreevy may have got friends with the industry but, as far as public responsibilities, he is the loneliest man in the world," Mr Rasmussen said. The Socialists, who form the Parliament's second largest political bloc, will publish a report next week which they say illustrates how leveraged buyouts can damage companies and the real economy.

Mr Rasmussen said huge fees earned by private equity managers did not send the right signal to society.

"We are in the beginning of a much more open discussion on the development of the financial market. We have no intention to demonise them," he said.

Mr McCreevy said asset disposals were generally part of a private equity company's plans for transforming the businesses they invest in.

Huge bonuses paid to some private equity managers could be justified when they outperform substantially.


"If those rewards are properly performance driven, I ask myself why they should be less acceptable than performance fees paid to professional golfers, or transfer fees paid to professional footballers?" Mr McCreevy said.

A Commission working group is drawing up a a "comply or explain" code for the industry to boost transparency, he said.

Brendan Keenan

© http://www.unison.ie/

See also: McCreevy praises private equity

'Cadbury a sweet target for bidders' - The Birmingham Post

“Investors are lining up to buy the American drinks division of Cadbury Schweppes should the company decide to sell the business, which includes name brands such as 7Up, Dr Pepper and Snapple. Private equity firms including as Kohlberg Kravis Roberts and Texas Pacific Group are among those believed to be interested in bidding for the beverage group, while Lion Capital and Blackstone – who acquired the Cadbury bottling business in 2005 – have also been mentioned.”

“... there is concern that once the sale is completed the private equity speculators will turn their attention to the company's confectionary business.”

Continue reading: Duncan Tift, ‘Cadbury a sweet target for bidders’, The Birmingham Post, Mar 23 2007.

March 19, 2007

ITUC supports calls for new transparency and tax rules for private equity

The ITUC fully support the decision taken by Unions from 15 countries and a dozen global organisations which met at the OECD in Paris and issued a strong call for the activities of companies to be oriented toward long term sustainable investment strategies that create wealth for all, and good employment opportunities for workers. (ITUC 19 March 2007)

'Dutch MPs summon hedge funds’ - The Financial Times

"All parties involved in the escalating controversy over shareholder activism in the Netherlands are to be summoned to address an influential Dutch parliamentary committee in a further indication of rising concerns about the activities of hedge funds and private equity. The move comes as European trade unions pledge action against private equity. It follows recent comments by Nout Wellink, president of the Dutch central bank, who criticised hedge fund demands for the break-up of ABN Amro, the largest Dutch bank."

Continue reading: ‘Dutch MPs summon hedge funds’, The Financial Times, 18 March 2007. (Alternate link).

‘Private equity firm takes Burton’s biscuits with £210m purchase’ - The Times (UK)

“The company behind Wagon Wheels and Jammie Dodgers was yesterday snapped up by Duke Street Capital, the private equity firm, in an estimated £210 million deal. Duke Street saw off competition from Jacob Fruitfield Food Group, the Irish owner of Jacob’s Fig Rolls and Jacob’s Cream Crackers, in the final round of bidding to seal a deal with Burton’s Foods, Britain’s second-biggest biscuit maker. “

Continue reading: ‘Private equity firm takes Burton’s biscuits with £210m purchase’, The Times, 19 March 2007.

March 18, 2007

Spotlight Grows on US Tax Breaks Favoring Private Equity Buyouts

According to a recent New York Times article, Charles E. Grassley of Iowa, the ranking Republican on the Senate Finance Committee, has been talking up the prospect of taxing the enormous fees that private equity firms take on the profit of investments — known as the “carry” — as ordinary income instead of as a capital gain. The tax talk in Washington is the latest sign of a growing resentment of the buyout business that seems to be spreading from Europe to the United States. “What I worry about is really the political stuff that’s going on,” Mr. Schwarzman of the Blackstone Group said two weeks ago in Frankfurt at Super Return, one of the industry’s best-attended and most closely watched conferences. “There are people who are trying to, at a minimum, interfere with what’s going on in private equity business.”

Click here to read the full article.

Critical changes to US tax law in 2003 also paved the way for the explosion of "dividend recapitalizations" in leveraged buyout deals which have allowed the funds to get their money back in record time by piling on even more debt and further squeezing company cash flow and the workforce.

