AOL Column: …A recent article in The Wall Street Journal tells the tale. In a “going private” transaction last year, private-equity firms Leonard Green and CVC Capital bought BJ’s Wholesale Club for $2.8 billion. BJ’s was a struggling rival to dominant warehouse chain Costco (COST) and Walmart’s (WMT) Sam’s Club. It’s understandable that a bunch of high-powered investors, seeing a chance to make BJ’s even better, wanted to buy it and do some tinkering behind the scenes, free from the constraints of having to answer to public shareholders…
After taking BJ’s private, LG and CVC ordered the company to pay them a $643 million dividend — equal to the entire cash outlay they’d made in the purchase. (They’d borrowed the balance). Of course, BJ’s didn’t actually have $643 million, so to pay their dividend, the new owners had BJ’s take out a loan.
If all goes according to plan, they’ll eventually re-IPO BJ’s back to the public in a few years — at which point, new individual investors will get stuck with its debt… (more)
EDITOR: There are the ‘captains of industry’ who profit from creating and operating good companies and then there are the debauchers, segments of the financial sector who are the equivalent of packs of wolves, circling their prey, and acquiring and then sucking the life blood out of vital concerns. This has been going on in the USA for decades and is a major contributor in many different ways to the nation’s economic and political decline. The low capital gains tax of 15% contributes to the problem.
The same occurs in the real estate industry. All too often, the new owners of investment properties such as hotels and apartment complexes that hitheto had been well run and managed for decades will ‘milk’ them for two or three years by deferring maintenance, capital investment, replacing staff, and curtailing services, and then sell for a profit to passive investors (often from out of the country) who are impressed with the past three years of financial statements and sham profits. Perhaps capital gains treatment of sales profit should only be allowed after six years. That would go far towards curing such practices.
Good Points. But why would banks loan that kind of money to an investment firm and a company that quite possibly couldn’t pay it back. Was BJ’s severely undervalued? Did the banks loan the money because the banks were “too big to fail” and thus entitled to a taxpayer bailout? And let’s not forget the huge amount of capital gain tax dollars on the 2.8 billion dollar sale of BJ’s the government reaps from these transactions. There really is more here than what immediately meets the eye.
EDITOR: When the smell of blood is in the air, there is no problem getting money from wolves.
I don’t have a problem with this sort of deal provided the bank’s investment isn’t backed with FDIC deposits or the management doesn’t drain the pension fund. I suspect these deals would dry up if the bank’s were truly using their own funds as well.
I write computer code for a living. I have worked at a few places purchased by Private Equity.
In my experience they come in and fire just about everyone who creates new products and anyone who makes a decent living. It’s all about cutting the business to the bone to show bigger short term profits.
Then after a few years of this artificial EBITDA, they sell you off with a lot of debt and no long term prospects because they killed off innovation.
When they sell you they walk away with sometimes ~20% of the sale price.
PE employees are not necessarily smart people. Any 18 year old could do this if they had the capital.
I am told not all PE companies are evil but, from what I have seen, they are. PE companies suck, they should not enjoy such a low tax rate for hurting our country.