Private Equity Funds and the TDC Case Interview with by utg65734

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									During the course of the last year a debate on private equity funds has erupted in Denmark, mainly due to the
takeover of the Danish telecommunications incumbent TDC by five large private equity funds. One of the most
outspoken participants in the debate is Poul Nyrup Rasmussen, former Prime Minister of Denmark and current
member of the European Parliament and President of the Party of European Socialists (PES).



Private Equity Funds and the TDC Case
Interview with Poul Nyrup Rasmussen
Interviewer:                                  means that TDC now finds itself in a         internal economic cash flow has been re-
How do you see the TDC case?                  considerably depreciated competitive         duced considerably.
                                              situation, compared to its situation be-
Poul Nyrup Rasmussen:                         fore the takeover.                           These are the facts and are beyond dis-
If we look at the facts and compare                                                        cussion, if you like. If you ask if TDC
TDC before and after the takeover by          Second, shortly after the new owners         is in a stronger situation than before,
the private equity funds, then first of all   stepped in, they withdrew an extraordi-      in terms of the challenges of globalisa-
the strain of debt on TDC has risen no-       nary dividend, an amount in the region       tion but also with regard to the renewal
tably. My information is based on find-       of 43 billion DKK. This as such is not il-   process that TDC is constantly witness-
ings that have all been published. Today      legal, but it is pushing the boundaries of   ing, then by looking at the financial sit-
TDC probably has a net debt of about          the law, simply because it was not fore-     uation, the answer is no. TDC is in a de-
60 billion DKK and a strain of net in-        seen that such a situation would sudden-     teriorated situation compared to before
terest somewhere between 3.5 and 4 bil-       ly occur. It would have been more within     because its internal financial strength
lion DKK, which is almost parallel to –       the boundaries of reason, after a take-      has been decisively weakened. Net cap-
or at least close to – the annual earnings    over, to have done a share addition. So      ital has been reduced to a tiny size. As a
of about 4.7 to 4.9 billion DKK. This         here we have a situation in which TDC’s      result, financial capability of investment




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has been lowered to a level that is unac-
ceptable in comparison to the level of in-     Poul NyruP rasmusseN (1943 - )
vestment by the company seen until now.
Furthermore, TDC will have to borrow           Former Prime Minister of Denmark from 1993 until 2001
money on the market to maintain the
                                               Leader of the Danish Social Democrats from 1992 until 2002
previous annual level of investment, or
else will have to postpone its plans.          Member of the European Parliament and President of the Party of European
                                               Socialists (PES) from 2004
Interviewer:
However, TDC says that its plans for           Economist and CEO 1986-1988 of ATP, Denmark’s largest pension scheme and
investment in the years to come are the        major Danish investor
same as previously, and that they pretty
much will continue as before.
                                             sell off everything abroad as quickly as      nal experts to control their cash flow to
Poul Nyrup Rasmussen:                        possible. This is the next natural step for   the optimum. Both claims simply can-
Sure, but it will inevitably be at a dif-    them. Not that I think it is natural, but     not be right. So my point is that in re-
ferent price, which means that it will       we can see from other European com-           ality, the story of TDC underlines the
be harder for TDC. Having to invest          panies, that it is the move that has been     naivety that still marks the Danish po-
at the same level as previously will cost    used in similar situations.                   litical climate with regard to the trades
the company. It will have to borrow                                                        and industries – this new phenomena of
the money, as it does not have a cash        DEnmark Has BEEn                              large private equity funds – the so-called
flow to match the level of investment.       UnPrEParED For THE                            leveraged buyouts (LBOs).
Either TDC will have to borrow from          PrivaTE EqUiTy FUnDs
a bank syndicate or will have to borrow                                                    The way the LBO takeover took place
the money from the new owners. And,          Interviewer:                                  in cooperation with the management
knowing the new owners, I highly doubt       Why did TDC catch the attention of            of TDC merely underlines my point.
it will be for free.                         private equity funds?                         The payment methods and levels and,
                                                                                           therefore, the questions of competence
You could say that the way these private     Poul Nyrup Rasmussen:                         which could be asked of the manage-
equity funds persuaded TDC is con-           There is no doubt that private equity         ment of TDC in the case of the takeo-
sistent with a number of cases around        funds have been drooling over TDC’s fi-       ver are very serious. This is very consist-
Europe. They start off by contacting a       nancial and market strength in the IT         ent with cases of other takeovers around
group of foreign banks to get their con-     business in Denmark. It is not a mo-          Europe. Private equity funds have scout-
sent for providing liquidity to take over    nopoly but almost – TDC has a very            ed around to see whether management
the company in question. The banks can       dominant status. It has the copper and        are willing to cooperate, which is to say,
see that the company is well consolidat-     a crucial part of the telecom market in       whether they are willing to listen to the
ed and the money lent will quickly be        Denmark. Plus TDC has had optimal             persuasions of the funds.
returned. As a result, the company takes     cash flow management, if you choose to
over the debt financed by the banks, and     believe the retiring management. It can-      As I said before, the characteristics of
we know the rest of the story. So what       not be true that TDC was taken over due       these private equity funds tell us that
we have in this case is not an unknown       to bad financial management when, at          we in Denmark, and in Europe, have
way of operating. As is also typical, the    the same time, you can see in the annual      to think through how we choose to deal
first thing said by the new management       accounts that they used the most mod-         with this in the future. Having said this,
of TDC is that now it is important to        ern optimisation methods and had exter-       I wish to mention that it is wrong to