March 17, 2007

International Unions Call for Tax, Regulatory Measures to Rein in Private Equity

National and international trade union organizations, including the IUF, met in Paris on March 16 to address the destructive impact of "private equity’s short-term ownership regime" on employment, public finances and general economic and financial stability. The unions issued a call for "a coordinated regulatory response by the international community and by OECD governments in particular."

Read the text on the TUAC website by clicking here.

Blackstone Seeks "Massive Enrichment" Through IPO

US-based private equity group's have traditionally had difficulty raising cash on US public equity markets. That situation may change dramatically as global buyout giant Blackstone Group prepares, according to the Financial Times, a US IPO (initial public offering) that would "raise billions of dollars, massively enrich its top executives and thrust the booming buy-out industry further into the public spotlight."

Read the article by clicking here.

'Unions call for G8 action on private equity' - The Financial Times (UK)

"A demand for a co-ordinated G8 response to the “threat” posed by private equity and hedge funds will be made on Friday by trade union leaders from the world’s leading industrial nations. This will be the latest development in the growing political pressure being brought to bear particularly on private equity."

Continue reading: Andrew Taylor, 'Unions call for G8 action on private equity', The Financial Times, March 15 2007 22:27.

March 16, 2007

Private-equity takeover bid for Unilever? Talk of takeover target boosts share prices

Once again there's speculation among financial analysts that private-equity funds may attempt a leveraged buyout of Unilever. According to various business news reports, talk of a takeover caused a surge in share prices.

This also happened in March 2006, when financial market analysts speculated that Goldman Sachs was putting together a group of private-equity funds to make a £30 billion bid for Unilever in its entirety and taking the company private.

For more news see:

Andrew Dewson, 'Market Report: Unilever up on fresh talk of private equity bid', THE INDEPENDENT, 16 March 2007.

Unilever up on Private Equity Interest Talk - Dealers, Reuters (16 March 2007)

Also see our previous update on the speculation of a Goldman Sachs-led buyout in 2006: A Goldman Sachs buyout of Unilever?

Unions call on G8 Leaders to work on new transparency and tax rules for private equity - TUAC News

Unions from 15 countries and a dozen global organisations meeting at the OECD in Paris issued a strong call for the activities of companies to be oriented toward long term sustainable investment strategies that create wealth for all, and good employment opportunities for workers. TUAC News 16 March 2007

Unions note that private equity firms have in a short period become owners and movers of vast pools of capital, significant swathes of the economy and of employment. The share of private equity investments in the total volume of mergers and acquisitions exceeds 20 percent in some OECD economies. These alternative funds are highly “leveraged” (i.e. debt financed) and are exempt from many of the regulations that apply to traditional collective investment schemes, to banks and to insurance companies, notably in the areas of investment prudential rules and reporting requirements.

The very high rates of return required to finance private equity debt-driven buy-outs can jeopardise target companies’ long-term interests and provision of decent employment conditions and security for employees. Rather than corporate restructuring for the purpose of shared productivity gains, some private equity firms are seeking to extract maximum value over a short period before reselling the company (or what remains of it) and banking a substantial premium. Trade unions’ experiences with employment and working conditions in leverage buy-out firms are alarming. There is a strong concern that the private equity model poses risks to the stability of the international financial system and the sustainability of national economies.

The growth of private equity investment requires a coordinated regulatory response by the international community and by OECD governments in particular. Regulatory reforms should address four areas:

Transparency, prudential rules and risk management: There needs to be a level playing field between those alternative funds and other collective investment schemes with regard to transparency and reporting on performance, risk management and fee structure. Importantly, the investment policies of private equity within the OECD zone should be regulated according to prudential rules aimed at both financial market stability and long term asset value creation.

Workers’ rights to collective bargaining, information, consultation and representation within the firm should be regarded as key mechanisms by which the long-term interests of companies can be secured and promoted.

Tax regulation – including tax deductibility of debt service, tax on capital gains and tax havens – needs to be reconfigured to cover private equity regimes so that tax systems remain investment-neutral and are not biased toward short-term investor behaviour. Some countries have already either proposed tax legislation to curb the negative tax effects of the activities of private equity funds (e.g. Denmark) or announced that they would further investigate the effect on their tax systems of such activities. Comprehensive answers should be developed so that the increasing activities of private equity funds does not jeopardise government revenues from corporate taxes.

