Buyout firms under fire in UK

Private equity firms questioned on asset stripping and job slashing after buyouts increase
The Associated Press
Published: July 3, 2007

LONDON: Private equity firms went on the defensive Tuesday as they faced a grilling from British lawmakers about their reputation for tax avoidance, asset stripping and job slashing — but one senior partner broke ranks to accuse the industry of abusing the tax regime.
Lawmakers are considering whether the sector needs tighter regulation and higher taxes following a string of buyouts in recent months that culminated in an US$11.35 billion (€8.35 billion) offer for Virgin Media Inc. on Monday.

Summoned to give evidence to the Parliamentary committee, Jon Moulton, a founding partner of Alchemy Partners, told lawmakers that some private equity firms are moving money overseas to avoid paying tax.

"In some cases people are abusing what is already a generous tax regime," he said.

However, partners at three other leading firms also providing testimony on Tuesday — CVC Capital Partners, Blackstone Group International Ltd. and Duke Street Capital — denied knowledge of abuse of the tax regime.

"I have certainly seen no evidence of that," Peter Taylor of Duke Street Capital told the committee.

Duke Street Capital has come under heavy fire from unions for shedding two-thirds of the staff of British company Burtons Food within months of buying it and on Tuesday took the unprecedented step in an industry renowned for being media shy of holding a news conference to defend itself.

Duke Street's decision to talk openly reveals the height of criticism being leveled against buyout firms, particularly on the tax issue. The industry currently pays tax of around 10 percent, but sometimes as low as 5 percent. The main corporate tax rate is 30 percent.
Jack Dromey, the deputy general secretary of Unite, Britain's largest trade union, told the committee that "it's scandalous that these people are paying minimum tax and receiving massive wealth."

A multibillion pound (dollar) merger between Saga, the over-50s travel company and the AA, the roadside assistance and insurance group, has come under particular scrutiny because the two companies are owned by private equity houses CVC, Charterhouse and Permira.

Saga and AA have avoided tax liability by being loaded with high borrowings when they were taken over, despite having operating profits worth hundreds of millions of pounds (dollars).

Moulton said the merger, announced Monday, was "very large and very profitable," but did not help the industry's image.
"Certainly from the viewpoint of the rest of us in the industry it's not the finest PR that we could have had, with the very large amounts of money going 'round on a brand name at a time the industry is under scrutiny," he said.

But asked if he was a bit jealous his firm did not get there first, he replied: "Not 'a bit' — very."

CVC's Peter McKenzie defended the deal as in the best interests of Saga and AA.

"All the people who were looking at it were looking at why does it make sense, how good would it be to put the two businesses together, could we grow the profits more than we could if we kept them apart," he said.

David Walker, the author of a report into the industry, said that private equity firms need to be more transparent and that his review would propose a voluntary code of conduct. Walker is due to release a preliminary report next week.

"Private equity's importance has grown hugely in the U.K., especially in the last three years," he said. "Its attention to stakeholders' interests has not matched that growth."

Scrutiny has increased on private equity deals as more have been targeted at companies that are household names in Britain.
Kohlberg Kravis Roberts & Co. won a bidding war with rival equity firm Terra Firma Capital Partners Ltd. for Alliance Boots PLC, which has hundreds of pharmacy stores across Britain, earlier this year with an 11 billion pound (US$22 billion; €16.4 billion) offer.

However, Moulton said that fears of private equity domination might be off the mark.

A private equity bid for J Sainsbury PLC around the same time as the Alliance Boots deal fell apart as CVC, KKR and Blackstone walked away from the deal one by one after the supermarket group rejected their offers as too low.

Industry members also pointed to the rejection by Australian retailer Coles Group Ltd. of an offer from six private equity firms led by KKR that valued the company at 18.2 billion Australian dollars. Coles claimed that offer was too low and instead recently accepted an A$21.9 billion pound offer from conglomerate Wesfarmers Ltd.

Wesfarmers went ahead with the bid, the largest in Australian corporate history, after London-based equity house Permira pulled out, citing the state of the U.S. financing market.

"There are deals that are being pulled," said Moulton. "It's easier to sell at a good price than to find good value now."
Duke Street's Taylor agreed: "Personally, I think it could mark the top."