Capital Markets

Barney Frank Eyes Private-Equity Pay Cut

But Dunkin' Donuts CEO tells the congressman there are big advantages for workers when a company is taken private.
David KatzMay 17, 2007

House Financial Services Committee Chairman Barney Frank threatened legislative action if Congress finds that private-equity deals spawn a “gross imbalance” in pay between the workers in the affected companies and the executives and entrepreneurs who take those companies private.

Introducing a hearing by his committee on the effects of private equity on workers and corporations, Frank acknowledged that there was no question that the firms create value when they take public companies private. However, “when a small number of individuals benefit from a deal and workers are laid off,” he said, “that seems to me wrong.”

The hearing was held just two days after the announcement of Cerberus Capital’s watershed acquisition of a controlling interest in Chrysler from DaimlerChrysler, and representatives and witnesses alluded to it and other big deals as evidence of the growing clout of private equity in the economy. Quoting Washington Post columnist Steven Pearlstein, Service Employees International Union president Andrew Stern testified that the deal signaled private equity’s arrival as “the most powerful force in business and finance.”

For his part, Frank cited a New York Times story that reporting on Tommy Hilfiger company layoffs of nine unionized office cleaners who were being paid $19 an hour in favor of a new cleaning contractor that would provide the services for $8 an hour. Last year, Apax Partners, a private-equity firm, bought the clothing company. Founder Tommy Hilfiger cashed in his own stake of $66 million and will be paid a minimum of $14.5 million a year through 2010. “This is the sort of pattern that will make us determined to do something,” Frank, a Massachusetts Democrat, declared.

But advocates of private equity, along with a number of Republican committee members, delivered a ringing defense of private-equity firms as regenerators of flagging companies and creators of jobs. Offering his own experience as an executive of a public company bought by private equity firms, Jon Luther, chairman and chief executive officer of Canton, Mass.-based Dunkin’ Brands, told of his company’s emergence from being a “cash cow” milked by its publicly-traded corporate parent to a rapidly growing poster child for going private.

In 2003, when Luther joined Dunkin’ Brands, the parent company of Dunkin’ Donuts, Baskin-Robbins, and Togo’s, it was owned by Allied Domecq, a publicly traded spirits and wine company based in the United Kingdom. Almost three years later, Allied Domecq was bought by Pernod Ricard, a publicly held France-based liquor company. In March 2006, Pernod sold Dunkin’ to a consortium of three of the biggest private-equity firms: The Carlyle Group, Bain Capital Partners, and Thomas Lee Partners.

Luther described what being a thriving, but low-priority operation in a public company was like. Allied Domecq and Pernod, “would sweep our cash every day to fuel their wines and spirits [business],” he said, after noting that “the focus was usually on the next quarter’s numbers.” Assigned yearly growth targets, the subsidiary was last in line for capital.

But the private-equity firms “liberated our company,” the chief executive recalled. “Rather than tell us to change our goals and our plans to achieve them, our new owners asked how they could support us.” Through their contacts, the firms helped Dunkin’ Brands put together a $1.5 billion securitization package, according to Dow Jones Newsletters. The arrangement, which created a limited liability corporation that collects the company’s free cash-flow to pay down debt, has reportedly freed up about $35 million a year. As a result, the company is investing substantial amounts in infrastructure and expansion, he said.

Further, the private-equity firms put the company in touch with a real-estate development firm that’s aiding its Baskin-Robbins franchisees to find alluring locations for their stores. Fueled by growth in its franchising efforts, the company expects to add 250,000 jobs in the next 15 years, Luther says. “Our new owners have never asked us to cut costs or reduce our headcount,” he testified. “Any reductions in staffing we’ve had over the past four years have been a result of our efforts to be more productive and less bureaucratic.”

One committee member, Richard H. Baker, a Louisiana Republican, suggested that a strict regulatory approach to private equity would hurt ordinary Americans by curbing opportunities for growth in their employer-provided pension plans, many of which invest heavily in the funds. “In our search to help working people, we should be concerned about how fat we make that regulatory book,” he said.

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