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Private equity goes under, down under

Published: 20 March 2009
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 Australian private equity firm Babcock and Brown has collapsed in bankruptcy. This comes as little surprise to UNI global union who has been tracking the firm that has had a reputation for buying assets, loading them with debt and then bundling them into funds to earn management fees. UNI global union has been concerned about this firm since it bought Ireland’s national telecom provider Eircom less than 3years ago. Eircom has been struggling under its private equity owner since the sale.



The Babcock and Brown parent company had an 8% stake in Eircom which is also in a precarious position.

‘Last month, the investment firm wrote off €720 million of the value of their investment in Eircom due to a deterioration in the outlook and the telecoms firm’s increasing pension deficit. (Eircom parent faces collapse after creditor vote, Irishtimes.com) http://www.irishtimes.com/newspaper/breaking/2009/0313/breaking22.htm )

The sale of the Irish national telecommunications service to a private equity firm has been a huge mistake that the Irish Government is sorely regretting. Minister for Communications, Eamon Ryan, remarked: “We privatised a highly profitable, debt-free, heavily investing Eircom and the result on prices, services, and broadband has been disastrous”.

‘For the Government, this uncertainty is a serious setback for its plans to develop the infrastructure required to support a knowledge-based economy.’ (Eircom’s Broadband, The Irish Times 18.03.09)



Eircom is set up as a separate fund from the now collapsed parent company and continues to operate under hardship. UNI affiliate CWU in Ireland is working closely with workers at Eircom to work through solutions to improve the business. They report that the newly appointed CEO has sought a voluntary pay cut of 10% from his Senior Management Team, which is believed to be an attempt by him to demonstrate to all concerned the seriousness of the situation.



UNI believes that this is the beginning of what is yet to come in private equity. It is evident that the private equity habit for using leverage to make profits is not a healthy strategy to apply to any investments. A report from the Boston Consulting Group concludes that as many as 20-40% of private equity firms will disappear in the next two years. (see this link for the full report “Get ready for the private equity shakeout” http://www.uniglobalunion.org/Apps/iportal.nsf/pages/20090202_vetbEn )



UNI General Secretary Philip Jennings says “Babcock and Brown are a victim of their own leveraging strategy and failure. Let’s just hope that their portfolio companies like Eircom survive. What is starkly absent from most of the reporting on company collapse is that workers and families are behind it all. It is not just a value in stocks that drops. It is job numbers. It is a workers dignity in making a contribution to society that collapses also”



An opinion writer for the Financial Times had this to say about the Babcock and Brown collapse:



“This mascot of the bubble may also become a symbol of the aftermath. Many of the 25 banks in its syndicate of lead lenders have written down some A$3.9bn of Babcock loans to zero. While they were happy to pile in together when the going was good, they are now in opposition, fighting very hard for scraps. More messy workouts like this await.”



To read more follow this link and see the attached article: http://www.ft.com/cms/s/2/6d77cbd2-0fb0-11de-a8ae-0000779fd2ac.html