Corporate governance: Current national corporate governance frameworks focus on publicly traded companies and generally have far more weaker requirements for un-listed companies. In addition, they do not have sufficient mechanisms to guard against short term value extraction and to promote long term value creation. They are not suitable to address the challenges of private equity’s short-term ownership regime. The responsibility and powers of the boards of directors to preserve long-term interests of companies under private equity regime need to be reinforced.

Unions call the OECD Ministers and G8 leaders to create an international regulatory task force on private equity including the OECD, the IMF, the Financial Stability Forum, relevant UN agencies, and the ILO.

Possible buyout of Cadbury Schweppes US beverage division by Blackstone and Lion Capital

On 15 March, Cadbury Schweppes annnounced plans to split up its confectionery and US beverages businesses. According financial news, the US beverages division may be bought by private equity groups like Lion Capital and Blackstone Group.

In 2005 Cadbury Schweppes sold its European beverages division, including the brands Schweppes, Orangina and Oasis, to Lion Capital and Blackstone for £1.3 billion pound.

See the following links for news report:

Cadbury working on £12.6bn break-up (The Times March 14, 2007)

Private-equity funds target Carrefour

“Vandevelde exits Carrefour as private equity moves in”, The Independent, (08 March 2007)

“The future of the French supermarket colossus Carrefour was plunged into uncertainty yesterday after a Californian private-equity company and France's wealthiest man joined forces to acquire almost 10 per cent of its shares.... "

"The acquisition of 9.8 per cent of Carrefour shares, worth US$3.8 billion ($5.6 billion), by the luxury goods magnate Bernard Arnault and the Los Angeles-based investment company Colony Capital caused feverish speculation in France yesterday that the supermarket chain is a bid target....

Colony Capital has specialised in brokering similar deals to divide hotel groups such as Accor into management and property-owning companies. Analysts believe Carrefour's property portfolio could be worth £22 billion ($62.4 billion).”

Continue reading:

See also:

Carrefour hints at property portfolio sell-off (8/3/2007)

March 15, 2007

T&G Responds to UK Government on Private Equity

As the UK debate on the role of leveraged buyouts continues to broaden, the government Financial Services Authority has released a discussion paper. The T&G has responded by highlighting the critical issues the paper fails to address.

Click here to read the union's response.

March 13, 2007

German tax reforms threaten private equity returns

Private equity groups in Germany could face lower returns on their investments following proposed tax reforms. The country's finance minister has stated that if the result trims the buyout funds' returns, "Then so be it. That's the point."

Read the whole Financial Times article by clicking here.

March 11, 2007

"Unions round the world unite against private equity threat", The Independent (UK)

"Union leaders from the world's biggest economic powers will meet in Paris this week to take on what they view as the growing threat to their members from private equity. The meeting, set for Friday, was called in the light of intensifying tensions between unions and the private equity industry, particularly in the UK."

Continue reading: Danny Fortson, 'Unions round the world unite against private equity threat', THE INDEPENDENT, 11 March 2007.

March 09, 2007

'They are a risk to the economy as a whole' - The UK is waking up to the power of private equity. But the IUF has long warned of the dangers.

Click here to read the full article in THE OBSERVER

Sunday March 4, 2007 The Observer
Nick Mathiason reports

Suddenly Britain has woken up to the power of private equity - clinically selling off assets, slashing costs and jobs to boost short-term profits and fuel massive windfalls. It now employs about one in five people in the private sector.

It took the potential £11bn bid for Sainsbury's, a company which is part of the fabric of British life, that forced publicity-shy financiers blinking into the political spotlight.

For one man, though, the relentless 'plague of locusts' comes as no surprise. As communications director for the IUF - an international union representing food, farm and hotel workers - Peter Rossman has been noting the industry's worst excesses since 1991.

He is arguably one of the most thoughtful critics of the sector. The 55-year-old Californian, now based in Geneva, charts the advent of aggressive buyout firms back to the Seventies when inflation and changing demographics slashed pension fund returns. The decline of the US rust belt manufacturing base forced a shift of investment to new sectors and a fundamental loosening of tax and investment rules unleashed huge capital flows to rampage round the world. And so, he says, was born a new breed of capitalism on steroids.