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subject everyone to the same treatment.     point here is that the movements I see       the big agreements on the labour mar-
What I am talking about here are the        and the declarations I hear constantly       ket, and then look at the last 40 years of
big LBOs. If, on the other hand, we talk    seem to confirm what the strategy of the     construction of our industrial and wel-
about venture capital funds, then they      LBOs is. It is focusing cash flow, with-     fare society, then this is the biggest with-
do a really good job, as they think long-   drawing as much liquidity as possible.       drawal of capital from one single, sound
term and on the terms of the companies,     And it is selling the company again as       and well-functioning company that we
whereas private equity funds think in       quickly as possible.                         have ever seen.
the short-term and on their own terms,
and thereby promise the pension funds,      Interviewer:                                 Interviewer:
especially in the US but also to an in-     It is also possible that parts of the        Turning to a more specific issue, TDC’s
creasing degree in Europe, proceeds sub-    Danish operations will be sold off. But      management has subscribed to shares in
stantially higher than what the market      then one could argue that this would         NTC (which now owns TDC) for 51.5
can traditionally offer.                    be good for competition on the Danish        million DKK. What do you think of
                                            market.                                      the management subscribing to shares
As an economist, I have to say that you                                                  in NTC?
can promise good proceeds that are sub-     Poul Nyrup Rasmussen:
stantially higher than those on the mar-    Yes, if they brought new investment          Poul Nyrup Rasmussen:
ket for short periods, but not perma-       thinking and a new boost of invest-          The offer to buy shares in the moth-
nently. If you do so, you constantly have   ments and new technological develop-         er company is a mix of interests that is
to do something which is quite atypical     ment, but that is not how it is. What        ethically offensive. In reality, we can
to the market. As a result, you strip the   happens here is not that you get a new       ask whether ordinary rules of compe-
company of all it is worth if you are to    opening of technology. Instead you get       tence are handled in the best interest
maintain an exorbitantly high level of      the destruction of an otherwise well-        of the company. I do not doubt that
proceeds.                                   functioning set of activities tied togeth-   there are some, possibly the chairman of
                                            er in a company. It could be said that in    TDC, and possibly the board, who will
sTraTEgy oF PrivaTE                         the short term it would enhance compe-       say: “Really, we are fully capable.” But
EqUiTy FUnDs                                tition on the Danish market, but the net     that is not the point. The fact that you
                                            result afterwards will be a weakening of     can question their competence is in it-
Interviewer:                                the Danish IT market in international        self a problem. The rules of competence
So, to the best of your knowledge, the      competition.                                 in Denmark are such that if by looking
first things they are selling off are the                                                at the objective factors one can decide
foreign parts?                              Interviewer:                                 there is basis for questioning compe-
                                            But would you compare it to the com-         tence, then you have a problem.
Poul Nyrup Rasmussen:                       pany raiders that we saw in the Danish
They have said it themselves in an in-      market in the 1980s and early 1990s?         You do not get the free and direct test-
terview in the press. The new manag-                                                     ing of your dispositions and the test-
ing director says that everything abroad    Poul Nyrup Rasmussen:                        ing of the owners’ demands of you, due
is up for sale and now they will focus      If you look at the amount of money be-       to the fact that you are now part own-
on Denmark and the Nordic countries.        ing withdrawn from the company and           er. So it is a mix of interests and, there-
And the new management has already          the trading/selling of the company, it       fore, also an enhancement of the image
sent the message that there will be fur-    does look like the biggest corporate raid    unfolding since the beginning of the
ther dismissals of staff – something that   in the history of Denmark, at least since    TDC case. However, I must say that I
totally contradicts what was said at the    the 1960s. If you start from the 1950s       still do not know everything about the
beginning of the takeover process. My       when industrialisation really began with     TDC case. I still feel like there are pag-




