Buyouts Didn’t Help U-T and Petco

Go, Newt! In your donnybrook with Mitt, please keep informing the citizenry about the rapacity of private equity groups (essentially leveraged buyout firms). I’m neutral on the nomination but feel strongly about private equity groups: they’re predators.

San Diegans have seen what’s happened to the Union-Tribune since being taken over and quickly flipped by Platinum Equity, a private equity firm. Petco Animal Supplies has gone through two dubious buyouts; some say the company has slipped noticeably, but Petco claims it is as healthy as ever.

Private equity firms buy undervalued companies, claim they have turned them around (often through accounting changes), and then take them public or dump them on a sucker. Most of the buyout money comes from debt piled on the supposedly sick company’s back. Then, the buyout bandits are likely to put the company in even more debt to pay themselves fat dividends. Worst scenario: the buyout gunslingers may put the ailing, leverage-laden company into bankruptcy to shed the debt and pension obligations.

Mitt claims that his former firm, Bain Capital, creates jobs. Nonsense. Whacking employment is a major tool used by private equity firms to fatten profits of companies they have purchased. The only objective of the private equity firm is to rake in money for its insiders and investors.

Today, the public is correctly focused on the tax breaks that Mitt and his business associates enjoy. He pays about 15 percent on $20 million–plus annual income. Financial engineers in his racket claim their income comes from capital gains, which have a lower rate. Sorry. The Bain Capitals of the world manage other people’s money; little of their own capital is at risk in these takeovers. The principals should pay ordinary income rates.

Takeover rustlers benefit because their investments are often domiciled in the offshore tax and secrecy haven of the Cayman Islands. Mitt’s handlers insist that he doesn’t benefit tax-wise from this arrangement. Tax experts say he does and that the U.S. Treasury suffers from the loot parked offshore. (In 2010, he had money in Switzerland.)

The utilization of tax and secrecy havens around the world, including the Caymans, is all too common. There are not only tax advantages. Also, there are few disclosure requirements. Moves can be kept hush-hush longer. Gerald (Gerry) Parsky, Republican powerhouse, flies every day from his Rancho Santa Fe estate to Aurora Capital Group in Westwood, a private equity firm he founded. Aurora put together a company named Aftermarket Technology. Caymans-based entities had 4.5 million shares; Parsky had a slug of them. Similarly, Aurora took an aerospace company named K&F public; some of the shares were domiciled in the Caymans. Parsky had some of them.

The public must understand that private equity groups are fast-buck operations. Josh Kosman is the author of The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy. Says Kosman, “Because the strategy of private equity firms is to sell their businesses within several years, they focus on quick, short-term gains and give little consideration to long-term performance.”

When Platinum Equity finalized its purchase of the Union-Tribune in May of 2009, it pledged it would make changes designed for the long term. But Platinum normally holds a purchase three to five years. Platinum sold the newspaper to local hotelier “Papa” Doug Manchester in November of last year — not even holding it three years. Platinum had continued the oft-justifiable head-chopping started by the Copley organization but cut too deeply, as the product shows. Platinum may have doubled its money or more in the deal, but San Diegans would appear to be the losers, given Manchester’s revelations about his editorial aims.

Petco Animal Supplies, the second-largest pet retail chain in the nation, has had problems through the years from excessively rapid expansion, among many things. Two private equity firms jointly bought out the company — twice. Petco’s stock was doing poorly when the buyout firms first purchased the company in 2000 for $600 million, most of which was debt plunked on Petco’s balance sheet. Two years later, Petco went public for the second time as the buyout firms amassed 600 percent profits.

Just a few years later, the largest pet retailer, PetSmart, wanted to buy Petco, but it didn’t want Petco’s top management. So Petco brass turned again to those two buyout firms. In 2006, Petco agreed to a second leveraged buyout by the predator pair at $29 a share. But PetSmart was offering $33. Nonetheless, the shareholders approved the buyout, even though Petco would be saddled with even more debt. The deal stunk, as plaintiff lawyers said in a class action suit that was settled in 2010, with Petco paying $16 million.

More than five years later, Petco has not gone public for the third time. Market research firm IBISWorld notes that since 2006, PetSmart has increased its market share to an estimated 41.8 percent from 39.2 percent. In those five years, PetSmart’s sales have grown by 7.4 percent annually while Petco’s have risen an estimated 5.9 percent. PetSmart stock has zoomed in the period, along with earnings. Because Petco is privately held, most of its numbers are a mystery.

An investment banker named Bryan, using the handle “I’m not that kind of banker,” writes knowledgeably on the web about the pet retailing business. Asking, “Has Petco lost its mojo?” he estimated last June that in the 2006–2011 period, PetSmart’s operating cash flow zoomed 45 percent while Petco’s went nowhere. As of mid-2011, Petco’s stock, if it were trading, would be 16 percent lower than the 2006 takeover price, he calculated.

Mike Foss, Petco’s chief financial officer, disputes the operating cash flow estimates on which Bryan’s estimates are based. “By virtually every single metric — sales, profit, cash — we’re better off” than in 2006, he claims. The company just hit $3 billion in annual sales.

The investment banker pointed out that Petco a year ago took out a $1.225 million loan, partly to pay a dividend to its investors (the takeover crew). The dividend: almost $700 million. Foss doesn’t argue the point but says Petco has saved $18 million yearly by rejiggering its bonds in a period of lower interest rates.

“Net net, it is clear that all is not going according to plan at Petco,” said the investment banker.

Mitt bitches that Newt attacks capitalism. But Mitt’s form of capitalism is strictly greed-obsessed — not the kind that made America great. Keep pointing that out, Newt.