Operating Companies on the Cheap -KKR and Bain Similarities at LuminantSomervell County Salon-Glen Rose, Rainbow, Nemo, Glass....Texas

Barbarians at the Gate

Operating Companies on the Cheap -KKR and Bain Similarities at Luminant

10 August 2012 at 11:57:17 AM

EFH (Energy Fufure Holdings) has been in the news a lot this week, what with bad financials, cutting back pensions and repaying back not-arms-length loans that they took FROM TXU when they bought it. I want to talk about a comment someone left on Somervell County Salon in 2011, when we were talking about whether Luminant was going to go for a couple more nuclear reactors at Comanche Peak.

1 - Henry Kravis   11 Apr 2011 @ 11:18

I work at the plant. Luminant doesn't have two nickels to rub together. I wouldn't get all wound up over a bunch of press releases about building a new nuclear plant. All of Luminant's cash has to go to pay management fees to Goldman Sachs, KKR and TPG. The billionaires in New York get first dibs on the money. This loan guarantee scam is just something they're trying to get that they think, and they're usually wrong, will have some sort of tangible worth when they either take Luminant into bankruptcy or flip it in the long-shot event that gas prices come back and Luminant's junk coal plants somehow come back into the money. The problem in Japan won't keep Luminant from building, low natural gas prices will. It is silly to think a company that is too cheap to do routine maintenance is going to plow billions and billions into a nuclear plant that isn't needed.  Everything this company does seems to blow up in its face, which is sad for the customers and employees, but doesn't bother the money-changers who own the company and are destroying it. Remember, they make a fortune on management fees. In a just world, the scumbag politicians who approved this sale would be horsewhipped, or at least tarred and feathered.

Now. Who and what does this remind you of?Mitt Romney, American Parasite.

Bain would slash costs, jettison workers, reposition product lines, and merge its new companies with other firms. With luck, they'd be able to dump the firm in a few years for millions more than they'd paid for it.

But the beauty of Romney's thesis was that it really didn't matter if the company succeeded. Because he was yanking out cash early and often, he would profit even if his targets collapsed.

and this is the part that reminded me of the comment above.

"When Bain Capital took over, it seemed like everything was being neglected in our plant," Sanderson says. "Nothing was being invested in our plant. We didn't have the necessary time to maintain our equipment. They had people here that didn't know what they were doing. It was like they were taking money from us and putting it somewhere else."

Remmber that *Henry Kravis*, above, said that Luminant is too cheap to routine maintenance. And yet, the top people make their money, including bonuses. Plus, management fees is EXACTLY what Mitt Romney did, as he sucked money out of so many businesses.

"The great irony is that his entire management experience at Bain Capital is buying companies and loading them up with debt and then looting the balance sheet," Foster says. "It's the very model that drove the American economy off the cliff then left other people to manage the wreckage."

KKR AND  Mitt Romney

Kosman calls it standard Romney operating procedure. To pump short-term earnings, he would essentially "starve a company," whacking not just employees, but also customer-service and research-and-development funding—the ingredients of long-term prosperity.

"I think they're one of the worst, at least during Romney's time," Kosman says. "They were very aggressive about dividends. They were very aggressive about borrowing the most money they could. He's very driven to be the best he could be, and that was to be as cutthroat as he could be. But in the process, he hurt a lot of companies and cost a lot of jobs, maybe tens of thousands of jobs."

Kosman says it's telling that Romney never cites companies he actually managed as evidence of his job-building skills.

"If Romney had some stories to tell, he'd use those stories," he says. "I think it's very interesting that he's not telling those stories because I think they don't exist."

What actually constitutes a welfare queen?

In 1988, he bought South Carolina photo-album maker Holson Burnes. In exchange for the firm's promise to build a new factory, the people of Gaffney, South Carolina, gave Bain $5 million in bonds and $200,000 in utility upgrades.

The plant closed just four years later. The 100 jobs there were later shipped to Mexico.

At GSI, he dumped $44 million in pension shortfalls on the federal government. And when he bought mattress maker Sealy in 1997, he took $600,000 in welfare to move the firm from Ohio to North Carolina.

Back to Luminant. Luminant said, with regard to those 2 reactors it wanted in the past, that they couldn't buy them without GOVERNMENT, TAXPAYER BACKED LOANS. And we already know that if they default on those loans, say, by declaring bankruptcy, that the TAXPAYER will be left holding the bag. Corporate welfare REALLY okay with you, especially in the case of SHARKS who feed off companies in hopes of *flipping* them?

Seems to me if you INVEST in a company with hopes of flipping it and making money but then the market turns, it's your own problem. Suppose I buy an old house and do some minimal repairs on it, gambling on the hope that the housing market is good, and planning to make a profilt. But the market goes sour, and I am stuck with my house. Does that make me a job creator if I'm an investor? Does it make my gamble YOUR problem and shoudl I expect to get additional govenrment handouts to help me? I don't believe so.

Let's just go back to this original comment about management fees, etc. Who's left holding the bag? Think KKR is? Nope

The loans that KKR and TPG took out for the LBO were repaid when the bonds were sold that were based upon the equity that was in TXU.  The current indebtedness is by EFH and not KKR and TPG.

In a default it is EFH that is left holding the bag, not KKR or TPG.

Once again we see the results of an LBO based on optimistic rather than realistic economic analysis.

The people who have made money on this deal are KKR and TPG through their management fee and the equity strip from TXU; and, the investment bankers who floated the bonds and short term financing.


The initial EFH bonds were rated as junk to begin with.

In this case the equity available in TXU was greater than the amount that KKR and TPG borrowed for the acquisition.

This is generally the case in any LBO.

While in some cases an acquirer will attempt to use the LBO in order to modernize or streamline the operations of a company in order to improve the financial condition of a concern outside of the spotlight and scrutiny of quarterly results, I do not believe that this was ever the intention of KKR or TPG in taking TXU private.

In the takeover, I do not remember anything from KKR and TPG about being able to improve the profitability of TXU, reducing costs or reducing overheads; or, streamlining operations.

The fact that all cash flow above immediate month to month operating needs is dedicated to the management fee and bond repayments indicates to me that the takeover was indeed nothing more than an equity strip.

Also given KKR and TPG's typical IROR targets for takeovers also points out another reason why electricity deregulation has not worked in Texas and is not in favor of the consumer.

PS:  Typical GS fees for underwriting are in the range of 5% to 10% of the package, so the GS clip on the deal is on the order of $1B to $4B.  IIRC, the "management fee" by KKR and TPG is on the order of tens of millions per month.

It is likely that KKR and TPG have already recaptured their initial capital outlay.

The takeover of TXU is no different from the initial takeovers in the early 80's where the net worth of a company was not reflected in its stock prices.

Some people ask "What' the matter, are you against Henry Kravis or Mitt Romney making money, being rich? You must be jealous". Nope. I believe in the American way ot people working hard and becoming American success stories. But THIS way of doing it is odious, plus when those that believe in this form of company raiding get their money, why aren't they paying the same kind of taxes that the rest of us do and why are they putting their money in offshore accounts? Mitt Romney clearly doesn't want people seeing what's in his tax returns, but even more than that, I do not believe that those who make money this way, at the expense of company employees getting corporate welfare and gutting pensions should be looked up to as heroes. T Boone Pickens sure wasn't when he tried this crap in Texas years ago. Why should Romney or Kravis?

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