The IUF's Private Equity Buyout Watch

Domino's Pizza, the US-based pizza delivery giant with operations in 55 countries, claims to have discovered a new financial tool: heavy leverage to fund share buybacks and dividends.

Domino's worldwide sales last year exceeded USD 5 billion (of which nearly 2 billion were outside the US) through some 8,400 franchised operations.

Between February and April this year, Domino's recapitalized by securitizing USD 1.85 billion in debt through the subsidiaries which generate the bulk of the company's cash flow, i.e. royalties and brand names. The debt package pushed the company's debt to free cash flow ratio up to nearly 7 to 1, and was used to fund a USD 13.50 per share special dividend to shareholders. In addition, according to Domino's, "The Board of Directors approved an open market share repurchase program of $200 million of the Company’s common stock, which will be funded by future free cash flow and if determined appropriate, a portion of the borrowings available under the $150 million of variable funding senior notes portion of the securitized debt facility."

Speaking to the Financial Times, CEO David Brandon declared "I think the equity markets have new found respect for the way the use of a balance sheet can drive shareholder value", adding “I don’t view it as anything other than a newly discovered financial tool for some industries that never before recognised the opportunity.”

The "new financial tool", however, bears an astonishing resemblance to…the financing of a leveraged buyout. Considering that Domino's was taken private for 6 years by a private equity group headed by Bain Capital, the resemblance is hardly coincidental.

The only novelty was in marrying the massive use of cheap credit with the advantages of a multinational franchise system centered on royalties and copyrights, with few employees and little fixed overhead. Of the 1.85 billion in securities, 1.6 billion was insured and given a AAA rating.

CEO Brandon told the FT that he expected similar companies to go down this financial path. Multinational food processors, moving towards becoming "virtual corporations" uniting flexible subcontracted production networks through their brand portfolios, could also be tempted - provided the capital markets maintain their appetite for high levels of debt at a time when the buyout business is headed for a fall.

“My job is to reward my investors today, and that’s why we did what we did,” Brandon told the FT.

Domino's workers have yet to see the rewards. On July 26, the T&G section of the UK union Unite reported that 15 Hungarian migrants at a Domino's franchise in Derby had received virtually no pay for months due to illegal deductions for accommodation and "insurance", with one driver earning just 5 pounds in four months. In the UK, company profits in the first 6 months of this year rose by 35 per cent to GBP 8.3 million.

Posted on July 30, 2007 05:51 PM | Permalink

Trade unions in the UK have criticized the report commissioned by the UK Venture Capital Association - the Walker Review of Disclosure and Transparency in Private Equity published earlier this week – for the voluntary, "self-regulatory" character of its proposals and have highlighted the report's silence on crucial issues concerning worker and trade union rights in the companies targeted for takeover

The report, assembled by the former chairman of Morgan Stanley International and leading private equity professionals, was produced to deflect growing calls for regulatory measures to govern the operation of the buyout funds by offering instead a "Code of Conduct". Final recommendations will be issued following a three-month "consultation period". (Click here to download the full text of the Walker report in pdf format).

Unions have tentatively welcomed the proposals for greater disclosure while criticizing their non-binding character. TUC General Secretary Brendan Barber stated that “It will do nothing to end worries about the wider economic instability threatened by the growth of highly leveraged buyouts. And most importantly it will do little to reassure the staff of private equity takeover targets that the quest for short-term returns will not continue to threaten their jobs, pensions and working conditions,”

The T&G section of Unite stressed that "If private equity’s consultation fails to address the issue of workers rights it will have failed." Walkers proposals for more "communication" with staff were "vague to the point of being -meaningless", said Assistant General Secretary Jack Dromey, adding "Workers should be fully informed and consulted on the plans for their futures before a takeover and their terms and conditions protected on transfer. They should be able to apply for a blocking injunction if private equity doesn’t come clean.”

In a presentation earlier this year organized with the Party of European Socialists at the European Parliament in Brussels, the IUF insisted on binding regulatory measures in this regard "to render the buyout fund as an employer visible, accessible and legally responsible for collective bargaining. In the EU this means amending the Acquired Rights Directive to take account of a wholesale transfer of share ownership in the context of the sale of a business." Unions also had to demand legally binding measures to

- establish in European law the right of workers to take solidarity action within and across borders as a necessary self-defence mechanism in response to the free movement of capital across frontiers

- increase regulatory oversight in light of the heightened systemic risk generated by the growth of the junk bonds and other high-risk debt-based instruments which are funding the buyouts. The European Central Bank should be required to make a quarterly or monthly report on the overall exposure of their respective banking systems to leveraged buyout-related risks (the full presentation is available by clicking here).

