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

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March 18, 2008

Permira Overruns Union, Management Opposition to Squeeze 'Special Dividend' Out of Fashion Firm Hugo Boss

Buyout funds continue to squeeze cash out of the companies they acquire in order to pay off debt and get their money out early.

Permira, Europe's largest private equity fund, has used its 88% stake in leading fashion company Hugo Boss to obtain a "special dividend" of €350 million to repay loans it took on to finance the acquisition. Permira's takeover of Hugo Boss began last year when it took control of parent company Valentino Fashion Group.

Permira paid €2.6 billion, equivalent to ten times earnings before interest, taxes, depreciation and amortization (EBIDTA), a ratio typical of the deals made during the LBO boom before the global credit crisis. Permira followed the Valentino deal by buying chunks of outstanding Hugo Boss stock. Permira reportedly borrowed €1 billion to finance the Boss takeover. At the time, Permira announced its intention to "provide a long-term, stable and supportive ownership structure" for Hugo Boss.

Permira's takeover and associated dividend drive has already brought about the resignation of key management figures, including the former Chairman and CEO. Approval of the special dividend was followed by the resignation of the long-time chairman of the supervisory board. All 5 employee representatives on the Supervisory Board voted against the 2008 special dividend. IG Metall board member Gert Bauer was quoted by the financial press as stating "We fear (the company) will be bled in installments." Permira is said to be planning another special dividend in 2009.

Japanese Union Opposition to Hedge Fund Takeover Bid for Sapporo Breweries

Unions representing workers at Japan's Sapporo Holdings (which includes Sapporo Breweries and Sapporo Beverages) have declared their opposition to the recent takeover bid by the hedge fund Steel Partners.

Steel Partners last February sought to raise its 19% stake in Sapporo to 66% and has been aggressively pushing for greater "shareholder value", prompting the board to adopt a "poison pill" defense in 2007. On February 28 this year, Sapporo management officially rejected the fund's takeover bid. Steel Partners has since modified its strategy in an apparent bid to maintain pressure and keep negotiations going, lowering its target to 33.3% - just shy of the 33.4% needed to veto some management decisions at shareholder meetings.

Supported by Food Rengo, the Sapporo Group Union Council on March 6 issued a public statement affirming their strong opposition to the takeover move. Citing the national center Rengo’s views on “policy issue and measures on hedge funds and private equity funds” the unions condemned Steel Partner's focus on short -term profits at the expense of the company's long-term development and highlighted the negative implications for employment security and industrial relations.

Sapporo is not the first Japanese company to attract pressure from Steel Partners. The fund has aggressively invested in dozens of listed companies using hostile takeover bids to extract increased dividends and boost share prices. In 2003, Steel Partners launched a hostile takeover bid for Yushiro Chemical Industry, which increased its dividend by a factor of 14 and spent the equivalent of three years profit to block the takeover. Steel Partners profited enormously when it sold its shares.

In September 2006, Steel Partners used its minority stake to launch a hostile takeover bid for Myojo Foods, spurring Nissin Food Products to buy a 33.4 stake in Myojo to block the takeover. The takeover failed, but Steel Partners earned over 3 billion yen in sales of Myojo stock - after which it increased its stake in Nissin Foods to over 10%. Steel Partners then launched a takeover bid for Bulldog Sauces, where it ultimately lost a legal challenge to the company's poison pill defense measures (reported on this site on July 9, 2007).

March 11, 2008

Permira's Arysta Buyout Takes PE into Agrochemicals

Following earlier advances into agricultural commodity/supply chains and food testing documented on this site, private equity is now staking a claim in the agrochemicals sector.

The European Commission has approved the purchase of the Japan-based agrochemical company Arysta LifeScience by Permira, Europe's largest buyout fund, giving the go-ahead to a deal agreed on last October but awaiting regulatory clearance in the EU to be finalized.

Arysta is the tenth-largest agrochemical TNC by market share, and the largest privately held such company. The company had revenue of 124.1 billion yen (ca. USD 1.2 billion) in 2006 (the last available figure) and has over 2,300 employees in 120 countries. Arysta manufactures a broad range of agrochemicals (herbicides, pesticides, fumigants, etc.) and pharmaceutical and veterinary products.

