" /> The IUF's Private Equity Buyout Watch: January 2008 Archives

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January 31, 2008

New IUF Publication on Private Equity and Collective Bargaining

The global credit crisis has temporarily halted the mega deals which characterized the private equity boom of recent years, but has not eased the financial pressures resulting from leveraged buyouts which can fundamentally transform power relations and collective bargaining at the workplace.

In fact, these pressures risk becoming even more severe.

The buyout business requires two fundamentals: easy access to credit and rising stock markets on which to float public offerings of companies taken private. At present, public equity markets are slumping, and nobody wants to buy paper backed only by a pile of debt.

In The Harsh World of Leveraged Buyouts Has Suddenly Gotten Harsher, published by the IUF in August 2007, we wrote:

An abundance of cheap credit has made it possible for private equity owners to steadily drain corporate cash flow through predatory financing which under normal circumstances would push a company into insolvency. When the exit doors are blocked, and new debt can no longer be obtained cheaply to refinance the old, cash flow is squeezed even harder. The result is likely to be even more pressure to cut costs through layoffs, closures, outsourcing and further reductions in productive investment. Collective bargaining power, already eroded under the buyout onslaught of recent years, will come under heightened pressure. And more company pension funds will face deficits, capping and closure.

For unions in private equity-owned firms, the "transparency" promised by the UK Walker Report, for example, may bring greater general disclosure of the funds' financial operations, but will not deliver the specific information workers need for collective bargaining when the boss is a buyout fund.

Private Equity and Collective Bargaining: Guidelines for Negotiating with Portfolio Companies explains concisely why the financial mechanisms behind a leveraged buyout matter to employees, underlines the importance of full disclosure and union access to financial information for collective bargaining and provides a checklist of the information unions need to negotiate effectively.

To download the brochure (available in English, French, German, Spanish and Swedish) click here.

Growing Pension Fund Stakes Feed PE Search for 'Permanent Money'

CalPERS, the California Public Employees' Retirement System, has taken its third direct ownership stake in a private equity firm by spending an estimated USD 275 million to acquire 10% of Silver Lake Group, a US-based fund specializing in technology buyouts.

Silver Lake manages some USD 16 billion in assets through its various funds. CalPERS ownership share brings with it a seat on the fund's board and a commitment to invest even more in Silver Lake fundraising. CalPERS has already put USD 400 million into the firm's latest buyout fund - a three-fold increase over its 2004 contribution to the previous fund.

With over USD 250 billion in assets, CalPERS is the largest US public employees pension fund. CalPERS latest direct investment follows the earlier purchases of a 10% stake in Apollo Management and a 5% stake in Carlyle.

Since 1990, CalPERS has invested over USD 40 billion in over 400 private equity funds and (like many other large pension funds) has been rapidly increasing its allocation, recently announcing that it would raise the percentage of overall pe investment in its portfolio from 6 to 10%. The pension funds' pe investments can be viewed at CalPERS online Alternative Investment Management Fund Performance Review, which CalPERS claims has brought in USD 11.8 billion in profits since 1990. Legal action in 2004 forced CalPERS to make publicly available the management fees paid and profits generated from its pe investments.

Buying direct stakes in the firms is part of CalPERS' strategy of paring back the number of investments in individual funds while increasing the overall share allocated to "alternative assets", including buyout funds. Direct ownership also saves on fees. As one financial analyst told the Wall Street Journal, "Getting a piece of management is smart because you get part of your fees back and a piece of everyone else's fees." Research has demonstrated that pe funds in fact make more - much more - on various management fees than they do on "carried interest", the percentage of the profit resulting from the sale of the company and/or dividends. (See New Wharton Study Shows the Measure of the Buyout Fee Racket on this site).

For the funds, it provides a needed source of "permanent money" at a time when public offerings have flopped. According to Silver Lake, "The CalPERS investment and strategic partnership with us provide tremendous benefit to Silver Lake and our limited partners by bringing important long-term funding."

