"Treasury outlines tax breaks for John Lewis-style companies"

From City AM:

GOVERNMENT yesterday outlined plans for £50m of tax relief perks to help boost the number of venture capitalists who make money by allowing employees to temporarily enfranchise themselves.

The Treasury said it would introduce a capital gains tax relief on any controlling interest sold on into an indirect employee ownership business model - preferably one with lots of trustees, lawyers and accountants - in a bid to enable private equity to offload their stakes - the bulk of which is derived from the continuing efforts of whoever happens to be an employee at the time - to whoever happens to be an employee at the time.

It is also proposed that workers should be exempt from income tax and national insurance contributions on bonuses - which will enable the employing company to pay smaller gross bonuses than otherwise, which in turn will make them appear more profitable and boost the price which employees are willing to pay for the right to exploit their own successors - if they work for a company operating under an employee-owned model.

The proposals follow on from a Treasury pledge from March's Budget to provide £50m a year to support the extraction of more wealth from current and all future employees using employee ownership "trickle up" structures.

"Employee ownership is of no particular benefit to the wider economy, or else we would see more of it. Look at Associated Dairies, for Christ's sake. Starts off as a farmer's co-operative and now its a subsidiary of bloody Wal-Mart. Even the kibbutzim are being privately appropriated and sold off," chief secretary to the Treasury Danny Alexander said in a statement.

"Increased growth and business success of this business model will also add greater diversity to income streams for trustees, lawyers and accountants. They really took the piss with Performance Related Pay back in the nineties, which is why we had to shut that one down again. But the Big Four have given us their solemn word of honour that this time they won't abuse the new rules, and who are we to disbelieve them?"

John Lewis is one of the best known employee-owned companies, with most MPs owning household gadgets bought from the up-market department store.

Mr African Private Equity Fund

Private Equity Fun

From The Evening Standard:

One of London's biggest bus companies today buckled under the weight of its own debt and collapsed into administration only to be bought immediately by its one-time owner Stagecoach.

The acquisition of the East London Bus Group marks Stagecoach's return to the London bus market. It sold the operator of the Selkent, Thameside and East London bus brands to Australian bank Macquarie for £263 million four years ago, only to buy it from the adminstrator KPMG today for £52.8 million...

Explaining Stagecoach's decision to sell the business to Macquarie in the first place, finance director Martin Griffiths said today: “If someone gives you more than a business is worth, you would sell. At the time, Macquarie offered us a price that we thought was great value for our shareholders. We were running it profitably at the time, and expect to do so again. It's a good opportunity for us to return.”

Yippee! Our heroes, people who owned and ran a decent business, made a cool £200 million out of some foreign investment bank smart arses. What's not to like? The article continues:

Candover, once a leading light in the buyout industry, is closing down its £2.5 billion flagship fund after running out of money on deals including gambling group Gala Coral, on which it wrote off millions alongside fellow players Cinven* and Permira last year.

Other high-profile private equity deals of woe include Apax's £750 million stake in magazine group Emap, which it wrote down to zero last year, and Fitness First, the gym chain that reported a £242 million loss on last year after owner BC Partners** paid off a £642 million interest payment on its loans.

* See also this tale of woe.

** See also this tale of woe.

Debt For Equity Swap Of The Week

From The Telegraph:

The owner of the 1,600-strong Coral betting shop chain and the Gala Bingo business said four of its mezzanine debt owners had taken control after converting their £558m holding into equity and injecting another £200m cash to pay down senior debt.

Candover, Cinven and Permira – the buyout houses which owned what was once Britain's biggest private company – have exited the group. Permira is thought to have lost most of the £500m-plus it invested... Apollo, the biggest mezzanine holder, will emerge as Gala's largest shareholder with a 25pc stake. Cerberus will own 18pc, with Park Square taking 8pc and York Capital, 4pc.

1. Just to strip away a bit of jargon, 'senior debt' means most likely to be repaid and 'junior debt' or 'mezzanine debt' means least likely to be repaid, i.e. just above share capital.

2. So we can imagine Candover et al to be like over enthusiastic buy-to-let landlords, who borrowed money from Apollo et al but couldn't repay it out of rental income (in this case, the profits generated by Gala Coral. Apollo et al repossess the rented properties (the underlying business), and because the rented properties have some value and generate income, they don't demolish the rented properties (liquidate the business) they just take it over and keep going. Candover et al appear to have been wiped out, because they were in 'negative equity'.

So far so good.

3. The gimmick is that banks are actually in the same position as Candover et al*. The banks they have assets of a certain positive value (mainly money they have lent to people and which is being repaid with interest) and a to a large extent they are financed by borrowing money from other people (call it 50/50 between ordinary depositors and bond holders).

4. In the absence of government bail outs and guarantees, the shareholders would have been wiped out long ago, bond holders would have waived the right to be repaid the full face value of their loans to the banks (i.e. 'bonds') and would have become shareholders instead. Ordinary depositors can be considered to be 'senior debt' in this example, and would not be converted to equity.

5. What's interesting in this case is that the negotiations had been dragging on for nearly a year.

* You sometimes find almost endless chains - perhaps Apollo are in hock to a bank, so that bank takes over part of Apollo (debt-for-equity swap); but then that bank finds the value of its Apollo stake is not enough to repay its own bond holders, so the bank does a debt-for-equity swap with its own bond holders (who are in many cases other banks) and so on and so forth until the whole credit bubble is collapsed back to the underlying assets on one side (houses or businesses) and people who own them on the other side, without dozens of middlemen in between.

Private Equity Sour Grapes Of The Week

From CityAM:

FINANCIER Guy Hands is preparing to ask his private equity backers to plough another £100m into the troubled record company EMI.

The company, whose artists include Coldplay and Robbie Williams, is close to breaching the covenants on its £2.6bn debt with Citigroup and has until May to find fresh capital. Hands has asked EMI to put together a turnaround plan that will persuade investors in his Terra Firma private equity company to stump up the additional cash.

Terra Firma, led by Hands, bought EMI in 2007 for £2.4bn, but has since written down its investment. It has been wrangling with Citigroup for some time over EMI's debt burden, and is now suing the bank, which brokered the original deal, claiming it over-inflated the price of the record company.

I would add "I hope they both lose!", but the longer such a case drags on, the more money the lawyers get. Hmmm.