Why you should care
A private equity boom is changing the way business is done in Spain.
Like his father before him, Josep Bayod Cueto worked at one of Spain’s oldest companies for decades. It never occurred to the 59-year-old that he might lose his job at the sparkling winemaker Codorníu even as the company prepared to sell the family-owned business to a U.S. buyout fund. So when his redundancy notice arrived just over a year ago, “it felt like a divorce,” says Bayod Cueto, sitting in a café in the town of Sant Sadurní d’Anoia in Catalonia, where Codorníu has had its headquarters for almost 500 years. “I fear I won’t be the last.”
Bayod Cueto’s position was one of 100 — a sixth of the total workforce — axed in 2017 as Codorníu began negotiating a 390 million euro sale, prompted by falling sales and shareholder disquiet, to the U.S.-based Carlyle Group. Although the job losses predate completion of the Carlyle deal, it has fueled fears of further cuts in the town, whose 13,000 inhabitants rely on cava production to make a living.
The fallout from the job losses has also cast an uncomfortable light on the rising role of private equity in Spanish deal-making. In the first nine months of 2018, foreign private equity funds invested a record 4.35 billion euros in Spain, according to an analysis by the Spanish Venture Capital & Private Equity Association (ASCRI).
In some quarters that investment is prompting anxiety over the expansion of what critics view as a ruthless form of capitalism.
We are slowly losing our culture.
Toñi Prieto, general secretary, Unión Sindical Obrera
According to ASCRI, the number of international funds — some of them with billions of dollars under management — operating in Spain has grown, from 157 in 2016 to 184 in 2017. Permira, BC Partners, Cinven and KKR have all struck deals in Spain recently against a backdrop of economic recovery.
“Spain is an attractive place to invest,” says Lionel Assant, European head of private equity for the U.S. buyout group Blackstone, which recently took control of the gaming group Cirsa. “It has grown above most other eurozone countries for the last few years on the back of the structural reforms the country undertook and we expect that healthy rate of growth to continue.”
Last year, Luxembourg-based CVC, one of Europe’s largest buyout funds, bought a 20 percent stake in Gas Natural Fenosa from Spanish energy company Repsol in a 3.82-billion-euro deal.
The company was already planning to cut 1,400 jobs globally as part of a wider restructuring to save 538 million euros. But since the deal was struck the company, rebranded Naturgy, has axed 800 posts through voluntary redundancies, more than the 300 planned for 2018. Naturgy is now minority owned by a Spanish holding company, Criteria Caixa, which owns 24 percent. Global Infrastructure Partners, a New York-based private equity fund, owns another 20 percent.
It is not just at Naturgy that there are concerns. Across Spain workers fear the impact these groups might have on their jobs. Private equity groups tend to make money by buying companies, improving their efficiency through job cuts in underperforming areas and acquiring smaller businesses to merge them with the view to selling the company for a profit two or three years down the line.
“These cuts are a way of generating more value for shareholders,” says Toñi Prieto, general secretary of the 117,000-member Unión Sindical Obrera and a longtime Naturgy employee. “But we are slowly losing our culture. Following the voluntary redundancies, the loyalty to the company has been diluted.”
Spain is not the first country to display ambivalence to private equity funds. Industry observers have likened the hostile reaction in Spain to that in Germany more than a decade ago when the chairman of the then ruling Social Democratic Party likened financial investors to “a plague of locusts” descending only to strip firms of assets and shred jobs to make a quick buck.
Such skepticism is acute in Spain, a country battered by the financial crisis. At the height of the recession, in 2013, Spain had one of the worst unemployment rates in the European Union with nearly half of all young people without a job. The deep downturn was mainly a result of the crash of the local property market and disarray in the financial system.
The country is now enjoying some of the healthiest growth rates in the EU. Unemployment is expected to fall to 13.3 percent by next year — still high at almost double the EU average, but down from 16 percent in 2017 — and close to the rate in 2008 before the crisis hit.
Labor reforms dating back to 2012 and an overhaul of the banking system have acted as catalysts for deal-making, according to multiple private equity executives in the country.
“For many years, Spain was a place to avoid for investors because we didn’t enjoy a recovery as others in Europe did,” says Miguel Zurita, chairman of ASCRI. “At some point, there was even talk of Spain leaving the euro and unemployment figures were quite alarming. It was almost impossible to justify an investment in [the country].”
While there are domestic private equity players, overseas funds are making serious inroads. It is now “an attractive destination,” says Zurita, also a managing partner at Altamar Capital Partners.
The relaxation of labor laws, making it easier to hire and fire, has been particularly attractive to buyout funds, adds Zurita. “As an investor, you prefer to invest where you have the ability to adjust to the market and labor is a key component,” he says. He stresses that buyout groups do not, however, “buy with the idea of cutting jobs” but they do want “to have the option.”
Iñaki Echave, former head of Spain for Blackstone, believes increased lending by local and global banks has been critical to foreign investors.
“For years banks were either unable or unwilling to lend. The reform of the financial system in Spain has been more extensive and deeper than anywhere else in the Continent,” Echave says. This has led to more loans being made available to fund transactions, he adds. S&P Global Market Intelligence says 4.36 billion euros was lent in 2017, up from just 700 million euros two years earlier, according to data from LCD.
