IUF Press Release, Geneva, February 9, 2009
No one can accuse EU Commissioner for Internal Market and Services Charlie
McCreevy of excessive subtlety, but his current escapades set new benchmarks.
“Commissioner McCreevy and the European private equity funds are engaged in
an orchestrated maneuver to undercut a clear call for binding regulation of the
buyout industry adopted by a huge majority of the European Parliament last year”,
according to IUF General Secretary Ron Oswald. “McCreevy and the funds want
to smuggle in toothless ‘Codes of Conduct’ in place of binding legislation. Left
unchecked, this will provide an object lesson in undercutting democracy and pave
the way for similar efforts in North America and elsewhere at a time when there
are growing calls to bring private equity activity within the framework of
comprehensive regulation.”
In 2006,McCreevy commissioned a group of private equity funds and investment
bankers to author the background “report” for a European Commission White
Paper on “Developing European Private Equity” (which the funds and bankers
then “welcomed”).
In October 2008, the European Parliaments adopted (by a cross-party majority of
526 to 82) the report prepared by the Party of European Socialists (PES) on
legislative regulation of private equity and hedge funds. The normal response
would be for the Commission to develop concrete legislative proposals.
McCreevy, however, is now maneuvering to subvert the Parliament’s vote by
promising private equity firms that they can avoid regulation by signing up to…
codes of conduct. This was McCreevy’s explicit message in a recent speech to
the British Venture Capital Association (BVCA), and he appears to be working on
it at EU-level.
“The IUF and unions globally have considerable experience with corporate codes
of conduct”, says Oswald. “They have always been a move to escape from
binding laws and regulations, either the elaboration of new ones or the effective
implementation of existing ones.”
In the case of private equity, the mother of all codes is the one elaborated in the
2007 report of the UK Walker Commission, which was roundly criticized by unions
at the time as an inadequate substitute for binding regulations. If McCreevy
intends to again turn to the European Venture Capital Association to provide the
cover for his assault on democracy, the February 1 Financial Times editorial by
BVCA head Simon (not Sir David) Walker may provide more than a few clues.
According to Walker, the buyout funds have to “keep marching down the path
towards greater transparency” and “the regime of self-regulation” established by
the 2007 report. The report, strictly speaking, establishes no regulations at all, but
deals entirely with a limited number of disclosure issues in a limited number of
areas for a limited number of funds – and in fact applies to a mere 56 of some
1,300 UK private equity-owned portfolio companies. Moreover, the “disclosures”
are essentially useless. A quick trawl through the internet would supply more, and
more relevant, information to workers and all citizens concerned with the impact
of private equity on investment, employment and public finances.
Permira, Europe’s largest buyout house, blazed “the path towards greater
transparency” by publishing the UK’s first Walker-compliant annual report. Here’s
what they have to say, for example, about the job they did on Danish
telecommunications company TDC, which they took over as part of a private
equity consortium of 5 of the biggest global buyout funds in a 2005 deal which
was 80% debt-financed and took the company’s debt to asset ratio up to 90%.
Permira and the other funds then depleted the cash reserves, distributed the
equivalent of half the company’s assets to the new owners and top managers and
eliminated thousands of jobs:
TDC has introduced substantial changes over the past two years including: i)
significantly strengthening the management team; ii) successfully focusing the
business on the core Danish operations through disposals of non synergistic
assets outside the Nordics (Bite, One, Talkline); and iii) reorganising the company
into a customer-centric organisation. In addition, TDC has developed a new
corporate strategy and launched an extensive cost improvement and complexity
reduction programme that is currently being implemented.
That’s it. There’s a generic picture of a mobile phone, the names of senior
management, and the size of the total investment, but nothing about what really
matters: the debt, how it was financed, who owns it, the evolving debt to equity
ratio, how they’ve been taking their money out, the company’s tax liabilities (or
lack thereof), and so on. There is no information here of any relevance to a union
involved in collective bargaining or anyone simply seeking to understand the
impact of the buyout on the company, the sector or the country as a whole
(unsurprisingly, TDC. is no longer a leader in wireless technology).
In 2004, Permira bought Spanish retailer DinoSol from Ahold for €895 million. To
get their money out quickly, they launched a “sale and lease back” program in
January 2005 which freed up cash for Permira but worsened the company’s
balance sheet and piled more debt on to the books, took on additional debt in
November 2006, and in February 2007 took out more money through a €488m
dividend recapitalization. This is what is driving developments at DinoSol. What
does the report tell us?
The company is focused on defending and strengthening its competitive position
in its core Canary Islands market while improving the performance of the firm’s
mainland operations, aiming to increase both footfall and revenue per customer.
The “march down the path towards greater transparency” continues through the
portfolio, but provides not a clue as to why many of these companies are
staggering under their accumulated leverage and their debt is trading at severely
“distressed” levels, a possible prelude to insolvency (of course this can and will
be blamed on “unfavorable circumstances” in whose creation they had no part…).
It’s like reading an account of European history in the first half of the twentieth
history which compresses two world wars and a devastating depression into a few
lines celebrating a successful endeavor at “concentrating on core business”. One
eagerly awaits the next report’s handling of the financial carnage at Pro-Sieben,
Europe’s biggest television broadcaster from which Permira and KKR sucked out
a €270 million dividend last summer at a time when the company was struggling
with €4 billion in debt and plunging deeper into the red.
Is this the “new tone” which McCreevy, following Simon Walker, intends to impose
on private equity as “the course of action” to assure it of a “bright future”?
“It is the meltdown in financial markets, not the “self-regulation” of the ludicrous
Walker “code of conduct”, which has put a temporary halt to pillage through
leverage”, says Oswald. “What Walker and McCreevy are proposing on
disclosure doesn’t even come close to meeting existing requirements to which the
funds should be held to account – and disclosure is only a small, if significant, part
of the total regulatory program which is urgently needed.”
* * * * *
International Union of Food, Agricultural, Hotel, Restaurant,
Catering, Tobacco and Allied Workers’ Associations
Rampe du Pont-Rouge, 8, CH-1213 Petit-Lancy (Switzerland)
tel: + 41 22 793 22 33, fax + 41 22 793 22 38, e-mail: iuf@iuf.org – www.iuf.org
president: Hans-Olof Nilsson, general secretary: Ron Oswald, press officer: Peter Rossman
The International Union of Food, Agricultural, Hotel, Restaurant, Catering,
Tobacco and Allied Workers’ Associations (IUF) is an international trade union
federation composed of 397 trade unions in 123 countries with an affiliated
membership of over 2.7 million members. It is based in Geneva, Switzerland.
The IUF Private Equity Buyout Watch (http://www.iuf.org/buyoutwatch) was
established in 2007 as a continuously updated source of news and analysis of
leveraged buyouts and related financial developments with a focus on the IUF
sectors. Copies of A Workers’ Guide to Private Equity Buyouts are available
through Buyout Watch or from the IUF at www.iuf.org