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March 24, 2011

Kraft and Private Equity Slash and Burn at UK’s Burton’s Biscuits

Burton’s Biscuits, the UK’s second largest biscuit manufacturer (after private equity-owned United Biscuits), has announced it will close its factory in Moreton, Merseyside, with the loss of 342 jobs, despite commitments to the union at the site that production would continue through May 2012. Workers at the plant, represented by Unite the Union, are being squeezed by two converging financial forces: transnational food giant Kraft, for whom Burton’s manufactures Cadbury biscuits and chocolate products, and Burton’s private equity owners.

Under license to Kraft, Burton’s manufactures all Cadbury chocolate products. The Moreton site produces the new range of Cadbury Crunchie biscuits, Cadbury Turkish Delight biscuits, Cadbury Caramel biscuits and Cadbury Dairy Milk biscuits.

Kraft took on substantial debt to fund its USD 7.2 billion cash purchase of Danone’s European biscuit business in 2007, and piled on more debt when it bought Cadbury in January 2010. As a result of the Cadbury deal, Kraft’s financial structure resembles a leveraged buyout, with a debt-to-equity ratio pushing 50%. That hasn’t stopped Kraft from regularly upping dividends, and it’s now blaming high input prices for an additional squeeze on the workforce.

British private equity investors Duke Street bought Burton’s in 2007 in a secondary buyout from its original private equity owner HM Capital. In the buyout frenzy of the period, Duke Street reportedly paid some GBP 210 million. HM had bought the company in 2000 for GBP 130 million (beating out Duke Street!); they invested nothing while loading it with debt and bleeding it of cash.

Two months after Duke Street took charge, as part of the plan for “unlocking value” from Burton’s the Moreton workers were told that the site would cease producing Cadbury’s chocolates. The company CEO described this as a necessary measure for “securing the long-term success of the company”.

Local Labour MP Angela Eagle supported the union campaign against Duke Street’s plan to shut the Moreton factory. She took part in a 2007 parliamentary enquiry which helped thrust private equity into the spotlight. Production at the Moreton site was saved, though with the loss of 500 jobs. The union secured a memorandum of understanding that there would be no major employment changes until May 2012.

Eagle, speaking again about Burton’s in Parliament on January 26, 2011, described what happened at the time and since:

In 2007, the company earmarked the factory for total closure, but that was just months after the expiry of legal obligations it had agreed to in 2001 to access £4 million-worth of regional selective assistance from the regional development agency and rates rebates from the local authority. After that closure announcement, the work force were escorted off the site by security guards who had been hired specifically for the purpose. After that rather difficult beginning, we, together with the work force and their representatives, and after a successful campaign in the local community and this House, persuaded the company to change its mind. On 15 August 2007, a memorandum of understanding between the management and the Unite union, on behalf of the employees, was signed, saving manufacturing at the site and safeguarding a total of 437 jobs. In exchange for an undertaking that there would be no major restructuring on the site before May 2012, the work force accepted the proposed changes, some of which were painful, including new working practices. More painfully, there were 500 job losses despite evidence that the company's productivity had been increasing consistently year on year.

The Moreton work force have more than delivered on their side of the deal in the MOU. They have increased their productivity still further, despite having had pay freezes in four of the past 10 years and very modest increases in the other years. They have delivered £12.7 million-worth of cost reduction to the business and have agreed major changes in working practices to achieve that transformation.

I note in passing that the directors' remuneration increased by a staggering 97.5%, with a 119.9% increase for the highest paid director. That makes a startling contrast to the years of wage freezes inflicted on the work force at Moreton.

Duke Street continued to run up the debt, breaching its covenant with the lenders who funded the buyout in October 2009. Majority ownership is now shared between buyout giant Apollo Management and the Canadian Imperial Bank of Commerce, who converted their junior debt into equity, with Duke Street retaining a piece. The deal this time was valued at GBP 331.9 million.

Burton’s top management is now staffed by former Kraft managers. When Duke Street ceded control, Ben Clarke took over as CEO. Clarke had held top positions at Kraft including area director and vice president of Australia/New Zealand and category director of coffee and confectionery.

In March 2010 Kraft’s vice president of international customer development Steve Newiss was appointed to the new job of chief commercial officer. According to an industry trade report at the time (Burton’s Foods hires ‘top sales operator in Europe’) , “The move comes as Burton's, the UK's second-biggest biscuit manufacturer, announced a "new era" of investment. Newiss is expected to help Burton's grow its portfolio and expand into new markets. He will be responsible for commercial sales activities including customer management, retailer brand, international, category management and sales and operations planning.”

Speaking to FoodManufacture.co.uk after making public the company’s proposal to close the Burton’s Moreton plant, CEO Clarke said: "We've seen sales growth of 3-5% over the past 12 months and within that very strong growth from Jammie Dodgers, Maryland cookies and Cadbury products.

In a March 22 video story from the UK daily Guardian (How do you save a biscuit factory when it's not even clear who owns it?), Unite regional industrial organizer Richie James explains how Kraft, citing high cocoa prices, is pushing for additional cost savings and job cuts even before the proposed closure. He shows a series of dramatic photos testifying to the financial pillage of the site by the successive private equity owners. The factory which once employed 5,000 workers, and which the buyout bosses had pledged to transform into a “center of excellence”, is now a scene of neglect and devastation

Unite has been contesting the closure, which was announced on January 12, from when it entered into a 90-day ‘consultation’ period. The union has set up an on-line petition as part of their campaign for an alternative to closure – click here to support the campaign.