hits, your cash flow goes down but you won’t go out of business because you own your own property, you don’t have to pay rent. In this case the private equity sold off the property, paid itself back in the proceeds from the property, so we call it asset stripping, and then made the Mervyn stores pay rent on property they used to own. But at this point in kind of bubble prices because the asset prices were going up in the 2000s, okay. And then they also did a dividend recapitalisation that I just talked to you about. They took out 400 million in a loan, put it on the 14
company and paid themselves back. So they’ve already, you know, 200% returns on their own investment of 200,000. Then there’s a story we tell about breach of contract and, as most of you know, running organisations or businesses depends on a series of relationship of implicit trust. Some contracts are explicit but there are a lot of implicit norms that are recognised. In the case of retail stores, they need merchandise and so their dependence on a supply chain and strong relationships across that supply chain really matter. And the way that retail stores do this is they ensure creditors – they need creditors who will advance money so the vendors can produce the products and then they can get the merchandise in the store. The private equity fund doesn’t know the business, comes in and says “Well I don’t know if we can guarantee you that flow, you know, the company isn’t doing that great so I don’t know if we can guarantee it.” What do the creditors do? They pull back. The merchandise starts coming in much more slowly, the stores look crummy and don’t have a whole lot on the shelves. The company goes bankrupt in 2008, okay. And so the final piece of the story is they go bankrupt in 2008, they owed 64 million, they were paying 80 million in rent that year. So this is a kind of classic case of using the various financial strategies to extract wealth without creating a productive enterprise and bleeding a productive enterprise. And so this is an example of how financial strategies can be used to extract value from an existing company. And, of course, this is all legal. You know, there’s nothing illegal in these activities. 15
Okay, so now I’m going to talk about a couple more things, providing evidence. First of all the implications for labour relationship. So there are a lot of labour cases of private equity kind of doing the union marginalisation thing. The more interesting cases are the ones where it actually has negotiated in good faith with unions and I’m going to give you a couple of examples. The Texas Utilities buyout in 2007 was the largest in US history, $40 billion, the utilities for the state of Texas. And the private equity was incredibly sophisticated. They went in, they did an entire campaign, a stakeholder campaign to get support. 17 million to lobby the State legislature. They got the environmental groups to support them on the idea that they would reduce coal powered plants and they negotiated a good contract with the union.
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