The IUF's Private Equity Buyout Watch

Members of BCTGM Local 50 in New York city have been on strike against the Stella D'Oro biscuit company since August 13, posting pickets around the clock in a battle to defend their wages, benefits and dignity against the company's private equity owners.

The strike at Stella d'Oro, a former Kraft subsidiary, exemplifies the destructive process which results when pressure from financial markets to deliver elevated short term gains drives companies to boost dividends and share prices by continuously redefining their "core" business. The result is reductions in productive investment and employment, including the sale of profitable operations. Whole or partial product lines and divisions are then rotated through a succession of owners and investment portfolios. For growing numbers of workers, the process ends with the sale of orphan brands, manufacturing sites and services to a private equity fund.

Stella D'Oro, established over 75 years ago, is a nationally known maker of specialty baked goods. The company has been owned by a private equity fund, Brynwood Partners, since January 2006. Brynwood bought it from Kraft, which in turn acquired Nabisco in 2002. Kraft bought parent RJR Nabisco when it was still staggering under the debt from the heavily leveraged 1988 buyout by private equity fund KKR (a buyout deal which resulted in the loss of tens of thousands of union jobs). The RJR Nabisco deal, the largest LBO of the decade memorialized in the book “Barbarians At The Gate,” failed to yield the profits anticipated, despite job cuts and plant closings. Workers continue to pay the price.

RJR Nabisco acquired Stella D’oro in 1992. At the time of the Nabisco purchase, the previously family-owned company had 3 bakeries across the US with 575 employees and annual sales of USD 65 million. Nabisco failed to integrate the company into its brand development, and eventually sold it on to Kraft, who (like Nabisco) bought the company with the goal of challenging competitors in the market for higher quality biscuits. Kraft went as far as investing in new equipment and production lines in the Stella plant in Illinois. But, under pressure to deliver ever greater "shareholder value", Kraft abandoned its investment, scrapped the newly updated plant, and sold on the remaining Stella operation. The shrinking process under Kraft left Stella D’oro with one plant and sales of some USD 30 million.

Shortly after the Stella sale, Kraft announced a 23% increase in quarterly earnings and the elimination of an unspecified 8,000 jobs worldwide. Parts of Kraft's Canadian operations were sold to two slash-and-burn equity funds operating as CanGro Foods, which proceeded to pillage, sell, close and outsource the businesses. Today, little remains of that Canadian business.

At the time of the 2006 Stella D’oro purchase, Brynwood Partners declared “We are grateful to the Stella D’oro employees for their commitment and dedication to the business, and wish them continued success in the future.” The private equity firm than shed the company's own union-organized distribution system through an outsourcing arrangement…and waited for the plant workers’ collective agreement to expire.

When the contract expired on June 29, the private equity owners presented a series of demands as their "final offer". The company is insisting on reductions in wages over each year of the proposed 5 year agreement, a sharp increase in the employee contribution to health care, radical reductions in paid sick leave and vacation time, mandatory overtime and elimination of the union label from all product packaging!

The company's flat refusal to review their demands on the workforce or to consider union proposals left BCTGM Local union 50 with no choice but to strike. Union members have been walking the picket line in 6-hour shifts, 24 hours a day, where they've received support and solidarity from local unions, businesses and community residents. At a traditional Labour Day rally on September 1, state and local political representatives strongly condemned the company's stance and expressed support for the union's struggle.

At least two large public employee pension funds - CALPERS of California and the Pennsylvania State Retirement System - have investments in Brynwood, whose food portfolio also includes the Turtles and Flipz confectionery brands purchased from Nestlé (now merged as Demet's) and private-label sauce and frozen pizza maker Richelieu Foods.

BCTGM is engaged in a tough fight with a predatory investment fund and a management which has suggested that many Stella d'Oro workers should be earning a minimum wage since "anyone can do their job." The union welcomes messages of solidarity and support - write to Local 50 President Joyce Alston at bctgmlocal50@aol.com

Posted on September 19, 2008 04:58 PM | Permalink

The European Parliament is set to vote on a report on Tuesday, September 23, calling on the European Commission to introduce legislative proposals for comprehensive financial market reform before the end of the year. The report, spearheaded by former Danish Prime Minister Poul Nyrup Rasmussen, who also heads the Party of European Socialists (the EU-wide grouping of Social Democratic and Labour parties), sets out clear guidelines for closer regulation of private equity, hedge funds and financial markets as a whole in the European Union.

