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

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September 28, 2007

Private Equity Advances in Agriculture

Private equity funds continue their incursions into agricultural commodity and supply chains.

The California-based bio-fuel crop company Ceres has raised USD 75 million in financing through private equity firm Warburg Pincus to pursue the commercial development of energy crops. The financial package will fund a private stock offering. Warburg Pincus holds position 14 in the global private equity fund rankings.

According to the Ceres press release of September 27, "Ceres plans to use the proceeds for research and product development activities in several dedicated energy crops, which are bred to maximize yields of plant biomass — the energy-rich source of a new generation of biofuels. The funds will also be used for capital expenditures and general corporate purposes.

"Ceres President and CEO Richard Hamilton welcomed Warburg Pincus’ vote of confidence. “Coming from one of the energy sector’s top private equity firms, this late-stage investment is a key validation of our growth plans. We now have the resources we need to expand the scale of our commercialization efforts, and the independence to broadly collaborate with downstream players in the transportation fuel industry.

"Mr. Hamilton noted that the genomics-based tools and biotech traits that Ceres has developed for corn and other row crops can be fully leveraged in dedicated energy crops. The company also plans to continue the discovery and licensing of its traits to other businesses outside of energy crops.

"Chansoo Joung, a Warburg Pincus Managing Director, said that the cellulosic biofuels industry shows promise of significant growth and is likely to become a material part of the transportation fuel market in the next decade. “We believe that Ceres is well-positioned to succeed as a leading supplier to energy crop growers and cellulosic biorefineries. The company has a strong track record in research and development and an intellectual property position that has been validated by industry-leading licensing agreements,” commented Mr. Joung.

September 26, 2007

The Carlyle Model: Permira Recruits Former Dutch Finance Minister

Gerrit Zalm, the former Dutch Minister of Finance and Deputy Prime Minister who served in various cabinets for the center-right liberal party VVD until February this year has joined Permira as an advisor.

According to Permira, "His role will be broad-ranging - covering advice on business issues, the economy and the socio-political environment - to reflect the depth of his experience and the quality of his network."

In a September 25 interview with the Dutch Financieele Dagblad Zalm insisted that his advisory position with the buyout fund owed nothing to his "political connections."

As pressure continues to build for regulating the buyout business beyond issues of general partners' personal income tax, Permira seems to be building on the Carlyle Group model. Carlyle has included as major shareholders and advisors at various times, among others, former US secretary of state James Baker, former defense secretary and deputy CIA director Frank C. Carlucci, former White House budget director Richard Darman, former chairman of the Federal Communications Commission William E. Kennard, former Securities and Exchange Commission chairman Arthur Levitt (not to mention the former World Bank Treasurer and Chief Investment Officer Afsaneh Mashayekhi-Beschloss, who did a stint as Carlyle's CEO and chief investment officer).

In June, Gordon Brown appointed Permira head Damon Buffini to a new "Business Council for Britain" charged with "advising government on all policies affecting business." Brown had previously appointed Buffini to a newly established National Council for Education Excellence.

September 24, 2007

Study Documents Devastating Impact of PE Ownership in US Nursing Homes

The New York Times has published a feature article documenting the impact of private equity ownership on US nursing home quality. The Times evaluated data collected by government agencies over the past 6 years, comparing over 1,200 private equity-owned homes with 14,000 others. The results are a powerful demonstration of what happens when locusts are unleashed on the elderly.

The study found that "As such investors have acquired nursing homes, they have often reduced costs, increased profits and quickly resold facilities for significant gains. But by many regulatory benchmarks, residents at those nursing homes are worse off, on average, than they were under previous owners."

According to the study, acquisition by the funds was typically followed by cuts in expenses and staff, including registered nurses. The Times found that the cuts often reduced staff requirements below minimum legal requirements. "Federal and state regulators also said in interviews that such cuts help explain why serious quality-of-care deficiencies — like moldy food and the restraining of residents for long periods or the administration of wrong medications — rose at every large nursing home chain after it was acquired by a private investment group from 2000 to 2006, even as citations declined at many other homes and chains."

The article also describes how complex ownership structures have effectively put the companies beyond government regulatory reach and legal liability. “Private equity is buying up this industry and then hiding the assets,” said Toby S. Edelman, a nursing home expert with the Center for Medicare Advocacy, a nonprofit group that counsels people on Medicare. “And now residents are dying, and there is little the courts or regulators can do. ” "These companies leave the nursing home licensee with no assets, and so there is nothing to take,” said Scott Johnson, special assistant attorney general of Mississippi. Publicly-listed nursing home facilities, notes the Times, are "required to disclose who controls their facilities in securities filings and other regulatory documents."

The full article is available here .

September 20, 2007

SEIU Calls on Carlyle to Disclose Impact of Major Health Care Acquisition

The SEIU demonstrated outside the Washington DC headquarters of the Carlyle Group - the largest global private equity fund - to demand full disclosure of the impact of the fund's pending USD 6.3 billion acquisition of the nursing home and health care provider Manor Care.