Big deals: Cirsa Gaming Corp.
Price tag: 2 billion euros
Spain’s largest casino operator also manages thousands of slot machines and many bingo halls. Long regarded as a good barometer of Spanish consumer confidence, its revenues took a big hit at the height of the financial crisis but have since recovered. Blackstone, which bought 100 percent of Cirsa, fought off some of the largest names in private equity, including Apollo Global Management, to secure the deal.
A growing economy — gross domestic product increased by 3 percent in 2017 — is not the only factor driving private equity investment. Concerns over Brexit have diverted attention to businesses in Spain, while groups including CVC, Carlyle and Apollo have also raised their largest-ever funds.
Armed with that cash, private equity is thriving not only in Spain but in Europe as well as the U.S., where the largest transactions since the financial crisis took place last year. Private equity groups have in recent times influenced the shape of some of the largest businesses in the world — from Unilever in Europe to Thomson Reuters in the U.S.— deploying billions in loans and employing millions of people around the globe.
But this frenetic activity is triggering a backlash in Spain, with some characterizing buyout groups as little more than rapacious, greedy financiers looking to ride the recent economic boom without thinking about the long-term future of these companies and their employees.
Big deals: Allfunds Bank
Buyer: Hellman & Friedman and Singapore’s GIC
Price tag: 1.8 billion euros
As in other recent large deals, competition for Allfunds Bank was subject to an intense bid battle with a string of foreign buyers vying to buy an asset that was once part controlled by Spanish banking group Santander. Among the bidders were the Chinese investor group Legend, Advent International and Permira. Hellman & Friedman and the Singapore sovereign wealth fund GIC won out against a backdrop of opposition to Chinese ownership.
This image of the finance sector in Spain was cast during the country’s financial crisis when distressed investors — mainly hedge funds — bet against the battered Spanish economy. Some of these made quick profits by buying companies low and selling assets high after the collapse of the property sector.
“We are not in distress anymore but their actions created some noise,” says Echave. “Those investors have moved elsewhere but private equity is about the long term.”
Negative headlines about private equity deals outside the country have dogged the sector in Spain, says Ludovic Phalippou, a professor of finance at Oxford University’s Saïd Business School and author of Private Equity Laid Bare. “There is a sense of emergency that private equity funds bring with them. People know this and it worries them at the start of an investment.”
Phalippou highlights a recent Washington Post article that accused Carlyle, the purchaser of Codorníu, of putting financial considerations ahead of patient care at a nursing home it took over in Pennsylvania. Carlyle has said the quality of care at HCR ManorCare was not compromised by financial considerations.
“Open any newspaper and you will find evidence of a bad image for private equity,” says Phalippou. “It is the purest version of capitalism on steroids and their ultimate goal is to make money. They don’t care about many other things and that’s where the tension with the rest of society comes in.”
Big deals: Hotelbeds
Buyer: Cinven and Canada Pension Plan Investment Board
Price tag: 1.2 billion euros
This deal was a bet on growing tourism demand in Spain. Individual tourist spending has been increasing every year since 2012 and, according to multiple analysts, it is likely to grow further thanks partly to troubles in holiday destinations in the Middle East and Africa. The acquisition of Hotelbeds, which sells rooms to travel agents and tour operators, is an example of how private equity buyers have spotted this opportunity. Swedish fund EQT was reportedly also interested in the business.
Zurita points to a study commissioned by ASCRI showing that private equity-owned businesses in Spain added 7.6 percent more jobs annually three years after acquisition. This compares with a 2.3 percent rise in jobs for those that did not receive private equity backing, according to the report by Spain’s Universidad Complutense de Madrid, based on 186 companies.
Yet a survey conducted by Consumer Science & Analytics, a polling group, shows public opinion toward private equity funds in Spain is roughly split down the middle. The reaction to the influx of foreign buyers in parts of the Spanish media has been more partisan, with some employing nationalist or protectionist language.
Gonzalo Baratech, a newspaper columnist for Crónica Global in Barcelona, described the Codorníu sale as being “positive to the shareholders” but “calamitous for the country because we are losing control of a company from these lands, one of the oldest in Spain and Europe.”
The political debate in Spain has not reached the pitch it hit in Germany or even in the United Kingdom when buyout funds were under public scrutiny over the little tax they paid. But on a local level Rafa Berlanga, a politician in Sant Sadurní, sums up the fears of many in his community: “Private equity groups are like a virus, they suck in as much juice and then leave the carcass behind.”
ASCRI’s Zurita insists that private equity funds add value to society. “It is not only good for us to have a healthy private equity industry but it is good for the Spanish economy as well,” he says.
At the time of the purchase, Carlyle sought to reassure the Codorníu workers by highlighting its record of buying family-owned businesses. Alex Wagenberg, managing director at the U.S. buyout group, said: “We hope to build on this successful trajectory by supporting the company with growing its global footprint, both organically and through acquisitions.”
But in Sant Sadurní workers are wary. Codorníu’s head of marketing and other executives lost their jobs at the end of last year. Some expect Carlyle to identify further cuts in administrative roles. “There will be some fat to trim,” says a longtime Codorníu employee.
Antonio Cruces, a longtime worker at the company and a prominent union leader, sums up the view of many in his town: “These funds move like the lion in the savanna: They prey on the weak.”
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