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es of the book that we have not yet had         have seen in this case will run the risk       deliver. This was the case witnessed in
a chance to read. I hope that in time we        of becoming like a knife in the wound          the US in the 1990s when the loans mar-
will get to read them, but from the mo-         inflicted on co-responsibility, which has      ket collapsed.
ment the story broke in The Wall Street         left its mark on labour market collec-         Looking at these four factors – the abil-
Journal and up until now I feel there           tive bargaining for many years. I speak        ity to handle globalisation, the ability to
are aspects of this case that society has       from experience. I have been part of an        finance our welfare society in the future,
a right to know.                                amazing number of collective agree-            the ability to secure solidarity, which is
                                                ments and I have been part of introduc-        one of our strongest parameters of com-
PrivaTE EqUiTy FUnDs                            ing income policy and real wage policy         petition in Europe, and finally the as-
in gEnEral                                      in Denmark. Negotiators in collective          pect of the pension funds – the conclu-
                                                bargaining are facing people who have          sion is clear. I foresee a negative trend in
Interviewer:                                    taken stock options and paid cheques to        all four of them.
How do you see the implications of pri-         themselves that are totally out of coher-
vate equity funds in general, and not just      ence with people’s daily salaries. We are      There is also something fundamental. I
in the TDC case?                                facing an ethical situation for which it is    spend my time travelling around, giving
                                                very hard to convince these people that        talks on Danish society, about flexicuri-
Poul Nyrup Rasmussen:                           not a lot can be afforded while they see
There are four observations that make           other parties who have given themselves
                                                                                                 TDC
me really concerned. First of all, I think      sums at a whole other level. If it is a gen-
                                                                                                 Danish telecommunications
there is a certain risk that it will weaken     eral trend that the stock market is rising       incumbent
our long-term response to the challeng-         and as a consequence of this you can add
es of globalisation. If the net result of the   stock options, then those who work with          In January 2006, taken over by
operations of the private equity funds –        stocks get an exorbitant bonus while reg-        Nordic Telephone Company (NTC)
who all openly admit that they operate          ular wage earners can look forward to a          owned by five international capital
                                                                                                 funds: Blackstone, Apax Partners,
within a timeframe of three-to-five years       couple of percent more. Then you have
                                                                                                 Kohlberg, Kravis Roberts & Com,
and then back out – is that the compa-          a pattern that in the long run will have         Permira and Providence Equity
nies are left in a much worse state than        a destructive effect on Danish society. It
before, which means the companies’              will work against the concept of Danish          NTC presently owns 88.2% of the
long-term globalisation strategies are          solidarity.                                      TDC shares
greatly weakened, because their possi-
                                                                                                 Established in 1990 by the Danish
bilities for investing in technological up-     The fourth element I wish to mention is
                                                                                                 government as a holding company
dates, employee education and new mar-          pension funds. Pension funds might be            for the regional Danish telephone
kets will be considerably weakened.             tempted by the promise of the very high          companies
                                                returns. There is a lot to indicate that the
My second point is tax payment. The             big international banks that are financ-         1994: 49% of shares sold on the
tax yields that a society like Denmark          ing these takeovers through the private          open market