"Carlyle has not said how Manor Care workers will be affected and whether there will be wage and benefit changes," a union spokesperson told the Washingto Post. According to the paper, the demonstrators "were unsuccessful in delivering a list of demands to Carlyle executives, including assurances that Carlyle would disclose how planned changes might affect nursing-home workers, residents and taxpayers in each of the states where Manor Care does business. Security personnel at Carlyle's headquarters on Pennsylvania Avenue NW denied them admission to the company's offices, and no one from Carlyle would agree to meet with the union."

"When our portfolio company customers are well served, our investors are as well," Carlyle spokesman Christopher Ullman said in a statement.

Buyouts Continue for Mid-Sized Food Companies

The multi-billion buyout business may be stalled, but private equity continues to snap up medium-sized food companies with little letup. On September 17, the private equity firm Palladium Partners - a fund specializing in businesses targeting US Hispanic consumers - acquired the Castro Cheese Company, a Texas-based maker of cheeses and creams. Palladium's other portfolio companies in the IUF sectors include the fast-food chain Taco Bueno and snack food manufacturers Sahale Snacks and Wise Foods.

The same day, in the UK, Hermes Private Equity bought into the Symington's Group in a deal reported to be worth some USD 80 million. Symington's - which has already undergone a round of leveraged buyouts and management buy-ins - makes a variety of products best known under the Ainsley Harriott and Crosse and Blackwell brands, mainly ready meals and soups. Some 70% of the Group's sales are accounted for by retail brands.

Buyout funds and their portfolio companies are also avidly circling around Unilever spinoffs and potential spinoffs, with e.g. the Blackstone-owned Pinnacle Foods reported to be interested in acquiring Unilever's Lawry's seasoning business.

September 17, 2007

New Wharton Study Shows the Measure of the Buyout Fee Racket

The most detailed study to date of management fees shows the funds raked in close to 20% in fees of the funds under management - with carried interest accounting for only around a quarter of the total.

As we wrote in A Workers' Guide to Private Equity Buyouts, one of the key methods used by private equity funds to pump cash out of the companies they acquire is their ability to collect gargantuan fees, including "additional fees for each financial service, which typically consist of loading more debt on to the acquired company's books. Acquisition fees, management fees and "financial advisory" fees can total as much as 5% of the amount of the fund under management. Given that the funds under management run into billions of dollars, these fees easily add up to hundreds of millions. So the fees alone can make a buyout deal extremely profitable for a private equity firm even if the company purchased is no longer profitable!"

Just how profitable this can be has now been meticulously demonstrated in a new study from the prestigious US Wharton School, where two researchers have examined the data available to a large institutional investor in the funds. The results of the study, incorporating records from investments in no less than 144 individual funds over the period 1992-2006, showed fees on "carried interest" - the percentage of the profit resulting from the sale of the company and/or dividends - yielded on average 5.41% of the funds under management, but accounted for only around a quarter of the total fees raked in. Management fees associated with the acquisition (levied on the acquired company), exit and other creative advisory/operational fees brought the average fee revenue to a whopping USD 19.76 for every 100 dollars under management!

As the Wall Street Journal commented, "The pace of private-equity deal making slowed almost to a halt in August… With their funds sitting stagnant, private-equity firms could reduce the size of their existing and future funds, much as venture-capital firms did early this decade. The lure of billions of dollars in management fees suggests that won't be the case. Buyout firms are more likely to continue to deploy high levels of capital and pursue deals that don't rely so heavily on the sale of debt for financing, typically for 70% of the purchase price. Of course, that would only bring down carried-interest returns, making management fees an even bigger percentage of total income for the funds."

September 12, 2007

US Private Equity Lobby Claims Progress in Beating Back Calls for Higher Taxes

Mega-billion buyouts may be off the immediate agenda due to the widening credit crisis, but the biggest US-based funds are optimistic about their prospects for beating back proposals to tax fund managers' earnings at a higher rate.

"Things look better now than they did two or three months ago",according to the head of the US Private Equity Council, Doug Lowenstein, who claims the situation has "stabilized.". The Council was founded last December by 11 of the largest funds, including Blackstone, KKR, the Carlyle Group,Apollo Management, Bain Capital and Madison Dearborn Partners - previously the funds had felt no need to engage in public relations and relied on direct contacts with lawmakers to achieve their legislative goals. The Council has enlisted the services of high-powered Washington lobby firms to turn back calls for taxing fund managers' profits on carried interest at the 35% corporate tax rate rather than the considerably lower rate on capital gains. The funds are also lobbying hard to kill proposals to tax publicly-traded private equity funds (like Blackstone) and hedge funds at the higher tax rate.

According to an August 31 report by Bloomberg, the lobbyists' strategy centers on mobilizing the middle-market firms who do the smaller deals to put pressure on Congress to drop the tax proposals. One of the lobbyists cited by Bloomberg described this as "Private equity going back to its roots.''

