Shopping for Clerys: The unacceptable face of capitalism

 

Shopping for Clerys: The unacceptable face of capitalism

In 1973, the British prime minister, Edward Heath stood up in the House of Commons and referred to “the unpleasant and unacceptable face of capitalism”.

He was speaking about a mining group called Lonrho run by a buccaneering businessman, Tiny Rowland.

Mr Heath’s words seem particularly apt today.

Last week, our Taoiseach, Enda Kenny, was forced to respond in the Dáil to the sudden closure of Clerys with the loss of over 450 jobs.

Mr Kenny will have been aware of the limits of his power as he refused to accede to a demand from the Opposition for an immediate overhaul of the country’s insolvency laws.

The closure and the harsh manner of its implementation has drawn criticism.

The great irony is that the property deal at its heart was made possible by the recovery in asset prices that has come with the rebound in the economy.

This recovery has allowed Clerys’ former owners, Boston-based private equity group, Gordon Brothers, to quit town in a hurry with a fat cheque of around €29m in its back pocket, having effectively doubled its money.

Go to the Gordon Brothers’ website and you will discover a lengthy entry on its now former Clerys’ investment.

The Gordon slogan is: ‘Creating Value Where Other See None.’ According to the blurb on its CEO, Frank Morton, he has “worked with several European retailers, most recently the iconic Irish department store, Clerys.”

Readers are informed that Clerys is “already seeing an increase in like for like sales” and that Gordon Bros had worked “seamlessly” with restructuring company, Grant Thornton, to create only the second pre-packaged receivership sale ever seen in the country.

The authors go on to describe how back in 2012, at the time of its acquisition of Clerys, the decision was made to close two out-of-town stores, a third having just closed. The “primary object” of the exercise was the preservation of the O’Connell Street store.

We are told that Gordon Brothers agreed settlement claims with trade suppliers in record time, giving them the confidence to continue trading with Clerys. In short, Gordon Bros has ensured value preservation for stakeholders including suppliers, concessions partners and employees.

John Rowe, finance director of Clerys, is lined up to describe how Gordon Brothers “not only offered the best value for Clerys but also respected the significant heritage associated with the Group”. Happy days, indeed.

In fact, Gordon Brothers followed the private equity model as applied in the case of struggling department stores. According to the Roosevelt Institute, when a private equity buys in, it typically splits the acquired entity into two: a property company that owns the real estate housing the store, or stores, and an operating company.

The ‘op-co’ must typically pay an enhanced rent to the property company which may be later sold on at a large profit by the private equity, or ‘PE’ company.

Typically, such deals involve large layoffs of employees at the stage the PE firm enters into the deal, and later, at the departure stage. This was the case with Clerys where the property was hived off from OCS Operations, the entity charged with running the department store.

The emphasis is on boosting cash flow through cost cutting in the operating entity so as to service often enhanced debts while providing a nice cut for the venture capital outfit.

When Gordon Bros acquired Clerys in September 2012, they were quick to deny responsibility for the firm’s defined benefit pension schemes, insisting that they would not be “embroiled in legacy matters”.

In the process, they annoyed the trade unions, one of whom, SIPTU, mounted a picket.

Relations with the unions were rebuilt, though Mandate official, Michael Meegan, in December 2013, at the time Clerys reopened following a flood, expressed concern about the role of venture capitalists in department store ownership.

“Their instinct is to strip costs to the bone,” he said.

Elsewhere, Gordon Brothers has shaken up other struggling retailers, earning a hefty payout.

The Spanish retailer, Blanco, had almost 250 stores when it filed for bankruptcy two years ago. Gordon Bros took it over, closing 45 under- performing stores before selling it on to Saudi buyers.

Such shake-outs at the behest of ‘turnaround’ venture capitalists has become the norm. The private equity and property industries work in tandem to extract value from assets. This is a cold world in which PR spin trumps commitment. The new owners of the site, Natrium, including ‘D2’ and Cheyne Capital Management, have unveiled plans for thousands of jobs in a retail and hotel development.

Let’s hope the city planners force these people to jump through plenty of hoops.

But then, this is capitalism, folks, red in tooth and claw, and after all, we tried other models of living and they didn’t work out so well.

It may be possible to tame the capitalist beast, however.

In 2008, a Californian based retailer, Mervyn’s, sought bankruptcy protection. It was sold to private equity firms, Cerberus & Sun Capital, and real estate investment company Lubert-Adler. The new owners split off the property from the operator, jacking up the rents and securing almost $60m (€52.8m) in transaction fees.

Later, $60m in borrowings were incurred to fund a special dividend payout. Mervyn’s eventually collapsed.

Suppliers brought a legal action charging the private equity firms with fraudulent conveyance, alleging that as a result the operating company had been “doomed to failure”.

Recently the parties agreed a $166m settlement —one of the largest ever paid out by a PE group, without admission of liability.

While the outcome is welcome, it does little to assist the thousands of employees who lost their jobs.

The writer Eileen Applebaum put it well: “Like a bride led down the garden path, all the risk fell on Mervyn’s, its employees & creditors, with the private equity firm essentially, making promises to workers and communities it didn’t keep.”

Her solution is to force private equity firms at the time of such acquisitions to enter into a ‘pre-nup’ under which assets are set aside in secure locations. In the event of a subsequent collapse, this ensures creditors are paid and relief is provided to employees who would otherwise be left high and dry.

Something for our legislators to consider, something better than hand-wringing.

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