This wave of what Rossman terms 'financialisation' means previously unthinkable targets now appear on the takeover radar. As the financial community seeks ever-increasing returns - 15 per cent is now benchmark - failure by companies to deliver 'hyper' returns puts them at risk of annihilation.

'A company that returns 10 per cent to investors is now considered sub-par and private equity will converge on it. The whole notion of corporate health, the notion that long-term is three to five years is laughable. The only way they can get those returns is by cutting costs. To realise those returns you have to shave costs everywhere you can. There's been enormous pressure on workers.'

Employees across the world, says Rossman, are victims of what he calls 'stock market Stalinism'. As jobs are slashed and unions derecognised, he argues, workers' productivity is ratcheted ever tighter. The outsourcing drive means food companies employ third parties to pack goods where margins are super-thin and workers' rights are trampled underfoot.

But isn't this efficient and disciplined business practice - essentially capitalism at its best? 'In the hotel sector, for example, massive outsourcing is not necessarily efficient enterprise, but a general decline of the quality of service and more pressure on the directly employed workforce. In food and beverages it is one of the factors in the general degradation of the terms and conditions of employment.'

Like Britain, Germany is waking up to the giant strides buyout firms have made. Subtle changes to fiscal German federal tax policy - the abolition of capital gains on business sales - prompted private equity to swarm into Germany, A move that saw influential politicians label the firms 'locusts'.

'Locusts describes very well the way funds consume assets but it can obscure the fact it's not a biblical plague. It's a man made phenomenon,' he says.

Rossman highlights the example of a deal which saw Apax, at the time run by Labour donor Sir Ronald Cohen, buy the German federal publisher in 2001. Then it had 4,000 employees. It now, says Rossman, has less than 900 workers and there is talk that the German government may buy the firm back.

Rossman also points to how the German government sold off large chunks of residential housing to Terra Firma, controlled by UK financier Guy Hands. Rents have risen as aggressive funds seek steep returns, forcing the public sector to increase subsidies to help those on lower incomes. So any windfall for government has been largely eroded.

And then there is the question of tax. Private equity typically operates through a series of holding companies and eventually a target company merges with a holding company. This holding company is often a subsidiary of another holding company which is typically held in a low tax haven.

'The British Venture Capital Association says it paid so many millions in tax last year. The figure is irrelevant. The real question is on what volume of transactions and through what mechanisms. Given the offshore structures of firms, what would they have paid if tax in havens was imposed? These are serious issues.'

There are signs that a significant number of Labour MPs are waking up to private equity. Unions are mounting increasingly effective campaigns against a sector whose top brass receive stratospheric salaries.

'This is a hyper-political phenomenon that requires specific tax environment and specific regulation. The type of changes in the last 20 years to tax and regulation is a product of what I call 'reregulation' but what is generally known as deregulation.'

But is there appetite to unpick some of the tax advantages private equity has, especially when some high-profile proponents fund both main parties? 'I think it can be regulated back in place. I think society has to save itself from an operation that is sucking up important assets for short-term financial gain because they pose an enormous risk to the economy as a whole. Given that these funds are investing in everything from health care and education to food, sport and telecoms, there is no limit to the damage they can cause.'

If there is a communicator with a better perspective of how turbo-charged private equity has cut swathes through America and Europe than Rossman, he or she has yet to surface.

March 06, 2007

'Canadian Union Leader Opposes Private-Equity Deal for Chrysler' - The Washington Post

"The leader of the Canadian Auto Workers warned against private-equity control of Chrysler, calling it the "worst-case scenario" for the automaker and a prelude to plant closures and worker layoffs.

"Our fear is private equity," Buzz Hargrove, president of the CAW, said in an interview yesterday. "They are not out to build cars. It could mean throwing a lot of people out of work and then reselling" the company."

Continue reading": Sholnn Freeman and David Cho, 'Canadian Union Leader Opposes Private-Equity Deal for Chrysler', The Washington Post, Tuesday, March 6, 2007; Page D02.

March 05, 2007

Exit by Stealth: TPG Completes Sale of Gate Gourmet

According to a March 2 Reuters report, "A day after Texas Pacific Group [TPG.UL] joined other powerful private equity houses in a call for more transparency, the firm's mystery sell-off of Gate Gourmet reveals just how much work the industry has ahead of it. TPG, which bought the airline catering firm in late 2002 from Swissair, has quietly reduced its stake in the business over the past year without any disclosure, selling the last piece to Merrill Lynch on Thursday."

