In 1964 Jerome Kohlberg Jr was co-running a corporate finance division of Bear Stearns when he suggested that instead of restricting itself to helping other business prosper, Bear should start buying companies itself. He had in mind the purchase of several manufacturing companies in partnership with their management teams. These companies should be generating stable and steady revenue by filing dependable but generally unglamorous market place niches, this has changed but football fans are v.dependable, you buy the kits, the tickets etc through thick and thin. His plan was to make companies pay for their acquisitions by having them take out loans equal to approximately 90% of their own purchase price, with Bear putting down only 10%. The target companies were generally willing to accept this unusual arrangement because Bear often offered the shareholders or owners a considerably more competitive price. Ring any bells Mr Moores !! They bought companies with people's money by structuring acquisitions like mortgages, the critical difference is that while we pay our mortgages, PE firms had the business they bought take the loans, making them responsible for the repayment, or in this case the fans. They then try to resell the company or take it public before the loans come due. Or in the case of Man Utd offer bonds in the business to pay of the debt to a later date, like a credit card.
Public ownership and IPO was the big thing for football clubs in the 1980's & 90's but in 1998 Gordon Brown cut capital gains tax from 40% to 10% meaning people buying and selling companies could keep much more of their money. At the same time Brown raised taxes on those collecting options from public companies. This gained the attention of the American Private Equity firms. Often management teams in the UK executed their own buyouts of growing companies and ran the business as going concerns but in the U.S. PE companies looked to sell immediately, bringing in their own teams with little or no emotional attachment to the company so they could slash budgets and fire workers to pay down the debt taken out to purchase the company and profit from the lucrative tax breaks. By focusing on core revenues and decreasing costs the new streamlined organisations looked perfect for sale, they did however mask long term issues. Jack Dromey, deputy general secretary of the British Transport and General Workers Union, "We could be staring at a fresh financial meltdown. Private Equity used cheap credit in the good times to swoop on vulnerable companies, but now the banks are not lending, those debts are looking very hard to sustain, this has the potential to be another subprime scandal that shakes the banking system". In America it is easier for an organisation to enter bankruptcy as Chapter 11 laws protect the company and in most cases enable them to recover and pay of their loans, UK companies must liquidate therefore British companies tend to make deals with their lenders, such as selling off pieces of themselves to pay debt, like the stadium, players etc.
To cite some examples 1,500 Boots staff made redundant, one in 10 staff at its pharmaceutical wholesale division, as the KKR owned business attempted a cost-cutting programme despite seeing a 12% increase in its annual profits. At EMI there is likely to be a further reduction in the workforce, on top of the 3,000 jobs culled by Private Equity company Terra Firma in January 2008. Those cuts followed Mr Hands's highly-leveraged £4.2bn takeover of EMI Group the previous year. Paul Talbot, who is the assistant general secretary of Unite, claimed the unions struggle to work with private equity firms because they're too secretive about their plans - again ring any bells. He's cited the example of Duke Street Capital, which bought Burtons Food. "Within months, two thirds of the staff were out of a job. Usually we could work with management, but private equity's secrecy means we couldn't find out what was going on." Duke Streets 1988 investment in do-it yourself retailer Focus. The firm made a good return over the years by expanding the chain though acquisitions. Then in 2005, it sold of Focus's 172 Wickes branded building-materials stores, which represented about half its locations but by early 2007 it could not pay its debts, months before the hearing Duke Street sold Focus to Cerberus Capital Management for one pound. After buying the chain Cerberus announced plans to to close or sell 20% of the stores which would result in hundreds of layoffs. By 2009 2,500 staff has been cut and and the company had entered into a Company voluntary arrangement with its creditors to stave of bankruptcy, despite making profits the company could not service the debts it inherited from a Leveraged buy out. Labour MP Andrew Love asked Taylor "what returns where made by Duke Street". For ploughing the business in debt, making redundant over 2,500 staff and burdening its creditors with a CVA Taylor street "earned a return of just under ¨ 300 million, the investors received total proceeds of around ¨ 800 million, which was a very successful deal" The list of this behaviour goes on. TPG bought Punch Taverns, Britons largest pub chain and walked away making $400 million in profits, today it has a stock market value of £540m hobbled by a debt mountain of more than £3.5bn many do not expect it to make it to Christmas jeopardising 7,500 pubs and the thousands of people it employs.
The same in the US were some experts predict the collapse of apx half the 3,188 American companies that PE firms bought from 2000 to 2008.
I could go on, I've been researching this for years and have been dreading the scenarios we find ourselves in since the day G+H took over but at the time nobody would listen. Purslow works in PE, I'm not saying there all bad but they all have one thing in common, the debt in monitezed to the product and hence passed on to the consumer. 2nd they do not invest anything themselves, that is the whole point of the model - not to spend any of your own money. This model just does not work in football.
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