The proposals for legislation address a number of key labour movement concerns, including: limitations on debt levels in leveraged buyouts; measures to contain asset stripping of portfolio companies by private equity owners; greater transparency and disclosure rules for private equity with far greater scope than the voluntary "Codes of Conduct" which have been promoted as alternatives to regulation; greater capital adequacy requirements for financial instruments and institutions (including private equity and hedge funds), limitations on the easy securitization of leveraged loans ("originate and distribute") which have fuelled both the buyout boom and the financial crisis generally; and ensuring that employees in private equity-owned companies exercise the same rights to information as other EU private-sector employees. Other initiatives in the report call for action and reforms on executive pay, credit rating agencies and conflicts of interest.

The report, first submitted in May, is the outcome of tough negotiations between the Eurosocialists and the conservative and liberal groups who form a majority in the Parliament. The IUF has been deeply involved in this initiative from its inception. Despite being a heavily amended compromise, legislative action along the specific guidelines set out in the report would represent a big step forward for workers. The European Commission is obliged to respond to the call for legislation and has always come forward with proposals in the past when requested to do so in this way by the Parliament.

The significance of this initiative extends beyond the EU, particularly at a time of acute financial crisis worldwide, because adoption of the report would signal the existence of a parliamentary consensus across party lines on the need for comprehensive regulatory action and financial market reform.

To highlight the need for action in the face of global financial meltdown, and to support the initiative, the online campaigning organization Avaaz has launched an electronic petition. Signatures will be presented by Rasmussen to Euro MPs and to the European Commission on Tuesday in connection with the report. You can sign the online petition here.

Posted on September 18, 2008 03:26 PM | Permalink

With hedge funds collapsing and the buyout business in the doldrums, pension funds are pouring money into "alternative assets" (including private equity) as never before.

According to Global Private Equity Review, the 10 largest public pension funds now have over USD 120 billion invested in the buyout business. California's public employee fund CALPERS, the largest US public pension fund with USD 239.2 billion in assets, last year raised its allocation to private equity from 6 to 10% (and also began acquiring direct stakes in some of the largest funds); the Washington State Investment Board (USD 81.9 billion in assets under management) topped that by increasing from 17 to 25%. Where ten years ago some 50 investment sources (limited partners) accounted for 80% of the money flowing to the buyout funds, there are today over 3,800. The phenomenon is not limited to the USA; Increased allocation to pe by pension funds is documented in a study commissioned by Uni (Pension Fund Investment in Private Equity, available here ), which shows that over half of the largest 110 pension funds outside the USA were investing in private equity. Global Private Equity Review estimates that pension funds account for 27% of the funds under management by global private equity.

With record sums pouring in but takeover targets scarce with lending virtually frozen, a mountain of uninvested "dry powder" of committed funds in search of outlets is accumulating. The uninvested capital is estimated to total some USD 450 billion (up from USD 300 billion at the start of 2007) - on which pension funds are paying "maintenance" fees of 2%. That's up to USD 9 billion in fees to serve as a cushion to offset the predicted flat or negative performance fees as exits stall and bankruptcies rise.

Posted on September 10, 2008 09:47 AM | Permalink

Litigation has proliferated since the onset of the credit crisis, with buyout funds, banks and target companies engaging in a spiral of lawsuits and counter lawsuits over collapsing deals and termination fees.

Banks have sued to walk away from the deals, companies have sued to press their claim to be taken private, and the funds have sued just about everyone, invoking everything from fiduciary responsibility to regulatory concerns to issues of national security. And as increasing numbers of portfolio companies fall into bankruptcy, one can anticipate a growing number of lawsuits being filed by creditors against private equity funds - like the suit filed in August by creditors of US generator manufacturer Powermate Corporation. The suit charges pe owners Sun Capital and York Street Capital Partners with bankrupting the company through dividend recapitalizations which smothered it in debt.

However, the lawsuit announced on September 2 by US retailer Mervyn's may be the first of its kind (and it certainly won't be the last). The suit charges the pe owners (Cerberus, Sun Capital and real-estate specialist Lubert-Adler), the banks which provided financing, and the parent retail chain Target, which sold off Mervyn's in 2004, with using the company's real estate assets to finance a heavily leveraged deal, then bankrupting the company through substantially jacked up leases. The result, according to company lawyers, "ultimately led Mervyn's to bankruptcy and is a fraudulent transfer that cannot withstand scrutiny." The company, which employed some 18,000 workers, is seeking to reorganize under bankruptcy protection.

