Hedge funds and Private Equity - PES

their relations with TPG and CSFB as adversarial and say that cooperation between management
and labour has deteriorated dramatically. TPG and CSFB were now intervening heavily in
the operational and strategic management of the company. Major changes have been made at
senior management level.
When the company dropped into the red, the private equity investors brought in McKinsey management
consultants to identify ‘non-essential’ expenditure. The consultants proposed an accelerated
internationalisation drive, relocation of numerous production facilities to other countries,
a tighter purchasing policy, a smaller range of products and a slimmer administration. The main
brunt of restructuring was to be borne by the staff in Germany, many of whom would lose their
jobs. The plants at Lahr in the Black Forest, Herzberg and Porta Westfalica would be closed
down, leaving only the Hemer and Ludwigsfelde factories in Germany. More than half of the jobs
in Germany, totalling 2 700, would be axed. The works council commissioned its own specialists’
report, which proposed the preservation of the plants in Hemer, Lahr and Porta Westfalica.
The report also proposed that there should only be 842 job cuts. It recommended a considerably
smaller degree of relocation abroad than McKinsey had proposed.
In June 2005, the works council and the company management reached an agreement whereby
943 employees would be made redundant by the end of 2006. Natural wastage would account
for another 290 jobs. The company would continue to operate at all of its locations except
Herzberg. In August of 2006 it became known, that due to good going business Grohe will lay
off less employees than agreed. Instead of 943 workers only 770 will have to leave the company.
Nevertheless the dubious actions of the private equity investors had serious repercussions for
the company’s workforce, which has been suffering for years from the uncertainty of becoming
redundant.
3. LBO exit (secondary LBO, IPO, listing)
It is assumed that the new investors, TPG and CSFB, intend to make their exit by floating the
company on the stock market. They are targeting an annual 28% return on the equity they have
invested, which is considerably higher than the target set by BC Partners, who had the advantage
of taking over a company that had not yet been plundered.
Overview
Equity ratio average years 1994 – 1998: 50 %
Return on assets average years 1994 – 1998: 16-17%
Return on sales average years 1994 – 1998: 12 %
1999 sale to BC Partners – price of sale 900 mill € – 2/3 loans
Increase equity ratio from 32 % in 1999 to 44 % in 2000
EBITDA 1999: 769 mill. €
Increase debt capital ratio from 50 % before 1999 to 94 % in 2003
Negative leverage effect in 2003: return on assets less than debt capital ratio
Recapitalisation by BC Partners until sale 350 mill. €
Average return BC Partners 20 % per year
„Secondary sale“ to Texas Pacific Group (TPG) / CSFB / 1.8 bio. €
EBITDA in 2004: 911 mill. €
Loss 100 mill. € in 2004 due to debited interest
Restructuring program McKinsey: loss of 1200 working places in Germany out of 5000
Annex – 21 Case studies
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