Hedge funds and Private Equity - PES

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to be a lucrative German market, and they hoped to find further hidden reserves in the company,
but these no longer existed, having been unlocked long before by BC Partners. Along with the
negative leverage effect, returns on equity also slipped into minus figures. Because of the high
purchase price that TPG and CSFB paid BC Partners, Grohe’s level of debt, which had already
been high, underwent another steep increase. That caused the rating agency Moody´s to reduce
Grohe´s credit rating. Moody´s finds fault in the high interest and restructuring costs and
claims, that they will probably continue to absorb a significant part of the operative cashflow.
The turnover in the third quarter in 2006 rose by 15.3% on 900 Mil. EUR, the EBITDA on the
basis of reorganisation expenses only about 14%.
In January, 2007 a variably bearing interest loan (floating rate note) was brought in the volume
of 800 Mil. EUR by Grohe to the capital market. Together with a new credit line of 150 Mil. EUR
the whole bank debts were replaced with it. Already in 2004 a loan of the same sort was transferred.
Both loans have together a volume of 1,135 Bn. EUR and are payable in 2014. An analyst
from S&P means, the new loan would improve Grohe’s liquidity position significantly. 80 Mil.
EUR of credit line and 30 Mil. EUR of liquid means would be available with it to the company.
Besides, the credit conditions were less strict than with bank loan. But on the other side the
risks implied by the financial instruments are very high and the term of the loan will not coincide
with the term of the involvement of the PE-investor.
2.3 Effects on job creation, investments in training
and education of labour force, investments in innovation
Under the first private equity investor, BC Partners, there were very encouraging developments:
further progress was made in internationalising the company, its organisational structure
was modernised, new products were put on the market more quickly, the product range was diversified,
and expenditure on research and development was increased.
2.4 Management policies and shareholder activism: stock option
programs, effects on board and CEO´s, management fees,
employee information
In respect to its rising level of debt the company was close to saturation point. This was to have
serious repercussions at a time when commodity prices were rising, the industry was entering a
difficult period, and competition in general was becoming tougher. One of the company’s responses
was to shift a large part of its production to low-wage countries. In the view of industry
experts, that was a strategic error. They believe it could damage the prestigious Grohe brand,
which might lead to a sharp fall in sales. By now this danger has also been recognised by
Grohe´s management. The brand Grohe is to be maintained as a premium brand. That’s why the
chairman of the board, Haines, does not plan to cut back any more jobs in Germany.
In the course of their restructuring drive, the second set of private equity investors have constantly
sought to play off the company’s various locations and their workforces against each
other. The workforces in the company’s plants and their works councils concede that they have
not cooperated as closely with each other as they might have done. The works councils interviewed
describe the representatives of the private equity investors as people who have no emotional
bond with the Grohe brand and the company’s products. They do not identify with the
company and its staff but regard Grohe as nothing more than a financial asset. While the works
councils were still able to cooperate in a professional manner with BC Partners, they describe