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The threat of private equity takeovers of British listed companies has been evident for years: the collapse of Debenhams, the defenestration of aerospace innovator Cobham and more recently the squeeze of The Body Shop.
Elsewhere, Morrisons is only now escaping a three-year downturn thanks to debt-fueled buyout ownership, and Asda is losing market share.
As for the sewage treatment companies, they are beyond dispute.
Meanwhile, private equity is just as active, if not more active, than ever.
Away from these shores, UBS has just sold a Credit Suisse (CS) loan portfolio to private equity group Apollo, as the Swiss savior clears out CS’s investment banking arm.
Concerns: Bank of England’s Financial Policy Committee has issued scathing criticism of buyouts and is now launching a deeper investigation
Amid all this, the rear-view specialists at the Bank of England’s Financial Policy Committee (FPC), charged with maintaining stability in the city, have put forward scathing criticism of buyouts.
The FPC highlights concerns about debt levels – transparency and valuations.
Executives working in the private equity industry often argue that being outside the influence of publicly traded owners allows them to make the far-reaching decisions that are impossible under the pressure of quarterly reporting.
As the recent competition report on private equity ownership of veterinary practices shows, this has been hugely damaging to animal lovers in terms of rising prices and choice.
The Bank’s biggest concern is that higher financing costs have increased risk.
Default rates in private equity have increased. It also warns that the complexity and connections in the sector – private equity firms often buy and sell to each other – make it difficult to detect where the threat stability lies.
There are precedents for disaster in debt-fueled deals. The collapse of Michael Milken’s Drexel Burnham Lambert bankruptcy in 1990 is a striking example of how leverage can collapse the house of cards.
Package deal
Fittingly, both bids for British packaging giant DS Smith are paper bids.
Mondi, a spin-out of mining giant Anglo-American, is offering a deal that values the British company at £5.1 billion.
The second bidder, International Paper, is putting £5.7 billion on the table.
At a time when the world of paper and packaging is consolidating, DS Smith is attractive.
CEO Miles Roberts’ enthusiasm is infectious and he showed how, with creative thinking, what started as a waste disposal company collecting cardboard boxes from supermarkets could be transformed.
Its use of 21st century technology and embrace of climate change allowed it to become a key supplier to Amazon and other online delivery companies looking for custom packaging.
Its strength across Europe (although Brexit made life more difficult) is seen as desirable.
The assumption is that with two bidders in the ring, DS Smith is up for grabs. As we saw with Direct Line and Currys, this is not a given.
In Geoff Drabble, who has done excellent work at global rental group Ashtead, Smith has a robust chairman. It also has British funds Aviva, with 5.5 percent, Columbia Threadneedle and Janus Henderson among the top investors who could back a defense of the public interest.
International Paper is willing to allow a UK headquarters, staffed by DS Smith executives, and a secondary bid in London, if that helps it reach the finish line.
We should be grateful for small, albeit unwanted, mercies.
Higher authority
British financial justice is not known for its speed or robustness.
This could be one of the reasons why Autonomy founder Mike Lynch fought for so long to have a case against him heard in Britain instead of the US.
Tom Hayes, the first banker convicted of fraud in setting the Libor rate, has been on a decade-long journey to clear his name.
After a three-day hearing, the Court of Appeal denied his request.
Hayes insisted outside court that he is ‘not a quitter’ and one would imagine there are higher courts to go to – the Supreme Court in Britain and even European courts – that could hear the case.
As Yankees baseball coach Yogi Berra once noted, “It’s not over until it’s over.”