The other key source of "permanent money" has been the state investment funds (or "sovereign wealth funds"). CalPERS' 10% stake in Apollo was matched by a 10% stake sold to the Abu Dhabi Investment Authority. Another Abu Dhabi state investment arm, Mubadala, has taken a 7.5% stake in Carlyle.

January 22, 2008

PE Owners Combine Findus, Young's to Create European Seafood Giant

Effective February 1, the Findus and Young's frozen and chilled food operations will be merged into a unified operation by their private equity owner CapVest, operating under the FoodVest name.

Young's has a leading position in the UK fresh, frozen and chilled seafood markets, supplying some 40% of all seafood consumed in the UK, with Findus (formerly Nestlé's frozen foods brand) the market leader in Scandinavia. The combined annual turnover of the two companies is some 1.1 billion Euro.

According to the company press announcement, Findus operations will remain essentially unchanged while, in the UK, Young's Seafood will focus on branded frozen and chilled seafood products with The Seafood Company focusing on retailer own label chilled products. Young's also has a foodservice subsidiary supplying restaurants and caterers.

FoodVest claims that the move is driven by economic reasons but has nothing to do with "cost-cutting". The official announcement stressed that there would be no job loses as a result of the reorganization. The essential point is that both Findus and Young's have already implemented substantial job restructurings as a result of earlier private equity-driven reorganizations.

Employment at Findus was systematically and brutally reduced following its acquisition by Swedish private equity fund EQT in 2000. At the time of purchase the Findus Group consisted of 14 plants throughout Europe - including 2 in Sweden - with 3,400 employees. Today there are 6 plants - only one left in Sweden - with 2,900 workers. Research staff at the company's Swedish headquarters - crucial to product innovation - was reduced from 200 to 40. CapVest acquired it for an undisclosed sum, on undisclosed terms, in a secondary buyout in 2006.

CapVest also acquired Young's in a secondary buyout, from UK private equity firm LGV in 2002. LGV combined Young's with Bluecrest, picked up from wholesaler Booker PLC, to create Young's Bluecrest. Prior to being acquired by private equity, Young's had undergone a series of changes of ownership, including a period of ownership by United Biscuits (itself acquired by private equity firms Blackstone and PAI in 2006). CapVest built Young's through a series of acquisitions, but failed in a bid for its chief frozen fish rival Unilever's Birds Eye/Igloo, which was captured by Permira.

Recent restructuring at Young's has involved the January, 2007 closure of a factory in Hull which eliminated 200 jobs, following on the closure of another Hull facility one year earlier. Between the two Hull closures, Young's eliminated 120 jobs at its scampi processing facility in by shipping the scampi for hand shelling in Thailand, where Findus operates shrimp shelling facilities, and then closed the factory completely, with more job losses. From Thailand the scampi are shipped back to the UK for further processing, a roundtrip journey of 17,000 miles (30,000 km). The T&G regional industrial organizer at the time called the decision "global capitalism gone absolutely mad." In a convoluted defense, Young's declared that "We are an international business committed to high standards of practices and wherever possible we will select seafood suppliers that are able to catch, farm and undertake primary processing locally round the world. In this particular case, I believe the decision to ship to Thailand will produce long-term benefits for one of the UK's best- managed fisheries - a benefit that in this case outweighs the environmental impact of transporting that product by sea."

The announcement that CapVest would be combining its two seafood operations reiterated that "It intends to be a world leader in responsible seafood sourcing and good environmental practice." While piling on food miles by shipping shrimp around the globe and back, the same investors who back CapVest can also trade in carbon emissions…

On January 17, CapVest acquired a controlling stake in Dutch-based coffee roaster Drie Mollen, one of Europe's largest coffee roasters and a specialist in private label production.

January 15, 2008

Kraft Spinoff CanGro Continues to Shrink Jobs Through Closures, Outsourcing

Three days before Kraft announced, on January 30, 2006, the elimination of 8,000 jobs worldwide as part of a new "growth" strategy, a deal was sealed for the sale of five of its Canadian brands and manufacturing sites to two private equity partners, Sun Capital and EG Capital Group, operating as CanGro Foods.