It remains to be seen whether aggressive lobbying and increased donations to both US political parties by the buyout funds - dressed up as a "grassroots mobilization" - will secure their tax relief. But by diverting public debate from the impact of the aggressive use of debt through leveraged buyouts on both the individual company and the financial system as a whole, the funds are already on the way to a key victory. As the IUF wrote on this site in June, "Taxes are only half the story, the other is DEBT. Proposals to tax private equity firms are just the beginning, not the end of the debate. While politicians are just coming to terms with the need to tax private equity firms, trade unions must escalate demands for more comprehensive regulation and ensure that - before the door is closed on debate - governments deal with the whole truth of private equity buyouts, not just half of it."

With every day bringing new evidence of the extent to which US mortgage debt was recombined, repackaged and circulated throughout global financial circuits, unions should be calling for national and supranational financial regulatory authorities to immediately investigate and regularly report on the extent of risk exposure to buyout related debt, which has been bundled, securitized and peddled around the world in as many creative forms as the subprime loans.

September 07, 2007

Learning from the Locusts: When corporate management starts acting like private equity

Workers are finding that even a failed private equity buyout bid has an impact on employment security, trade union rights and working conditions.

This appears to be the case in the Australian alcoholic beverage company Foster’s. Over the past year the company has attracted the attention of private equity buyout funds. Even though the buyout did not happen Foster’s executives are now claiming that they learned some lessons from private equity. The head of the company’s operations in Australia, Asia and the Pacific, Jamie Odell, said: "Private equity and the people in it have specific skill sets, particularly about taking cash out of the business and making hard decisions quickly....” (“Foster's avoids buy-out but learns lessons”, The Age, September 3, 2007.)

Taking cash out of the business is exactly what Foster’s management did - announcing a sudden A$350 million share buyback, while pushing an aggressive cost-cutting program.

The impact on unions is illustrated by the struggle for trade union rights at the Yatala brewery near Brisbane. Since July, Foster's has stubbornly refused to recognize and engage in negotiations with the Liquor, Hospitality and Miscellaneous Union (LHMU), the Australian Manufacturing Workers Union (AMWU) – both IUF affiliates - and the Electrical Trades Union (ETU), jointly representing a majority of Yatala workers. (Click here to read about the campaign.)

Last year when Australia’s largest retail chain Coles Myer faced a hostile takeover bid by a KKR-led consortium, The Financial Times (22 September 2006) reported that: “Coles Myer, the Australian retailer, yesterday bolstered its defence against a A$17.3 billion (US$13 billion) takeover attempt by private equity firms by pledging accelerated earnings improvements from new cost savings, including 2,500 job cuts.”

The key word here is “pledge”: a promise to shareholders that if they reject the private equity offer then cost-cutting and restructuring will be used to generate increased cash flow back to shareholders. This cost-cutting and restructuring was not planned before the buyout bid, but was a response to the attempted takeover.

A similar pledge was made when the Australian national airline Qantas successfully fended off a hostile takeover bid by a private equity consortium involving Macquarie Bank and TPG earlier this year. Shortly after the bid failed Qantas management announced a A$1 billion share buyback, equivalent to 10% of the company’s market value.

The link with share buybacks is important for understanding the impact that failed buyout bids have on workers. Faced with a hostile takeover, management must convince shareholders not to accept the offer made by private equity funds to buy all of the company’s shares and “take it private” (off the stock market).

In some cases companies convince shareholders to adopt “defence” mechanisms or so-called “poison pills”. This includes changes to shareholder voting rights; issuing more shares; etc. There has been a surge in the adoption of defence mechanisms by companies in Japan in the face of hostile buyout bids, and more than 250 major corporations now have defence advisers on standby - up from just 25 companies two years ago.

Recently both the brewer Sapporo and the sauce manufacturer Bull Dog successfully defeated hostile takeover bids by Japan Strategic Fund - a private equity fund registered in the Cayman Islands tax haven and managed by the New York-based firm Steel Partners. Management convinced shareholders to adopt defence mechanisms that prevented a takeover by Steel Partners. But then shareholders began agitating for their reward.

So even if the buyout bid fails it still has an impact. When management succeeds in getting shareholders to either reject the offer and/or to adopt a defense mechanism, then institutional shareholders want to be rewarded. They want a massive transfer of cash through higher dividends or share buybacks to make up for what they “lost” in not accepting the buyout bid. The result is that companies that successfully defend against buyout bids still end up imposing cost-cutting and restructuring. Financial resources that should be used for future productive investment and expansion ends up in the hands of shareholders instead.

What are the implications?

Clearly unions need to keep fighting private equity buyouts on a company by company basis. But they must also become involved in a broader political intervention demand the re-regulation of financial markets, strengthening of corporation laws (especially on transparency and debt levels), and new restrictions on the activities of private equity buyout funds. Without such regulations, even failed buyout bids will have an impact on workers’ rights and employment security.