Why Pacific Brands Has Been A Ticking Time – Bomb

Back in September 2008, SMH’s Ian Verrander wrote an article highlighting the time bomb that is ‘private equity’ deals.  The idea  is to take out huge loans to buy companies (or buy the existing shareholders out), gut them or reorgnise them, load them up with debt and sell them into a booming stockmarket. Nice work if you can get it.

Nasty business aimed at making the deal makers very wealthy whilst lumbering the company and it’s future shareholders with all the debt.

The next big bang is private equity

… the private-equity boom from 2006 and 2007 is the real time bomb silently ticking away in the mind of every executive of a major bank. In those two years, inexperienced thirtysomethings with inflated egos and overblown salaries scoured the globe buying businesses about which they knew nothing, with borrowed money, at grossly inflated prices.

It was an unprecedented debt binge that drove global stockmarkets in those years, and the fallout has yet to impact on the banking system.

Figures compiled by Thomson Financial show that in the year to June 30 last year, private equity firms spent $US1.06 trillion snapping up businesses.

The idea was to gut them, load them up with debt and sell them into a booming stockmarket in 2009 and 2010 and repay the loans. That’s never going to happen now.

Michael West today concludes what Verrander started and explains how and why Pacific Brands finds itself in the position it is today.

Vultures go hungry

Pacific Brands is a classic of the golden era of private equity.

Bought out of the foundering conglomerate Pacific Dunlop for $730 million in 2001, its new private equity owners ripped out $100 million in cash, geared it up with mountains of debt and sold it back to the stock market in early 2004. They banked $1 billion from the public float.

It was a slick operation all round. The privateers from CVC Asia Pacific and Catalyst Investment Managers, and their investment bankers from Macquarie Bank who teed-up the float, slapped together an impressive board of directors. Fat with other peoples’ money to spend, the big superfunds bought it with their ears pinned back, even though it had been loaded with debt to the tune of 3.5 times its earnings (before interest, tax and so on).

The success of the deal was not down to paper shuffling alone. The privateers had turned the manufacturer around. They fixed the supply side. They breathed new life into the brands. Blue collar marques such as Chesty Bonds and King Gee turned bogan into chic.

The irony won’t be lost on the 1,850 real blue collar types who are losing their jobs to China – in a company which deployed dinkum Aussie multimillionaire Pat Rafter and billionaire Sarah Murdoch to spruik its products.

As an end note, you’ll note that the kings of private equity deal in Australia, Macquarie Bank are currently under immense pressure.  And just to add insult to injury one former Macquarie Bank exectuive is now making a living helping to clean up some of the mess he helped create. And he’s making a killing out of it.

Former bosses back to make a killing

FLUSH with funding from redundancy deals and golden parachute payouts, former business high-flyers are returning as corporate undertakers, using the skills and networks honed during the boom years to profit from the bust.

Mr Moss, who left Macquarie in March 2007, just before the sub-prime crisis wreaked havoc on property markets, is now chairman of insolvency practitioners PPB, which is overseeing the administration of companies including ABC Learning, Allco Principals Investment Group, digital media group Destra Corporation and Lehman Brothers.

PPB and other insolvency specialists stand to pocket hundreds of millions of dollars from the collapse of companies, while the shareholders of these listed entities have been told to expect little or nothing.

When Mr Moss left Macquarie, he took a package of more than $30million, and hired James Keeran, a former executive at Macquarie Real Estate, to run PPB’s real estate consultancy business nationally. Mr Moss told The Weekend Australian he was glad he retired a year ago when Macquarie’s share price was $96, compared with the closing price yesterday of $16.98. “I think the highest and best use for a few of the investment bankers around town is probably selling secondhand cars,” he said. “Not all of them, but a few. There are a lot of people out there not adding any value at the moment, and what normally happens in a cycle is a lot of investment bankers in a cycle end up driving taxis.”

Mr Moss said he decided to join an insolvency business because he could see more than a year ago that things would start to fall apart. Mr Moss said he was surprised more people from investment banking had not gone into insolvency

Over to you


One Response

  1. Sarah says…actually they’ve held on to Australian manufacturing longer than other Australian businesses and to me it’s still an Australian company owned by Australian shareholders.

    Wow, it’s that easy? She does feel bad about it though, but no, she’ll keep her contract – she needs the money.

    Bonds’ model Sarah Murdoch says she feels “terrible” about parent company Pacific Brands’ decision to sack 1850 Australian workers.

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