An equitable balance

Is private equity bad for brands, or are investors now taking a longer-term view, asks Jane Simms.

Birds Eye: private-equity owned brand
Birds Eye: private-equity owned brand

Private equity (PE) has been getting a bad press. Its practitioners are often stereotyped as rapacious asset-strippers who invest the minimum in the companies they buy and extract the maximum profit when they sell them on - which is as soon as they can.

Reports of cases such as PE-backed film and TV production and distribution company MGM, which filed for bankruptcy protection earlier this month because it can't pay the interest repayments on its $5bn debt, and the failure of Guy Hands, boss of PE house Terra Firma, to convince a court that he was misled over the value of (the now heavily indebted) EMI when he bought it, provide ammunition for detractors.

The PE model, its critics argue, which typically involves relatively high levels of debt and interest repayments, can starve brands of investment - particularly in a recession, when the swift and high returns upon which the deal was predicated retreat from view.

Practical concerns

However, Martin Glenn, chief executive of PE-backed Birds Eye Iglo, is keen to point out that this is not a foregone conclusion. He will discuss the issue at The Marketing Society's Annual Conference tomorrow (Thursday), and insists 'there is no empirical evidence that private-equity ownership is bad for brands in a recession'.

Birds Eye Iglo has hiked its advertising and promotional spend by 27% this year on the back of a similar rise in 2009, according to Glenn. The additional investment has helped it launch products, including the award-winning 'Simply Bake to Perfection' range.

'We manage costs carefully, as any good business should,' he adds. 'But our owner, Permira, wants us to grow and grow our margins, as that is the way to get more money when it sells us.'

Indeed, Glenn claims the ownership argument is 'a total red herring'. He argues that a more pertinent concern 'is whether companies are so laden with debt that they can't operate'. Such problems, as he points out, are not the sole preserve of inappropriately financed PE-backed companies.

'Premier Foods, for instance, is well run, but has a terrible balance sheet, which is why it is having to sell Quorn - and it's a plc. Difficult capital structures get in the way of well-run businesses, whatever the ownership structure.'

Similarly, according to one retail analyst, the reason fashion chain New Look failed to float on the stock market earlier this year was more to do with the fact that it 'lacked a good growth story' than with its PE backing.

Some PE investments have been spectacularly successful - in both financial and brand terms. Bridgepoint, for example, bought Pets at Home for £230m in 2004; it sold it to KKR, another PE group, for £955m in January. In the intervening years, sales more than doubled, gross earnings more than tripled, almost 2000 jobs were created and 100 stores were opened.

Glenn believes that well-run PE-backed companies have more in common with family businesses than plcs, both in the sense that the interests of management and owners are aligned, and that, contrary to popular belief, ownership is relatively long term. He claims that about 40% of Cadbury shareholders invested in the business only three months before it was sold to Kraft in January. He also contends that the short-term focus on quarterly results in most plcs is potentially far more of a threat to investment in brands than the putative 'short-term horizons' of the PE houses.

'They hang on longer to companies than some might think, and reinvest in assets that they like,' says Glenn, citing as an example Birds Eye Iglo's recent purchase of Unilever's frozen-food unit, Findus Italy, for £800m.

What's more, there are signs that the overtly financial-engineering bias of PE firms is starting to be leavened by a marketing influence.

Creative business minds

Graham Hales, chief executive of Interbrand London, notes that Langholm Capital, which has owned Bart Spices, Dorset Cereals and Tyrrells, has a cohort of former Unilever, John Lewis and Marks & Spencer executives on its board. 'They demonstrate an innate understanding of marketing and brands,' he says.

The blend of financially oriented 'left-' and more creative 'right-brained' types is a good thing, believes Hales, who observes a more pronounced polarisation between the two different mindsets in the UK than exists in other countries.

He adds: 'Whatever the ownership structure, we need more hybrids to generate the long-term sustainable value growth - and to deliver similar value to ever-more demanding customers - that businesses will need if they are to survive and thrive in the post-recession era of austerity.'


Dorset Cereals - Langholm Capital sold the brand to Wellness Foods for £50m in 2008 after helping to lift sales from £4m to £30m.

EMI - Terra Firma bought the music company for $4.2bn in 2007, aided by a $2.7bn loan from Citigroup. Terra Firma now estimates EMI to be worth £1.8bn.

MGM - Bought by an investor consortium including Providence Equity Partners in 2005 for $5bn.

Pets at Home - Acquired by Bridgepoint for £230m in 2004; sold this year to KKR for £955m.

Tyrrells - Langholm Capital bought the potato-chip brand for £30m in 2008.

United Biscuits - Blackstone and PIA Partners bought the snacks manufacturer for £1.6bn in 2006 and are believed to be considering selling it for £2bn-plus.

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Bart Spices
Birds Eye
New Look