is missing out on are quite considerable.       equity funds are willing to provide fi-
                                                                                                 1998: Totally privatised with
This is quite serious for a small country       nancing on very easy terms. This means           Ameritech as major share holder
like Denmark that needs its welfare sys-        that the loans market will suddenly pull
tem to function properly.                       out of the pension funds, maybe not im-          1999: SBC takes over the Ameritech
                                                mediately but within three-to-five years,        shares
The third issue I would point out is what       with losses far too huge for them to deal
                                                                                                 2004: SBC sells all shares and all
I would refer to as the force of coherence.     with because the capital funds have
                                                                                                 TDC shares are on the open market
I think that stock options as high as we        promised them returns that they cannot




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ty, about the forces of coherence, about    but what about the rest of Europe?            and I have realised how important this
mutual understanding, about the sense                                                     company is. We did not prepare the
of responsibility in ordinary people,       Poul Nyrup Rasmussen:                         framework and the protection of public
about the rights and the duties. And eve-   British politicians are very concerned        interest well enough.
rywhere, in Eastern and Central Europe,     about hedge funds and private equi-
they are deeply committed, and this will    ty funds. I can also see that the French      Interviewer:
also be the nucleus of the vision I call    and the Italian politicians are very con-     The idea back then was to have a strate-
New Social Europe. I can see the pow-       cerned. Regarding the Germans, a lot          gic investor. But now it is another type
er of solidarity emerging and that is why   of people thought in the beginning that       of investor.
I speak up.                                 this was just the concern of the SPD and
PoliTiCal iniTiaTivEs                       that it was part of an election campaign.     Poul Nyrup Rasmussen:
                                            But from what I hear, it really is a wider    I think there were very few people
Interviewer:                                concern in the German business world          ten years ago who were able to predict
What do you think can be done about         and the German government.                    the new phenomenon of private equity
it? What initiatives are being taken?                                                     funds in Europe. Looking back, I have
                                            HisToriCal PErsPECTivE                        to say that the state did not set enough
Poul Nyrup Rasmussen:                                                                     rules with respect to putting TDC in
The first thing is to ask is what is the    Interviewer:                                  a new situation of competition. I did
prerequisite for optimal functioning of     Let’s return to TDC and look at it in a       not see the need to do so at that point
markets. And the prerequisite is to have    historical perspective. Taking the recent     in time, but looking back, I think there
optimal information about what is go-       developments into consideration, do you       should have been some higher demands
ing on. This was what earned Stieglitz      think it was right to sell TDC fully pri-     set. I clearly remember that we were
his Nobel prize. He proved that the opti-   vatise it in 1998?                            mainly preoccupied with securing uni-
mum performance of the market is con-                                                     versal service. But there needed to be
ditioned by us having all the informa-      Poul Nyrup Rasmussen:                         some additional demands. There should
tion we need. So my first point is that     I do not think it was wrong to modern-        have been some better thinking in the
now we have to make decisions through       ise, to contemplate a way to renew the        Finance Ministry.
legislation with a provision to ensure      telecom sector, the public telecom sector
that everybody can see what is going on.    that is; a way to enhance its ability to be
                                            more competitive. Everyone could see
Second, there is a lot to be done about     that in the coming years the pressure of
stock options, management fees, pro-        competition would increase drastically,
tecting the companies’ net capital, tax-    and you could not really say that nobody
ation, etc.                                 private was allowed to enter the telecom
                                            sector. It was bound to happen. The
We can do something – at a nation-          question in reality was how the condi-
al level as well as within the EU. It is    tions of competition were to be between
a question of political will and careful    large companies from Europe and the
regulation.                                 Danish telecom companies. And keep-
                                            ing that in mind, I think it was right to
Interviewer:                                say: Okay, let’s see if we can make the
Is this something people are attentive      transition of ownership in a sensible way.
to when you travel around? You say the      What I can see now is that there was a
Danish politicians have fallen behind,      failure to think five-to-ten years ahead,




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