According to the Financial Times, the UK private equity industry has been granted a "potential reprieve" by the July 10 decision to delay publication of the report of the Treasury Select Committee investigating private equity until the autumn. Because the report - to which unions made substantial submissions - is expected to be highly critical of the operations of the buyout business, the FT observed that "This timing means the MPs’ main recommendations are unlikely to surface in time for the party conference season, and hence will not fuel the unions’ campaign for a tax and regulatory clampdown on the industry."

Posted on July 19, 2007 12:43 PM | Permalink

Steel Partners, which has been leading hostile takeover moves in Japan, has lost its court appeal to block a poison pill defense by Japanese sauce maker Bull-Dog.

The company's board on June 24 approved a plan to issue equity warrants to dilute the hedge fund's ownership stake and thwart the USD 260 million takeover. The Tokyo High Court on has agreed that Steel Partners was an "abusive buyer" motivated by "the view of disposing of its target company assets and must be seen as solely concerned with pursuing its own profit."

The US-based hedge fund Steel Partners has taken ownership stakes in some 30 Japanese companies, including some of Japan's flagship food companies, using its shares to press for huge increases in dividends and profiting from increases in share value following takeover pressures (a practice called "greenmail" in Japan).

The case - which the hedge fund may attempt to appeal to the Supreme Court - is being closely watched by private equity funds, which have been aggressively stepping up their lobbying efforts in Japan.

Posted on July 9, 2007 04:54 PM | Permalink

US retailer Home Depot (persistently rumored to be a potential private equity target) has announced plans to borrow some USD 12 billion to finance a USD 22.5 billion share buyback, one of the largest buybacks ever. The move, which brings with it a lowering of the company's credit rating, highlights the growing penchant for corporations to take on debt in the service of shareholders, rather than investment.

A Citigroup analyst, speaking to the Financial Times, stated that companies with limited debt on their balance sheets are "hurting their returns by being so under-levered. Shareholders, particularly in the large-cap world, are getting more frustrated." In the same July 2 article, Home Depot's chief financial officer is quoted as telling analysts that "our financing strategy is evolving to one that facilitates capital distribution."

The other side of the corporations' transition to "facilitating capital distribution" is the declining rate of real accumulation, or investment in the capital stock. According to Goldman Sachs, an estimated 36% of global spending by non-financial corporations this year will go to share buybacks, with 33% earmarked for capital expenditures - the source of employment and productivity growth. According to a recent Thomson Financial forecast, capital expenditure in Europe as a percentage of pre-tax profits will fall from last year's 64% to 55% in 2007. Debt-financed share buybacks and declining capital expenditures have been identified by the IUF as key aspects of the financialization process, which is undermining the traditional basis of collective bargaining by dissolving the link between investment, productivity, profits and wages.

Posted on July 4, 2007 04:47 PM | Permalink

Blackstone has purchased the Hilton Hotels Corporation for USD 26 billion, paying a premium of nearly one-third over the company's closing share price. With the Hilton buyout, Blackstone now owns 2,800 hotels in 76 countries with nearly 500,000 rooms. In 2005, the Hilton brand's US and international operations were merged into a single company. Hilton employs over 100,000 workers worldwide.

The North American hotel workers' union UNITEHERE welcomed the acquisition, with union President Bruce Raynor stating that "This combination is good news for the workers of what will be the largest hotel owner in the world." UNITEHERE has a positive relationship with Hilton, and Blackstone, said Raynor, "had demonstrated its commitment to fair treatment for thousands of hotel workers in several major markets."

Posted on July 4, 2007 02:44 PM | Permalink

Since 2005, the French-based fast food chain Buffalo Grill, with some 300 restaurants in France, Spain, Belgium, Luxembourg and Switzerland, employing over 6,000 workers has been owned by the US-based Colony Capital.

Colony Capital is a major employer in the IUF sectors through its ownership of, among other properties, the Fairmont/Raffles and Kerzner hotel and resort chains. Colony Capital has also taken a strategic stake in the Accor hotel and services group.

Buffalo Grill sales declined following the 2003 French judicial proceedings against management for allegedly violating the embargo on banned UK beef iimports during the 1996-2000 phase of the mad cow disease crisis, but sales have since recovered. In June, workers, with trade union support, began occupying one of the units in Viry-Chatillon, in the South of Paris, in response to repression instigated by management against undocumented workers who supported a migrant running as a union candidate in workplace elections. Revelations in the French press have documented a conscious practice by Buffalo Grill management of hiring undocumented immigrant workers in order to exploit their vulnerable situation. More information on the union struggle is available here on the IUF web site

Posted on July 2, 2007 02:55 PM | Permalink