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Private equity 'locusts' are circling us all!

By Simon Alford, Communication Workers Union, UK



Suddenly household names as massive as Sainsbury's and Boots are being openly stalked by a new breed of super-rich investor who, some experts believe, bear a striking resemblance to locusts in their asset-stripping behaviour.

Simon Alford reports on mounting concern over the activities of private equity firms which, in addition to their present retail feeding frenzy, are known to be sniffing out the telecoms and postal sectors…



Just six months ago few outside City circles had come across the idea of 'private equity' as an investment vehicle.

Fewer still would have had any real inkling of a revolution in business ownership which is sweeping across the corporate world with, some believe, devastating consequences for the future of companies and employees alike.

All that is changing fast, thanks in large part to a concerted drive by the global union UNI to shine light on the secretive and largely unaccountable investment groups which are suddenly emerging as a dominant force in business finance.

UNI's intervention – intended to spark a public debate on a huge step in the dark with as yet uncertain implications for the entire corporate sector – couldn't have been better timed.

Within the last few weeks Sainsbury's and Boots have joined an arguably terrifying role-call of household names being stalked by a new breed of super-rich investor.

Well known companies that have already fallen prey to private equity (PE) groups already include Hertz, Debenhams, National Car Parks, the AA, Madame Tussauds, Birds Eye and the infamous Gate Gourmet in-flight catering company in the UK and EirCom in Ireland. The aspirations of these secretive investors, however, are known to extend much further.

Other public companies currently being stalked include ICI, Amec, BA and EMI in Britain, while in Australia the Quantas airline and the country's biggest retailer are currently subject to private equity bids.

Private equity firms have also snapped up stakes in the Danish and Belgian postal industries – and in Britain BT is considered a possible target on the back of a number of PE-backed deals in Europe in the telecoms sector.

One PE company has already acquired a stake in Deutsche Telekom, while Danish operator TDC was snapped up by another consortium.

BT is believed to be attractive to such investors not just because of its strong cash generation but also for its potential to broken up– a favourite pastime of PE firms who 'create value' (others call it asset-stripping) by selling off parts of businesses.

While BT's market capitalisation of £25 billion means that any attempt to take the company private would dwarf other PE deals in Europe, recent developments world-wide demonstrate that PE deals are getting bigger and bigger.

Valued at or around £10 billion a piece, Sainsbury's and Boot's demonstrate there is no shortage of PE money swilling around - but even these UK retail Goliaths look comparatively small fry compared to some of the biggest deals concluded to date.

Last month in America a Texas energy company was taken private for $44 billion – and in South Africa questions are currently asked by the Ministry of Finance after a company with 60,000 employees was recently bought by a PE firm with just one employee on its books.

As such UNI believes that just about any company is vulnerable, a view certainly shared by financial commentators.

With Morrisons, Unilever, Ladbrokes, Astra-Zeneca, Home Retail Group - the owner of Argos, publishing groups Reed El-sevier and Pearson, Cadbury's Schweppes, Lloyds TSB and even Vodafone already publicly identified as vulnerable to PE bids, the question has to be….who's next?



So what's the problem with private equity? That depends on your perspective, and unsurprisingly the industry itself – squinting under the spotlight of unaccustomed media and political scrutiny ¬– is busily trying to paint itself as a benign 'kick up the ass' for companies that are not trying hard enough to maximise profits.

By bringing their peculiar brand of managerial ''alchemy' into play - driven first and foremost by the 'healthy' desire to make life-changing fortunes for themselves – they claim they give the necessary shock-treatment.

Others take a very different view: The German finance minister recently described them as the 'locusts' of the corporate world. Others share the view that PE investors – often of the more extreme American variety who typically saddle the companies they take over with huge debts while paying themselves massive fees and dividends – are more akin to highwaymen than saviours.

As one commentator wrote in the New Zealand Herald we can "forget the perils of global warming, terrorist attacks or the slumping United States housing market. The biggest threat to investors is private equity, which is on a world-wide, debt-fuelled spending spree."

Yet perhaps the more sober language of leading business and accountancy figures - not known for their hyperbole – is even more worrying.

Auditing giant Ernst & Young has already predicted a string of corporate collapses next year as debt-laden private equity deals begin to unravel, very possibly tipped over the edge by increased borrowing costs.

In such an eventuality PE investors would be surprisingly unexposed to the failure. The debt they took out, after all, lies with the company – not them – and they will already have received significant fees (typically two per cent of the entire bid value on competition of the deal having put in just 20 per cent of the capital themselves) - as well as other charges and dividends - often paid by taking out more debt.

Moreover, as 'first level' creditors they are the first to be paid back, receiving up to 90 per cent, leading to some financial analysts to question how much they would care if the whole enterprise sunk

Employees, of course, would be in a very different situation – as has been pointed out by former M&S chair Paul Myners: "The one party that is not rewarded is the employees, who generally speaking suffer an erosion of job security and a loss of benefits."



Amid the growing chorus of concerns about private equity it's easy to forget that just last year the issue was hardly on the radar.

All that changed at the World Economic Forum at Davos in Switzerland in January when UNI general secretary Philip Jennings challenged the industry to answer concerns that PE is all about a short term profit, that companies are being crippled with too much debt and that, it would "all end in tears".

Levelling the accusations that PE investors had simply "found a new mechanism to become fabulously wealthy", and that "if the house goes up in flames it will be the workers…and the pension funds who have provided the capital who end up paying the price", Mr Jennings contribution was greeted by smirking silence. Fortunately, however, a number of journalists were in the room – and a long-overdue public debate was set in motion.

That debate has now become a Labour leadership election issue – and as the Voice went to press a Treasury Select Committee enquiry into had just been launched.

Certainly the penny appears to be dropping amongst the PE 'club' that the days of being able to operate unquestioned behind a veil of secrecy are drawing to a close.

Stung into defending its position in the media, the British Private Equity and Venture Capital Association (BVCA) even agreed to meet with UNI.

The reception Mr Jennings and UNI deputy general secretary Philip Bowyer received was a far cry from that in Davos where they felt the PE community adopted a "mocking tone".

Yet despite positive signals that the industry does genuinely accept that issues need to be addressed, UNI still believes it has not yet fully woken up to the need for a 'social dialogue' on the impact of its activities.

"I think there's a recognition they're getting it wrong, but that they think it is just a question of addressing a public relations failure," said Mr Jennings. "At UNI we believe something more substantial needs to be done than that."

More and more people agree…