Bloomberg News

State Pensions Find Private Equity Bites as Blackstone Cuts Jobs

February 23, 2012

Feb. 23 (Bloomberg) -- Shirley Kimber walked off the production line from her $17.56-an-hour job at a Birds Eye Foods plant in Fulton, New York, for the last time in November.

The new owners, Pinnacle Foods Group LLC, a company held by the private equity firm Blackstone Group LP, closed the factory and fired 270 workers. Kimber, 64, got eight weeks severance for her 12 years on the job and lives with her 37-year-old unemployed daughter in the rust-belt town of about 12,000, northwest of Syracuse.

“They just used us. That’s exactly what they did,” Kimber said. “And then they kicked us to the curb.”

While the closing killed union jobs, it may also help protect the retirement benefits that organized labor bargained for on behalf of public employees.

In addition to Blackstone, the world’s largest buyout firm, New York State’s two public employee pensions and four New York City pensions stand to gain from the drive for higher profits at Pinnacle foods. The retirement funds poured $920 million into the $20 billion Blackstone fund that owns Pinnacle, which took over Birds Eye in 2009.

Public pension funds -- seeking to boost returns after failing to secure the 8 percent annual investment earnings needed to pay benefits for teachers, police officers and other civil servants -- are the biggest source of cash for private equity firms.

Companies owned by New York-based Blackstone added jobs at a faster pace than the U.S. economy for the past two years, said Peter Rose, a spokesman for the firm. Private equity’s investment returns “are one of the few ways that pension funds can help keep the promises that they have made to their retirees,” he said.

Pinnacle Foods closed the Fulton plant to cut transportation costs by moving operations closer to suppliers, said Michelle Weese, a spokeswoman for the company.

While firms such as Blackstone and Bain Capital LLC, co- founded by Republican presidential candidate Mitt Romney, have drawn scrutiny for their paring of jobs and the low tax rates enjoyed by executives, the role of taxpayer money in financing their acquisitions has received less notice.

Public pensions have about $400 billion with private equity, 29 percent of the total, according to Prequin Ltd., a London-based private equity research firm. That’s more than twice what was put in by private pension funds, the next biggest investor.

State and local government retirement funds “have been the investors that have really fueled private equity’s rise,” said Steven Davidoff, a professor of law and finance at Ohio State University’s Moritz College of Law in Columbus, Ohio. “For those people who complain about private equity, the money is really coming from pension funds.”

Private equity firms buy companies and seek to trim costs, improve operations, boost profits and resell them. The takeovers are typically financed by debt taken on by the purchased companies.

Fulton Mayor Ronald Woodward, a Republican, said the Birds Eye takeover has devastated his town, adding that he is troubled to learn that New York pension money helped finance the acquisition.

“Isn’t that a slap in the face to the people in Fulton that are losing their jobs and paying the salaries of those union workers and they’re using their investments there,” Woodward said. “It’s like biting the hand that feeds you.”

The financial crisis of 2008 and subsequent recession have left U.S. state public pensions $694.2 billion short of having enough assets to pay future benefits by the end of their 2010 budget years, according to data compiled by Bloomberg.

Private equity deals promised higher returns than stocks and bonds. The 15-year median return on stocks for public pension funds with more than $1 billion assets, before fees, is 5.5 percent annualized as of Dec. 31, 2011, while the median return for private equity in that time period is 9.8 percent, according to the Wilshire Trust Universe Comparison Service.

New York state’s teachers pension’s private equity investments delivered an annual rate of return of 11.8 percent as of June 30, 2011. New York City’s private equity investments in four of its five pension funds have returns ranging from 9.2 percent to 11.1 percent.

That helps save taxpayers money. For workers and the acquired companies, the benefits can be harder to discern.

A study led by the University of Chicago’s Steven Davis, based on 3,200 private equity deals from 1980 to 2005 and published in September, sought to quantify the impact. It found that employment at acquired companies dropped 6 percent in the next five years relative to stand-alone peers as they shuttered lagging businesses.