Among the company's more toxic branded products are the herbicide Trevissimo, a 50/50 cocktail of Glyphosate and Diuron for use on vines (Diuron, a suspected carcinogen, is classified in the US as a developmental toxin); fungicide Sigma DG (80% Captan, a known carcinogen); fungicide Banko 500 (Chlorothalonil, classified as carcinogenic in the EU); fungicide Diafurin, a highly dangerous neurotoxin; insectide Rocky (Endosulfan, highly hazardous and banned for good reason in the EU); Calfos (Profenophos, a hazardous neurotoxin); and Mitac WP (Amitraz, recognized in the US as a developmental and reproductive toxin).

All of these are hazardous products which the IUF has long advocated banning in view of their threat to human life and health.

When announced in October 2007, Permira had agreed to buy the company for 250 billion yen, of which 100 billion in cash with the rest to be borrowed. Unless the terms of the sale have changed (no details of the financing were given at the time), that means the purchase is heavily leveraged. One of the company's flagship North American products, the herbicide Everest, is touted as taking chemical control "where no herbicide has ever gone. Flush after flush." This LBO can be considered an experiment in the impact on human health of cash flow management in the service of enormous debt when applied to the production of toxic agrochemicals. Will Permira continue the company's commitment to "contribute to many organizations such as those involved in the fight against breast cancer, the Girl Scouts of America and more", Arysta's stated commitment to "social responsibility"?

March 06, 2008

Proposed UK Legislation Extends Acquired Employment Rights to Buyouts

A new legislative proposal in the UK House of Commons seeks to remedy one of the most glaring gaps in existing UK labour law. Under existing law, when a public or limited company changes hands through acquisition by another company or individual, the existing terms and conditions of employment are protected through the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). TUPE does not apply, however, when a controlling shareholding is transferred to a new owner, who effectively becomes the new employer. And this is precisely the mechanism by which buyout funds take companies private.

This legal black hole which the buyout firms have massively exploited is not limited to the UK; it exists across the European Union. TUPE transposes into UK law the EU's Acquired Rights Directive. A similar legislative gap afflicts the legislation on European Works Councils, which also fail to recognize a transfer of shares as a change of employer. The exclusion of companies taken private through a leveraged buyout from laws and regulations which provide for continuity of employment conditions and rights (including union rights) has been identified as a key issue for union political action.

In a February 27, 2007 presentation on private equity to UK Labour MPs, the IUF stressed that "Existing legislation at nearly every level fails to take account of the role of private equity as employers. The funds actively intervene in management decisions, imposing layoffs and restructurings. They make decisions affecting the lives of millions of British workers, yet they call themselves an 'asset class' rather than employers…the funds aren't recognized as employers by national governments or international agencies. Even in the European Union they operate in a parallel universe outside legislation establishing and enforcing employer responsibilities, like the Acquired Rights Directive. The funds are focused entirely on exiting the investment. From this point of view, employees are merely an expense, and we've seen the kinds of industrial relations practices this leads to. This situation clearly has to change."

UK unions are now campaigning in support of the Transfer of Equity (Protection of Employment) Bill, introduced by Labour MP John Heppell, which will have its second reading in Parliament on March 7. The bill would amend TUPE by bringing within its ambits LBOs and other mechanisms for transferring a controlling share in a company by requiring that:

  • Existing contractual terms and conditions of employment are protected, including trade union rights and recognition

  • Workers are informed and consulted about any potential changes that flow from a transfer of a controlling share ownership. The purchaser and the seller of the shares will need to explain how the change will affect their job security and their terms and conditions of employment.

  • Trade union representatives are informed in advance of any proposed transfer of shares and are given the time to prepare their position and make presentations to the company before the takeover.

  • The principle of any dismissal connected with a transfer being automatically unfair will apply.

  • There will be provision for employee representatives to have appropriate remedies against both the purchaser and the disposer of the shares in the event of any default in the TUPE obligations.

The text of the Transfer of Equity (Protection of Employment) Bill is available