NYT is Excellent on Private-Equity

If you’ve been wondering what ever happened to high-flying private-equity, whose ever-bigger and ever-more-debt-laden deals dominated financial-press headlines in 2006 and 2007, but whose now-troubled deals have often been sort of put in the background by other financial crisis news, The New York Times has the story for you.

The Times’s Julie Creswell goes long
with a great story on Thomas H. Lee’s leveraged buyout of Simmons Bedding Company in 2003, years before the really crazy private-equity deals were sealed.

Long story short: THL loaded Simmons up with debt to pay itself hundreds of millions of dollars in special dividends. It made a nifty profit on the deal doing this—and drove the company into bankruptcy. Workers get screwed, bondholders lose their shirts (though many of them deserve to), while management and owners run off with their riches. Wall Street made out in all this, too, picking up millions in fees on each transaction, as the Times is good to point out.

In Simmons, the Times and Creswell have found a near-perfect anecdote to tell this story. The company has been flipped seven times in the last twenty or so years—each time by leveraged buyout.

Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.

But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.”

Effectively, THL took away all its downside risk and ensured a profit by borrowing hundreds of millions of dollars on Simmons just to put it in their own pockets. The economy turned down and Simmons business suffered. Had Simmons not been stuffed with debt it would have had much more breathing room to survive the recession. There’s some good stuff in the accompanying, well-produced videos, including the fact that Simmons’ CEO got his country-club dues and yacht payment covered.

Now a quarter of the workforce is laid off (of course, the bankruptcy was a great excuse to kill the union shop and move work to the non-union shop) and it’s about to be sold, yet again, to a private-equity firm.

And this is a very good couple of broadening paragraphs:

Simmons is one of hundreds of companies swept up by private equity firms in the early part of this decade, during the greatest burst of corporate takeovers the world has ever seen. Many of these deals, cut in good times, left little or no margin for error — let alone for the Great Recession.

A disproportionate number of the companies that were acquired during that frenzy are now struggling with the enormous debts. More than half the roughly 220 companies that have defaulted on their debt in some form this year were either owned at one time or are still controlled by private equity firms, according to analysts at Standard & Poor’s. Among them are household names like Harrah’s Entertainment and Six Flags, the theme park operator.

And the history of the company, given ample space here, is illuminating:

In 1986, his investment firm, Wesray Capital, and a handful of Simmons’s top managers acquired the company for $120 million, the bulk of which was borrowed. After selling several businesses to pay back some of the money it had borrowed, Wesray cashed out in 1989. It sold Simmons to the company’s employee stock ownership plan for $241 million — twice what it paid just three years earlier.

The deal was a fiasco for the employees. As part of the buyout, Simmons stopped contributing to its pension plan, since the stock ownership plan shares were meant to pay for the employees’ retirements. But then the bottom fell out of the housing market and Simmons, with its large debt, stumbled. Its pensions crumbled as the value of the stock plan shares plunged.

The Times quotes THL defending itself, weakly, but there’s notably no word about this:

Simmons issued debt that required the company to pay a hefty 10 percent annual interest rate. The proceeds were used to pay THL a dividend of $137 million.

From what I can recall, that was a very high interest rate to be paying in 2004, especially when the money being borrowed doesn’t even get reinvested into the company. That’s pretty much looting the company.

So what to do about this kind of stripping and flipping?

That conversation needs to be had. Let’s hope the Times has started one here.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.