Bloomberg News

Pensions Find Private Equity Bites as Blackstone Cuts

February 28, 2012

(Corrects spelling of Duncan Hines in 19th paragraph.)

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.

Faster Pace

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.

By September 2011, public pensions with at least $1 billion in assets had an average of 11 percent of their money in private equity, more than triple their investments a decade earlier, according to Wilshire Associates, a Santa Monica, California- based consulting firm.

Rising Investment

Such funds 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.

Public pensions “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.

The business has been drawn into the presidential contest as Romney parried attacks from Republican rivals who suggested he built a fortune of as much as $250 million with takeovers that cost workers their jobs. He has disputed this characterization.

Private equity executives, including Blackstone managing director and Pinnacle Foods director Prakash Melwani, have helped stock Romney’s campaign war chests. Melwani declined to comment.

Mayor Objects

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.”

Her severance exhausted, Kimber now lives off unemployment benefits of $1,620 a month, plus $100 a month in pension payments, she said. She pays 22 percent of that for health insurance. Her daughter, also named Shirley, has a biology degree but can’t find a job using that specialty. To make a few extra dollars, she babysits and sells books online.

Executive Compensation

Robert Gamgort is chief executive officer of Parsippany, New Jersey-based Pinnacle Foods, which also makes Duncan Hines cake mix, Vlasic Pickles and Hungry Man frozen dinners.

Gamgort was awarded compensation valued at $5.5 million in 2010 and $11.6 million in 2009. Sara Genster Robling, head of the Birds Eye division, got pay packages worth $1.5 million in 2010 and $2.1 million the previous year. Most of the pay was in company stock. Gamgort and Robling weren’t available for comment, she said.

After the collapse of 1990s Internet bubble left pensions reeling from investment losses, state and local government funds poured money into private equity firms. The financial crisis of 2008 and subsequent recession 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.

Higher Returns

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.

The deals have served pensions well. 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.

‘Creative Destruction’

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, with a “modest” impact on total payrolls.

“Private equity investors are remorseless in their perspective on business,” said Robert Bruner, the dean of the University of Virginia’s Darden School of Business. “That is a manifestation of the rigors of the capitalist system,” he said. “It accelerates the process.”

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, with eight weeks severance, 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.

Portfolio Companies

Blackstone says it has a record of boosting employment overall. In 2011, Blackstone’s portfolio 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.

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.

Taking Down Signs

A couple of years after Miller shut its operations, city officials took down signs on Routes 481, 48 and 3, the thoroughfares entering Fulton, that read: “City with a Future.”

It’s a far cry from the 1930s, when the New York Sun wrote a story about Fulton entitled “The Mystery of Fulton, N.Y., the City the Depression Missed.” Then, factories powered by electricity generated by the Oswego River, which bisects the town, churned out knives, textiles and shotguns. The Fort Stanwix Canning Co. opened a plant in Fulton in 1902. In 1938 it began packaging Birds Eye vegetables.

Two Decades

The Birds Eye plant had survived during the past two decades as it passed from General Foods Corp. to Philip Morris Cos. to Dean Foods Inc. In 1998, Dean Foods sold it to Agrilink Foods Inc. for $400 million. In 2002, Agrilink sold a majority stake in the company for $175 million to Vestar Capital Partners, a private equity firm where Melwani was a managing director. Melwani is now at Blackstone.

Vestar transformed the company. In 2006, it shifted focus to brand-named foods and developing new product lines. It announced that it would jettison most of its non-brand frozen food businesses, affecting five facilities, including three in western New York, that employed about 740. In 2007, Birds Eye borrowed money to pay Vestar and Agrilink a one-time $298.2 million dividend, according to corporate filings.

Vestar turned Birds Eye into a smaller, profitable company. By 2009, Birds Eye earned $54 million on sales of $936 million, compared with a $131 million loss and sales of $1 billion in 2002. Its workforce had shrunk to 1,700 from 4,000, filings show.

In November 2009, Pinnacle Foods, owned by Blackstone, agreed to buy Birds Eye for $1.3 billion. The purchase was financed by $1.15 billion of debt. Blackstone contributed $260 million in equity. Carol Makovich, a Vestar spokeswoman, declined to comment.

$17 Million

Blackstone affiliates were paid $17 million in acquisition fees for arranging the Birds Eye deal. Pinnacle has also paid Blackstone at least $15.5 million in management fees since it was taken over by the firm in 2007, according to company filings.

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.

Charles Murphy, 66, had worked at the Birds Eye plant in Fulton through a series of owners for 22 years before retiring at the end of 2010. He said employees were optimistic that the factory would survive.

Schumer Press Conference

In January 2010, U.S. Senator Charles Schumer, the New York Democrat, held a press conference with workers in Fulton, saying he would keep pressuring the company until all the jobs were safe. Schumer said he called Stephen Schwarzman, Blackstone’s chairman and co-founder, and asked him to spare the factory.

“No one expected that place to close,” said Murphy.

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.

Paul Robinson, a 59 year-old who ran packing machines remembered asking managers, “What can we do to keep the plant open?”

‘Minds Made Up’

Nothing, he said Pinnacle managers replied. “They had their minds made up.”

Wisconsin had offered Pinnacle $1.3 million in incentives to shift production to the state. Worker’s compensation costs were also lower -- an average of $1,100 per employee in Wisconsin compared with $12,000 in New York, Mayor Woodward said.

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.

“Synergies are true with every deal. It’s not unique to this particular deal,” Weese said. “It’s less expensive to run one company than two.”

Not all public pensions have stood by as a private equity firms managing their money announced job cuts.

Hugo Boss

In 2010, after hearing that clothing-company Hugo Boss AG was planning to close a factory in a Cleveland suburb where it manufactured suits, threatening the jobs of 300 workers, Ohio’s public employee pension fund contacted Hugo Boss’s owner, London-based private equity firm Permira Advisers LLP.

Ohio’s Public Employees Retirement System had invested $80 million in the Permira fund that owned Hugo Boss. After writing to Permira and not getting a response, the pension fund followed up with another letter saying it would “think long and hard” about investing any more money with Permira, said Hugh Quill, a former Ohio pension trustees. The plant was never closed.

“These guys could have cared less about a plant in Cleveland, Ohio, but they did care about not having institutional investors for their next $500 million offering,” Quill said. “I think it was the right thing to do, given the amount of pain and suffering that was going on in the state.”

The California Public Employees’ Retirement System and public pensions from Maryland and Pennsylvania, which invested in Permira, also lobbied the firm. So did New York City’s pension funds.

Liu’s Letter

“New York’s pension funds do not wish to be investing in job loss or in a global ‘race to the bottom,’” New York City Comptroller Liu wrote in a letter to Permira.

Chris Davison, director of communications for Permira, declined to comment.

In Fulton, Charles Murphy’s wife, Donna, had been out on medical leave since October 2010 when the Birds Eye closure was announced. Still struggling with lung cancer, she lost her job when she couldn’t return to work for the factory’s last two months. That meant she didn’t get any severance pay. She worked there for 25 years.

Pinnacle’s Weese said details about medical leave and severance pay were worked out in negotiations with the employees’ union, Workers United Local 1822.

‘Devoting Your Life’

“You spend that many years devoting your life to the company, coming in to work every day, and they think nothing of you,” said Murphy, who lives in nearby Oswego. “This hurt a lot of people’s livelihoods.”

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

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Martin Braun in New York at mbraun6@bloomberg.net.

To contact the editor responsible for this story: Jeffrey Taylor at Jtaylor48@bloomberg.net


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