The IUF's Private Equity Buyout Watch

The Swedish Food Workers' Union (livs) is preparing to meet the challenge of a potential private equity purchase of the government-owned Vin & Spirit AB (V&S), makers of famous Absolut Vodka.

V&S is one of 6 state companies which the Conservative government has scheduled for privatization in its term of office. V&S, which is still the largest producer, importer and wholesaler of alcoholic drinks in Sweden following the end of the government liquor monopoly in 1995, consists of two divisions, wines and spirits, with spirits accounting for the larger part of sales. The spirits division is composed of the Absolut Company, responsible for Absolut vodka (the fourth largest global brand), and Reimersholms, producing largely for the home market. Absolut is the crown jewel for a potential buyer. The selloff, which has had to be postponed due to a series of scandals involving links between government officials and D. Carnegie & Co. AB , the investment bank assisting the government in the selloffs, has attracted interested from major corporate players including Pernod Ricard, Bacardi International Ltd and Fortune Brands Inc.

Enter EQT, the largest Nordic buyout fund (and the firm which ripped apart Findus), which has now confirmed its interest in V&S, and in Absolut in particular. "It's obvious that the different parts can be developed best as separate entities," an EQT spokesperson recently told the financial press. Former V&S Chairman Claes Dahlbaeck sits on EQT's advisory committee

With one of the two V&S production plants already scheduled for closure, Livs is fighting to maintain employment and the future integrity of the company. The union has warned of the dangers of a selloff aimed at generating a one-off cash gain, insisting in the press that the government select a buyer committed to the long term interests of the company, its employees, and the country as a whole. The union also wants production to be continued at both sites.

Posted on October 12, 2007 04:46 PM | Permalink

Topps, the largest US maker of frozen meat patties, was forced into immediate closure following a massive government-ordered recall of hamburger meat tainted with the potentially fatal E. coli bacteria.

Topps products were sold nationally through Wal-Mart and major supermarket chains as well as to food service companies operating in schools, hospitals restaurants and hotels.

An initial recall of September 25 (332,000 pounds) quickly grew into a nationwide recall of nearly 22 million tons of meat, the second largest beef recall in US history. On October 5, the company announced that it could not survive the recall of product equivalent to the firm's entire annual revenues. With over 30 reported cases of E. coli poisoning, the company was hit with individual and class action law suits by individuals who fell ill after eating the contaminated beef.

According to the US Department of Agriculture, which had moved from initially suspending ground beef production to suspending nearly the entire Topps product line, action was required due to "inadequate process controls." The size of the recall in part stemmed from the company's practice of mixing older production beef with new, making it impossible to identify the specific source of contamination.

"In one week we have gone from the largest US manufacturer of frozen hamburgers to a company that cannot overcome the economic reality of a recall this large," said the company's chief operating officer. Beyond evoking "tragedy", Topps executives offered no explanation for the sudden collapse, declining to answer specific questions from reporters investigating the plant's shutdown.

Private equity firm Strategic Investments purchased a controlling interest in the company in 2003. A smaller share was also owned by Rand Capital, a smaller private equity company which had been increasing its stake since the initial buyout.

Posted on October 10, 2007 06:10 PM | Permalink

Lion Capital, which last year acquired the up-market chips maker Kettle Foods, has called in professional union busters to prevent the T&G section of Unite from organizing 340 workers at the company's Norwich facility. After the T&G successfully applied for union recognition in April, Lion engaged the "Omega Division" of US-based Burke Group, one of the most notorious US union-busting firms.

In the run-up to the October 1 representation ballot, according to a local news report "Staff supporting a petition for union representation at the Barnard Road site claimed they had been asked to retract their support in one-to-one meetings with Omega consultants, drafted in by Kettle Foods ahead of next Saturday's poll. Hygiene staff and office and warehouse employees also said they had been denied access to discuss union representation or were warned union recognition could lead to benefits being “bargained away.”

The election results will be announced next week.

Burke, well-known to US trade unionists, describes itself as "The nation's largest full service MANAGEMENT consulting firm specializing in union avoidance and preventative industrial labor relations" with 1300 clients in 50 industries in 10 countries. Burke boasts of its near-perfect record in defeating unions in recognition elections and decertifying existing unions for their corporate clients. Burke is becoming increasingly active in the UK. According to the International Transport Workers' Federation, "In the UK the Burke Group is believed to have been hired by T-mobile for its anti-union organising campaign, while Virgin Atlantic airlines admits to having hired the group for advice on 'communication issues.'"

Lion Capital's other portfolio food brands include Weetabix, Orangina and the French preserve company Materne. In August 2007 we reported on Lion Capital's advance into the Russian food market with the USD 500 million acquisition of the juice drinks company Nidan Soki, the largest Russian LBO to date.

Posted on October 3, 2007 05:13 PM | Permalink

Always in the forefront of financial innovation, the buyout houses are rushing to speculate in the massive debt their activities have generated. Private equity firms are lining up for the heavily-discounted debt – some USD 350 billion of it - the banks are anxious to unload following the collapse of the high-yield debt market

Apollo Management, Blackstone, TPG, Carlyle Group, and Oaktree, among others, are all raising funds from investors to specifically target "distressed" LBO debt.

According to a Reuters report of August 15, Blackstone is particularly keen on debt generated by the sale of companies they studied for a possible buyout. Reuters quoted CEO Hamilton James as stating "For companies that we worked on and were overbid, we're starting to look at those as being very attractive investments where, frankly, I think we may be able to buy the debt ... and get a higher return than the underlying equity…" The report went on to note that "Some LBO and hedge fund managers are discussing the possibility of buying the entire portfolio of LBO debt off the books of investment banks, according to one private equity professional who did not want to be named."

While the first tranche of unsold buyout debt was unloaded by the banks at 97 cents on the dollar, TPG's TPG-Axon was recently able to pick up a chunk of the debt from KKR's buyout of retailer Dollar General for 87 cents on the dollar – with an expected return of 18%.

The Financial Times, commenting on the proliferation of "recovery" funds on September 5,, wrote: "Managers are pitching double-digit returns to investors and claiming relatively low risk. Lehman is looking for about $2bn…and Oaktree of California is looking for up to $5bn. GLG of London is seeking $250m, investors said, but it could be geared up to three times. [our emphasis]" All of which is reminiscent of the pitch to investors at the height of the buyout boom. Carlyle Group's David Rubenstein, speaking at a recent Dow Jones Private Equity Analyst conference, has even suggested that pension funds should buy the debt from the banks! Carlyle hasn't failed to notice that pension funds continue to substantially increase their investments in private equity funds even as the credit meltdown continues.

The emergence of massive funds specializing in LBO debt (one hedge fund has already raised USD 7 billion) raises fundamental regulatory issues. The investment banks who have been collecting the fees and securitizing and peddling the debt to fund buyouts now find themselves unable to offload it, except at a heavy discount, to the very funds whose buyouts created the debt in the first place. Picking up heavily discounted buyout debt could bring massive rewards to funds who lost out in bidding wars which drove purchase prices to ludicrous earnings multiples – and leave them in possession of the company in the event of a default. All the classic conflict of interest issues raised by the buyout process are magnified and intensified here. It only remains to be seen how the rating agencies, which played a fundamental role in stoking the LBO boom, will rate the offerings…

Posted on October 1, 2007 04:48 PM | Permalink