The deal included five manufacturing facilities: four in Ontario (St. David's, Dresden, Exeter and Toronto) and one in Chambly, Quebec, employing in total some 800 permanent employees and large number of seasonal workers. Sun Capital's managing director stated that the new company would work to "Help CanGro's management team and employees to develop and implement a growth strategy to further advance the company's market position and strengthen its customer relationships with Canadian retailers."

Last May, CanGro sold its soup brands to the Baxters Food Group, which eliminated jobs when production was transferred to its plant in Quebec. This was followed by the November closure of the Chembely canned vegetable plant in order to ''enhance productivity and competitiveness''. The closure eliminated 52 permanent production jobs and 63 seasonal jobs. Last week, CanGro announced that it would be closing or selling its canning facilities in St. David's and Exeter effective March 31. St. Davids has 149 permanent employees, Exeter 119, plus a large number of seasonal workers. The plants are organized by UFCW Canada.

"Outsourcing our branded canned fruit business with multi-year supply agreements will improve our competitive position," Bruce Major, CanGro chief executive officer said in a prepared statement.

Cessation of activity would also have a catastrophic effect on the area's farmers, who have been supplying the local canned fruit industry for over a century. "CanGro is outsourcing to countries where they can get their fruit the cheapest. The industry here is dying", said the head of the Ontario Tender Fruit Producers Marketing Board.

Of 800 union jobs at Kraft Canada's operations sold to CanGro, nearly half have been eliminated in just two years of private equity ownership – not to speak of seasonal jobs and the impact on agricultural income. Sun Capital includes as part of its Mission ("consistent, top decile returns/benchmark, measure and improve") the exhortation to "lighten up and have fun." For workers and farmers, CanGro has been a catastrophe.

January 14, 2008

PE Firms Step into Brewery Wars

The UK-based brewers Scottish & Newcastle (S&N) have turned to private equity firms Blackstone and TPG in their efforts to wring the maximum out of their 50% stake in Baltic Beverages Holdings (BBH).

BBH, with 19 breweries in the Baltic countries, Kazakhstan, Russia and the Ukraine is a 505/50 joint venture between S&N and Carlsberg. Faced with a hostile Carlsberg/Heineken consortium demanding it sell its stake, S&N is seeking a higher price or a buyout of its partner with private equity participation. The sticking point for institutional investors in S&N is that financial information on BBH can only be released through joint agreement between the partners, and that has never happened. In pursuit of its takeover, Carlsberg has agreed to release some information to shareholders, but S&N says it doesn't go far enough.

It has taken a bidding war and the potential involvement of private equity investors to generate a simple 2008 profit forecast for BBH. Which is more than the company's 14,500 workers have ever been able to get out of the co-owners, who have persistently failed to make available to unions in the company information on such fundamentals as capital investment or profits.

Financial Alchemy Continues as Blackstone Uses Stock to Fund…Hedge Fund Purchase for More Credit Deals

Blackstone's stock had plunged by over 40% since its 2007 IPO, but the advantages of going public became evident yet again when it used some USD 300 million in shares to help fund the January 10 purchase of hedge fund GSO Capital Partners for $930 million. Following closure of the deal, Blackstone head Schwarzman declared “I think now is a fantastic time to be growing this business globally.”

The business is debt, and there's never been so much of it. The mega buyouts are still waiting for the banks to move unsold LBO debt off their books, but Blackstone reported an 88% increase in hedge fund revenues for its third quarter compared with the previous year. GSO, with some 10 billion dollars under management, specializes in credit market operations, including…leveraged buyouts. “Combining GSO’s operations with our strong fixed-income team gives us critical mass,” said Schwarzman. So Blackstone is making good on its vow to use Blackstone stock as "currency" to finance acquisitions. At the same time as it announced the GSO deal, Blackstone said that it will be buying back some USD 500 million of its own stock.

Blackstone's purchase of GSO more than doubles its available cash for buying up debt, including LBO debt (see Locusts into Vultures posted on this site on October 1, 2007).