VULTURE CAPITALISM IN ACTION

The term vulture capitalism refers to techniques of financial manipulation (aka financial engineering) used to extract profits from companies without regard to the health or survival of the companies. [1] Workers, consumers, suppliers, and the communities where a company is based, as well as taxpayers in general, typically end up getting the short end of the stick while the vulture capitalists realize significant financial gains. In my previous post, I outlined the vulture capitalist business model.

Recent examples of vulture capitalism include the bankruptcies of Sears, Toys R Us, the Hostess confectionery company (maker of Twinkies), and seven grocery store chains.

The bankruptcy of Sears is a classic case of vulture capitalism. In addition, there are conflicts of interest and self-dealing by the vulture capitalist that are even worse than usual. The vulture capitalist who bought Sears is Eddie Lampert. He is a hedge fund operator and used his ESL Investments fund (ESL) as a partner in the deal. He and ESL bought Sears in 2005 and he installed himself as CEO and board chairman. Lampert became Sears’ largest shareholder (31%) and ESL owned another 18%. What is unusual is that Lampert’s ESL and a related fund are also the biggest lenders to Sears, having loaned it roughly $3 billion. Sears was paying roughly $250 million per year in interest to these Lampert-affiliated entities. Also unusual is Lampert’s claim on Sears’ real estate. In 2015, Lampert, as Sears’ CEO, sold many of Sears’ real estate holdings for $2.7 billion in a sale / leaseback deal to a real estate investment trust that is 43.5% owned by ESL and where Lampert is the chairman. Sears has paid roughly $400 million to this REIT in rent and other payments since 2015. Therefore, Sears was paying Lampert and his affiliated funds over $600 million per year in interest and rent, while he served as Sears’ CEO and board chairman. [2]

In 2014, Lampert, as Sears CEO, sold the Land’s End clothing brand to a consortium that was two-thirds controlled by his ESL fund. In 2016, he sold Sears’ Craftsman tool brand to pay down debt that was largely held by him and his funds. He has proposed selling of other Sears assets and has made bids himself to buy some of them. Sears’ other stockholders have already won a $40 million settlement over Lampert’s self-dealing and selling of assets at bargain prices to entities in which Lampert holds a large stake. As Sears’ largest lenders, Lampert and affiliated entities are in position to control whatever entity and assets may emerge from the bankruptcy process, in what may be the ultimate conflict of interest in this story filled with such conflicts. [3]

Over the last decade, 175,000 workers at Sears and its subsidiary Kmart have lost their jobs and another 68,000 jobs are at risk due to the recent bankruptcy filing.

In the newspaper business, a vulture capitalist hedge fund, Alden Global Capital (AGC), has aggressively pulled cash and other assets out of newspaper companies while radically cutting staff (i.e., costs) and loading debt on the companies. AGC owns the Denver Post and hundreds of other newspapers through Digital First Media (DFM). AGC took control of DFM in 2011 and since then has eliminated two-thirds of the staff at the newspapers. Meanwhile, AGC has pulled $241 million in cash and millions more in real estate from the newspapers. It has loaded the newspapers up with $200 million in debt and “borrowed” almost $250 million from the workers’ pension funds. [4]

Earlier this year, 70-year-old Toys R Us filed for bankruptcy and closed all its U.S. stores with 33,000 people losing their jobs. In 2005, it was bought by vulture capitalists Bain Capital, KKR, and Vornado Realty Trust. They loaded up the chain with $6.6 billion in debt, extracted windfall profits, and then filed for bankruptcy. Forty percent of all retail chain bankruptcies between January 2015 and April 2017 were by companies owned by vulture capitalists. Sixty-one percent of all retail job losses over this period were due to vulture capitalism. [5]

You may remember the 2012 bankruptcy of the Hostess confectionery company, which made Twinkies. The company had filed for bankruptcy in 2004 and its unions agreed to massive pay and benefit cuts worth at least $150 million annually in an attempt to help the company survive. A vulture capitalist fund, Ripplewood Holdings, bought the bankrupt company for $130 million, saddling it with debt approaching $1 billion. Ripplewood installed new management who received big pay checks as the company struggled – CEO Brian J. Driscoll had his pay tripled to $2.55 million before he was pushed out after failing to turn the company around. The next CEO got a pay raise as the company was again headed for bankruptcy and while it was demanding 30 percent salary and benefit cuts from its employees. The company had also stopped contributing to the union’s pension fund, ignoring its obligations under collective bargaining agreements. Nonetheless, it filed for bankruptcy, eliminated 18,000 jobs, and asked the bankruptcy judge to permit it to pay executives $1.75 million in bonuses to oversee the dissolution of the company. [6] [7]

Since 2015, seven major grocery store chains, including A&P, have filed for bankruptcy. All seven bankruptcies were driven by vulture capitalists. More than 125,000 workers’ jobs are at-risk as a result. The case of Southeastern Grocers is a classic example of vulture capitalism. It was owned by Lone Star Funds, whose billionaire owner, John Grayken, renounced his US citizenship to avoid taxes. Lone Star sold $145 million of the company’s real estate – stores and a distribution center – that the company then had to pay rent to use in a classic sale / leaseback vulture capital deal. Between 2011 and 2018, Lone Star received $980 million in dividends, much of it paid for by loans that cost Southeastern Grocers tens of millions of dollars a year in interest. By March 2018, when the company filed for bankruptcy its debt was $1.1 billion. [8]

By way of comparison, Kroger, a conventionally owned company that is one of the largest supermarket chains in the country, whose stock is traded on the New York Stock Exchange, is doing just fine. It has low debt and, because of low interest and rent expenses, can afford to invest roughly $3 billion per year in its facilities and operations. It is also investing in its workers through workforce development, increased pay and benefits, and pension benefits. These are things vulture capital-owned competitors are unable to do due to the interest and rent expenses foisted on them.

These are just a few examples among many of how vulture capitalism is hurting workers and our economy, enriching a few financial engineers, i.e., vulture capitalists, without producing any benefits for the companies, society, or anyone but themselves.

In my next post, I will identify policy changes that would rein in vulture capitalists.

[1]      Wikipedia, retrieved 10/24/18, “Vulture capitalist,” https://en.wikipedia.org/wiki/Vulture_capitalist

[2]      Dayen, D., 10/17/18, “How Sears was gutted by its own CEO,” The American Prospect (http://prospect.org/article/how-sears-was-gutted-its-own-ceo)

[3]      Cohan, W. D., 10/16/18, “The billionaire who led Sears into bankruptcy court,” The New York Times

[4]      Reynolds, J., 4/13/18, “Meet the vulture capitalists who savaged ‘The Denver Post’,” The Nation (https://www.thenation.com/article/meet-the-vulture-capitalists-who-savaged-the-denver-post/)

[5]      Dayen, D., 3/20/18, “Private equity: Looting ‘R’ us,” The American Prospect (http://prospect.org/article/private-equity-looting-r-us)

[6]      Adams, S., 11/21/12, “Why Hostess had to die,” Forbes (https://www.forbes.com/sites/susanadams/2012/11/21/why-hostess-had-to-die/#41e34edb6dfe)

[7]      Blumgart, J., 11/20/12, “Vulture capitalism – not unions – killed Twinkies,” Salon (https://www.salon.com/2012/11/20/vulture_capitalism_not_unions_killed_twinkies/)

[8]      Appelbaum, E., & Batt, R., Fall 2018, “Private equity pillage: Grocery stores and workers at risk,” The American Prospect (https://read.nxtbook.com/tap/theamericanprospect/theamericanprospectfall2018/private_equity_pillage_grocer.html)