Union Bosses Want Action over the 'Rodeo Capitalism' of Private Equity ; BUSINESS ANALYSIS
Mesure, Susie, The Independent (London, England)
"Rodeo capitalism" was the blunt verdict of the takeover frenzy gripping J Sainsbury from a global workers' movement yesterday. Trade unionists have been tripping over themselves this week to denounce a potential [pound]10bn-plus bid for the supermarket chain by a quartet of private-equity firms.
The GMB wants MPs to "rein in" the industry, amid fears that Sainsbury's will be the next victim of a private-equity boom that the union believes is "destroying household-name companies by saddling them with massive debts".
It blames the UK's tax code, which lets the industry heap up debt to fund its deals cheaply and then claim tax relief on the interest payments on loans. This starves the Exchequer of cash, so its argument goes, although this fails to recognise the tax that does make its way back to Gordon Brown via, for example, the pay cheques of staff employed by private equity-owned firms.
Philip Jennings, general secretary of United Network International (UNI), a global union that speaks for 15 million workers in 150 countries, said yesterday: "How long does a cowboy stay on a bucking bronco? A minute and a half. It's the same deal with private-equity owners of companies. Rodeo capitalism rewards the speculators and punishes decent companies and their workers with uncertainty." He added: "The Sainsbury's sweepstake should stop right now."
Mr Jennings' great fear is the one outlined by the City's very own watchdog just weeks ago. The Financial Services Authority, which has placed the private-equity industry under its magnifying glass, warned that the collapse of a private equitybacked company was "inevitable" due to the mountains of debt their acquisitions are forced to carry on their balance sheets.
To be clear, the debt in question is not your ordinary "oh- whoops-I'm-in-the -red-this-month variety". It's barely even the equivalent of your average mortgage. Rather, to the private-equity industry, debt is the equivalent of a magician's wand. It lets the private-equity boys - those infamous Barbarians of the corporate world - buy companies for their equivalent of petty cash, borrow stacks more money from the bank, and then use the cash generated by their new purchases to pay back their loans, thus leaving them owning something that is worth vastly more than they paid in the first place.
Analysts estimate that the CVC, Kohlberg Kravis Roberts, Blackstone and Texas Pacific consortium stalking Sainsbury's would barely need to put in [pound]3bn of equity to buy a group that is valued at [pound]9.5bn by the stock market. The rest they would borrow from a mixture of banks and hedge funds. After a semi-decent length of time has passed - private-equity firms tend to own businesses for between three and five years - Sainsbury's private- equity owners would either sell the business on or try to refloat it on the stock market, pocketing vast sums in the process.
Or so the theory goes. And it is that theory that has so enraged trade unionists, fearful for the job security of tens of thousands of Sainsbury's staff, particularly if in practice the business ends up struggling under the weight of its new debts.
"Is this business model too short term?" Mr Jennings asked a panel of private-equity heavyweights including Blackstone's chairman and chief executive Stephen Schwarzman at the World Economic Forum in Davos last month. "'Buy it, strip it, flip it' seems to be the motto."
The UNI is worried about the potential threat to the trillions of dollars tied up in pension funds that are swelling private-equity warchests around the world in the event that one of their investments goes wrong.
It also laments the lack of regulation forcing the industry to be accountable. With the exception of private equity-owned companies that have issued bonds, the industry is not required to dish the dirt on its investments. …