Still, the companies also added workers by opening new business lines and through acquisitions. The study concluded that such deals accelerated the “creative destruction” of jobs.

Rose Pitcher, 50, experienced that first-hand. After working 25 years at the Birds Eye plant in Fulton, she wrapped up her last shift in November as Pinnacle moved the plant’s jobs to Wisconsin and Minnesota. Other employers in the area, like an apple-packing plant in Oswego, pay less than half the $17 an hour she was making overseeing the machine sealing packages of Voila! ready-made meals at Birds Eye.

“There just doesn’t seem to be anything out there,” she said.

Blackstone says it has a record of boosting employment overall. In 2011, Blackstone’s companies added 4.6 percent to their payrolls by creating new jobs, rather than through acquisitions, and increased them 3 percent in 2010, said Rose, the company spokesman. That outpaced job growth in the economy, he said.

“Private equity is a vital source of capital to grow and strengthen companies where public capital cannot or is unwilling to invest,” said Rose.

New York Comptroller Thomas DiNapoli, the sole trustee of New York’s $140 billion retirement fund, declined to comment. New York City Comptroller John Liu declined to comment. John Cardillo, a spokesman for New York state’s Teachers’ Retirement System, declined to comment.

In November 2009, Pinnacle Foods, owned by Blackstone, agreed to buy Birds Eye for $1.3 billion from Vestar Capital Partners, another private equity firm. The purchase was financed by $1.15 billion of debt. Blackstone contributed $260 million in equity.

Two months later, U.S. Senator Charles Schumer, the New York Democrat, held a press conference with workers in Fulton, saying he would pressure the company to keep the plant open. Schumer said he called Stephen Schwarzman, Blackstone’s chairman and co-founder, and asked him to spare the factory.

Then Pinnacle started cutting jobs. In mid-2010, it began closing down the Rochester, New York headquarters where 200 worked. That December it announced the closure of a Tacoma, Washington, plant that employed 160 and would shift production to Iowa.

On April 13, 2011, a Wednesday, employees coming to work at the Fulton plant saw a makeshift sign taped to a window: A mandatory meeting for all employees would be held at the Fulton War Memorial, the town’s exhibition hall and gymnasium on the 15th.

A Birds Eye lawyer told those gathered that the company would close the Fulton plant and move some of the jobs to Wisconsin and Minnesota.

Wisconsin had offered Pinnacle $1.3 million in incentives to shift production to the state.

While new jobs were added elsewhere, the closures cut the Birds Eye’s payroll by about 300, or 17 percent, as it eliminated more jobs than were added elsewhere, according to Weese, the Pinnacle spokeswoman. She said such costs are common after corporate mergers.

Under Blackstone, Birds Eye’s sales and profits have risen. In the quarter that ended in September, sales were $248 million, an 11.2 percent increase from the year earlier. The growth was driven by expanded distribution and demand for new products, in addition to lower new product distribution expenses, the company said in a filing.

Drivers coming into Fulton are greeted by the red-brick Nestle chocolate factory, where for 103 years the company made condensed milk, semi-sweet morsels and Crunch Bars. It shut down in 2003.

The Nestle factory employed 1,500 people at its height. In 1994, Miller Brewing also shut down a plant just outside of town, putting 900 people out of work.

Fulton mayor Woodward, who was a maintenance supervisor with Nestle when the plant shut in 2003, said his story is another sign of the times.

“What you’re doing by doing that -- you are systematically eliminating the middle class,” he said. “You’re going to be rich or you’re going to be poor. There’s no in between.”

--Editors: Jeffrey Taylor, Larry Edelman

-0- Feb/23/2012 18:44 GMT

To contact the reporters on this story: William Selway in Washington at; Martin Braun in New York at

To contact the editor responsible for this story: Jeffrey Taylor at

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