Inside private equity’s race to buy up Britain

If the Morrisons is taken private, 1 million British workers will be employed by companies owned by private equity. This equates to about 3% of the UK’s total workforce.

The deal spree is provoking anxiety in some quarters, as old questions about the merits and pitfalls of private equity resurface. Politicians and unions worry that takeovers could mean the breakup of crucial businesses and job losses. Investors, meanwhile, grumble that private equity is cherry-picking UK businesses too cheaply.

Darren Jones, chair of the House of Commons Business, Energy and Industrial Strategy Committee, worries about potential “job losses and pension fund shortfalls” at Morrisons. He raised concerns about the high levels of debt used to fund these types of takeovers in a letter to the Competition and Markets Authority.

Private equity firms borrow to fund takeovers but the way deals are structured means the debt ends up on the balance sheet of target companies. Data from Refinitiv shows that private equity deals typically involve debt worth around six times a company’s earnings. That’s much higher than typical debt levels for listed companies. Huge debt piles leave firms more vulnerable to changing economic winds. 

“Our main concerns are about job security, while maintaining and improving our members’ terms and conditions of employment,” said Joanne McGuinness, Union of Shop, Distributive and Allied Workers national officer.

Morrisons employs 118,000 people in the UK and there are fears that this number could fall after any deal. Cutting headcount to reduce costs and squeeze efficiency gains is a typical private equity strategy. A recent Harvard Business School study found that employment at target firms shrinks on average by 13% in the two years after private equity takeovers.

McGuinness said his union had a “constructive working relationship” with Morrisons’ bidders but was “seeking greater engagement and further assurances for staff on the future of the business.”

Private equity interest also raises concerns about asset stripping. A company can sometimes be valued lower than the sum of its parts, known as book value. Buying a business then selling off the crown jewels — property, factories, equipment — can be a quick way for private equity firms to make money.

Andrew Koch, a senior fund manager at Legal & General Investment Management, a top 10 Morrisons shareholder, said last month bidders appeared to be interested in Morrisons for the “wrong reasons”.

“If an acquirer makes strong returns this should come from making the company a better business,” Koch said last month. “It should not come from buying its property portfolio too cheaply, levering the company up with debt, and potentially reducing the tax paid to the exchequer.”

Analysts at Bernstein said they “struggle to see” how assets wouldn’t be stripped at Morrisons if the deal price was raised. Assets that could be sold off could include petrol stations, factories, warehouses and stores.

The Morrisons bidders have tried to put shareholders’ minds at rest, saying the supermarket’s large real estate portfolio — part of what makes it an attractive target — wouldn’t be put on the line. But that promise is not legally binding.

Source: Yahoo Finance