Another Private Equity Scam

Supposedly these operations can take a company, extract huge profits, load it with debt, and then expect to flip it back to the public. All the while the process removes stock from the market, making shares rise, pumping [pimping?] up the bubble, and setting the stage for a disaster. Or maybe these financial geniuses are so brilliant that they create enormous value — as in the case of the proposed Sears marketing of intellectual property bonds.…

Ip, Greg and Henny Sender. 2006. “In Buyouts, Payday For Firms Is Never Far Away.” Wall Street Journal (24 July).

“At the time of the acquisition, Burger King paid its new owners — Texas Pacific Group, the private-equity arm of Goldman Sachs Group Inc. and Bain Capital — $22.4 million of unspecified “professional fees.” Burger King also started paying the group quarterly management fees for monitoring its business, serving on its board and other services. The total reached $29 million by this year.”

“In February, after three years of restructuring efforts under the new owners, Burger King announced plans to sell shares in an initial public offering. Three months before the sale, Burger King paid the owners a $367 million dividend. The company justified it in part by saying it had produced cash “in excess” of its needs — and then borrowed to make the rich payment. Burger King also paid the owners a $30 million fee to terminate their management agreement.”

“According to company filings, the three firms collected a total of $448 million in dividends and fees from Burger King — approximately what they initially invested. All that took place before the May stock sale, which valued their remaining stakes at $1.8 billion — more than triple their original investment.”

“Burger King, Warner Music Group, mattress maker Simmons Bedding Co. and Remington Arms Co. — have paid their private-equity owners large dividends mostly financed with debt. In late June, the parent of Hertz Corp. borrowed to pay a $1 billion dividend to Clayton, Dubilier & Rice Inc., Carlyle Group and Merrill Lynch, which acquired the company last December. They reaped that bonanza even though the rental-car company swung to a loss in the first quarter, primarily due to higher interest payments on debt incurred to complete the deal. Hertz has since announced plans for an initial public stock offering, whose proceeds will go to pay down that debt. A spokesman for Hertz declined to comment on the dividend.”

“Since 2003, companies have borrowed $69 billion primarily to pay dividends to private-equity owners, according to Standard & Poor’s Corp. That compares with $10 billion in the previous six years.”

2 comments so far

  1. mickey bitzko on

    Did you just define a pyramid scheme?

  2. Don on

    It’s good to know the loan officers for the subprime lenders will still have work doing cash out refis on a grand scale.

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