The classic mechanism for "unlocking value" involved the creation of separate companies for the retail operations and the leases and property. According to an article in the Minneapolis/St. Paul Star Tribune of September 3:

"Mervyn's lawsuit tackles a favored technique of the last wave of leveraged buyouts, which have begun washing up in bankruptcy. Acquirers took advantage of the high value of real estate to finance the purchase of retailers such as Mervyn's in transactions that separated the real estate from the underlying business.

"'The amputation of the real estate legs from the body of the retail operations ... was all done in a split-second series of concurrent transfers orchestrated by' the private equity firms, Mervyn's attorneys said.

"According to Mervyn's, it received only $8.3 million out of the deals that deprived it of its real estate, while the private equity firms, lawyers and investment bankers split $58 million in fees. Mervyn's lawyers say the real estate was worth about $1.68 billion.

"Mervyn's real estate wound up in the hands of bankruptcy-proof companies so that creditors of the retailer could never reach the assets, the company alleges. According to the lawsuit, those behind the deal knew at the time that this would leave Mervyn's without sufficient assets to survive.

"In stage two of the real estate-based leveraged buyout, acquirers lock in a stream of cash flow through advantageous leases to the acquired companies. Mervyn's says its $172 million annual occupancy expense is $80 million higher than it would have been had the private equity firms not acquired it from Target and started charging rent."

Under the new leaseback arrangements, Mervyn's annual lease payments nearly doubled - to USD 172 million. According to the lawsuit, "By separating Mervyn's real estate assets from its retail operations, the private-equity players made sure that any residual value or upside in the real estate assets were reserved for themselves and not for Mervyn's,"

With inflated rents and a healthy dividend recapitalization, the pe owners more than doubled their initial stake in the 2004 USD 1.26 billion buyout. The Wall Street Journal, not generally known for its critical stance towards the buyout industry, had this to say on September 4:

"The transaction involving Mervyn's was struck during the earlier part of the decade when private-investment firms were snapping up struggling retailers less for their fashion sense and more for their real-estate value.

"Hedge-fund manager Eddie Lampert earned a fortune gaining control of bankrupt retailer Kmart and then selling off its real estate. Kohlberg Kravis Roberts & Co., Bain Capital and Vornado Realty Trust acquired Toys 'R' Us Inc. in part because of the value of its stores.

"The case against Sun and Cerberus is especially fraught for the private-equity industry, which is trying to shake off decades of criticism that the funds "strip" healthy companies with little regard for employees or institutions."

The separation of real estate assets and operations from the provision of services has also become a favorite mechanism for pumping cash out of hotel chains, notably through property selloffs to Real Estate Investment Trusts (REITS), and does not require taking a company private. Hedge funds and "activist investors" have pressed for these changes as they acquire growing shares in listed companies. Workers pay the price in layoffs, speedup, wage cuts and attacks on pensions and benefits.

Posted on September 8, 2008 01:15 PM | Permalink

The latest survey of US CEO Compensation documents the ever-widening gap between executive pay packages and the earnings of the average US worker. Compensation for private equity and hedge fund managers claims a special prize in the inequality sweepstakes.

Compensation last year for the chiefs of the 500 companies in the Standard & Poor's 500 averaged USD 10.5 million, or 344 times the average workers' pay. Three decades ago, the multiple ranged from 30-40. Since then, US wages have stagnated or fallen, while executive compensation continues to balloon.

In contrast to their less fortunate counterparts in the S&P 500, the top 50 hedge fund and private equity managers averaged annual pay packets of USD 588 million each - more than 19,000 times the average workers wage.

The figures come from Executive Excess 2008, the annual CEO compensation survey published by the Institute for Policy Studies and United for a Fair Economy. In addition to documenting the ongoing inflation of corporate pay, the report, which is available online here, describes the mechanisms through which ordinary Americans subsidize this looting through the corporations' systematic exploitation of loopholes in the federal tax system. Enormous shortfalls in public revenue are thus the inevitable counterpart of this obscene accumulation of wealth.

Private equity chiefs in particular exploit the well-known tax subsidy to the buyout industry (not unique to the US) through which income from "carried interest" (the share of profits after fees and other charges which accrues to the fund managers) is taxed as capital gains rather than income (normally taxed at a higher rate). The report cites the example of Henry Kravis of buyout fund KKR, who in 2006 earned USD 450 million but was spared as much as USD 96 million in taxes on the money due to the preferential treatment of carried interest. Faced with legislative proposals to abolish or reduce this absurd regulatory subsidy, US private equity funds have spent millions on lobbying in what was described by the Washington Post as the "heftiest six-month payment to any lobbyist" on record.

Posted on September 2, 2008 02:36 PM | Permalink