At the time of its acquistion by TPG in 2002, the airline caterer employed 25,000 workers. TPG immediately launched an aggressive drive for steep reductions in payrolls, wages and benefits involving closures and assaults on union rights. According to the Reuters report, the company today employs "about" 20,000 people.

Read the full story here.

UK Financial Regulators Under New Pressure to Broaden Sources of Funding for LBOs

Britain's Financial Services Authority is coming under increased pressure to allow offshore investors - mainly private equity and hedge funds - access to publicly listed sources of funding. Buyout funds in the US have difficulty accessing funds through public stock exchanges, prompting them to seek abroad for new sources of cash to feed their unlimited appetites. Publicly traded private equity funds already control an estimated USD 80 billion, but are seeking yet more through expanding in loosely regulated financial markets as 2007 is tagged as the year of the 50 billion dollar deal.

Click here to read the latest.

March 04, 2007

Report exposes "......[buyout firms] breaking implicit agreements with respect to pay that transfer wealth from employees to the new owners"

From: Scotland on Sunday Sun 4 Mar 2007

PRIVATE equity-backed companies give smaller pay rises than other firms, according to a report which is likely to fuel the controversy over the growing industry.

Staff working for bought-out companies, usually backed by private equity, received average pay rises of between £84 and £231 a year less than their counterparts in quoted and family firms, according to the Centre for Management Buyout Research.

The report states: "The results are consistent with [buyout firms] breaking implicit agreements with respect to pay that transfer wealth from employees to the new owners."

The latest report is likely to prove an embarrassment, given that it comes from an impeccable source backed by Barclays Private Equity and Deloitte, the accountancy firm.

CMBOR http://www.nottingham.ac.uk/business/cmbor/ found that workers at companies subject to a management buy-in, where investors bring in new directors, had almost no pay rise.

And workers at companies where there has been a management buyout, where investors back the existing board, saw their wages rise by a third less than their counterparts in mainstream companies.

UK Union debate on tax regimes panics private-equity funds

Union calls for regulation of buyout funds voiced on February 27 had a big impact in the UK, panicking private-equity funds into mobilizing their lobbyists and their political supporters to defend themselves against regulation. Over the past week, a series of editorials, commentaries, interviews and letters in the UK financial press have attempted to defend the funds, with the strongest reaction focused on to union calls to rectify loopholes in the tax regime that favour private-equity's debt-driven buyouts. Private-equity's extreme sensitivity to proposals to close gaps and fix inequalities in the tax regime - an issue also raised by the IUF in its calls for re-regulation - clearly demonstrates that such re-regulation can and will have a significant impact on the leveraged buyouts that are ripping through the manufacturing and services industries, undercutting employment security, undermining union bargaining power and destroying jobs.

In response to the public debate driven by union interventions, private-equity funds sought the political support of Gordon Brown and are even talking about a "voluntary code" to regulate themselves! (See: Private equity promises voluntary code, TELEGRAPH.co.uk March 2 2007)

Examples of private-equity funds' attempt to deflect class for tax regime changes can be found on The Financial Times website FT.com, for example:

UK flags regulatory action for private equity companies, THE FINANCIAL TIMES (March 1 2007)

Clampdown on private equity may yield little, say tax experts, THE FINANCIAL TIMES (March 1 2007)

See also:
Taxing questions about private equity, THE FINANCIAL TIMES (Feb 20 2007)

Unions urge investors to rethink private equity, Reuters (Feb 20 2007)

March 01, 2007

UK Unions Intensify Call for Political Action to Curb Buyout Funds

Speaking with the IUF to a group of trade union sponsored Labour Party MPs at the UK House of Commons on February 27, TGWU Deputy General Secretary Jack Dromey called for a Select Committee investigation into the workings of the leveraged buyout business and action to curb its destructive impact.

Click here to read the IUF presentation.

REUTERS: Private equity ownership damages ratings - S&P (March 1 2007)

"Businesses bought by private equity funds that borrow money to pay their new owners a dividend have contributed to a decline in the credit quality of European companies, ratings agency Standard & Poor's said." Read more....