Mitt Romney looks pretty benign now, at least in comparison to the current clown sitting in the White House. But back when Romney was running for president, WC wrote a series of blog posts attempting to show just how dreadful Romney’s original line of work was: that leveraged buy-outs and Romney’s Bain Capital had done catastrophic harm.
But Bain Capital was a sweetheart, a mere pussycat, compared to Sun Capital. Let’s examine what happened to one of Sun’s acquisitions as a case study.
Marsh Supermarkets, founded in 1931, owned and operated grocery stores, convenience stores and pharmacies. For decades the company was successful and innovative.1 But as competition in the midwest grocery business heated up, Marsh failed to adapt. The Marsh family ownership of the chain ended when president Don Marsh sold the business to Sun Capital Partners for $325 million in 2006. Most of that purchase price wasn’t Sun’s money; it borrowed against Marsh’s assets, and put the whole package into a wholly owned subsidiary, MSH Supermarkets, Inc. The leveraged buy-out made Marsh’s financial situation worse.
Nor did Sun Capital have any experience or expertise in running a competitive grocery chain. A cynic – not that WC is cynical – would say that Sun never had any intention of salvaging Marsh. While there was a lot of excitement about Sun Capital “discovering” Don Marsh had cooked the books a little,2 Sun bought Marsh for its real estate holdings. A footnote in Marsh’s fiscal third-quarter 2006 report claimed that an appraisal showed the company’s real estate was worth $100 million to $150 million more than listed on financial statements. That’s the kind of thing venture capital firms zero in on.
So it wasn’t a surprise that Sun sold much of Marsh’s real property and leased it back, turning that $150 million in to a quick chunk of cash, and saddling Marsh with rental payments instead. Sun sold off the more profitable pharmacy division of Marsh. Then the convenience store arm. Finally, some of the more profitable stores. In none of those cases, did Sun apply the sale proceeds to, say, the woefully under-funded employee pension fund. And then Sun put Marsh into bankruptcy. Alas, in that bankruptcy there’s no money to pay all of those delinquent pension contributions. They totaled $80 million. That’s money that retired Marsh employees will never see.
Sure, a portion of the contributions will be made up by the Pension Benefit Guaranty Corporation, the federally-chartered insurance company that steps in when companies with pension plans file bankruptcy. Nut the PBGC only pays 60-75% of the original pension. And it’s going to run out of money, meaning Congress is going to have to put taxpayer monies in to keep it afloat.
How did Sun Capital do on its investment? It made back all but about $500,000 of the $51 million invested in buying and operating Marsh. And that was mostly someone else’s money. When Sun Capital tells you it lost money on Marsh, this is what they are referring to.
But Sun Capital is being too modest. It did much, much better than merely recover almost all of its investment. Sun was probably an investor in its own fund, so it may have shared a small portion of the $500,000 loss. But Sun also collect fees on the portfolio of companies it managed, including Marsh. Those fees would have more than made up for that tiny loss. And Sun Capital collected a $1 million annual management fee from Marsh, according to former executives. Sun Capital also collected big commissions for selling off Marsh’s assets, but we don’t know the amount of Sun’s commissions in the case of Marsh. Sun Capital has declined to disclose its fees in Marsh. But it’s safe to say that Sun made a very handsome return on Marsh. Just not enough money to pay the other bills. Like pension obligations.[^3]
This isn’t the first time Sun has stiffed pension funds. Powermate was a manufacturer of electric generators with a factory in Nebraska, Sun Capital took $20 million from the company as a dividend in 2006, according to bankruptcy court documents. Two years later, it sent the company into bankruptcy court, leaving the PBGC to pay for the underfunded pension covering 600 workers.
Then there was Indalex, an Illinois-based aluminum parts maker, Sun extracted a dividend of $70 million in 2007, according to bankruptcy court documents. Two years later it sent Indalex into bankruptcy, leaving the PBGC to pay more than 3,000 pensioners.
At the other two companies, Friendly’s in 2011 and Fluid Routing Solutions in 2009, Sun Capital used the bankruptcy court to shed the pension obligations — and then kept operating. First, Sun put each company into bankruptcy, essentially relinquishing control. In bankruptcy court, the companies were forgiven their pension debts of $115 million and $30 million, respectively. Then, once the companies were pension-free, Sun Capital bought the same companies out of the ensuing bankruptcy auction.
Joshua Gotbaum, a former director of the PBGC, has estimated that as of 2013 companies controlled by private-equity companies like Sun Capital and Bain have used bankruptcy to shed more than $650 million of pension obligations. At a nice, fat profit to themselves, of course. Because, capitalism! That leaves the PBGC or employees to pick up the tab.
It doesn’t have to be this way. Congress could fix it by giving pension funds a higher priority in bankruptcy. But the private capital funds have rich, powerful lobbyists. Former employees of the companies they’ve looted? Not so much.3
The Washington Post (paywall) has more details. It isn’t pretty.
- Marsh was the first supermarket in the world to use a bar code scanner at checkout. It probably invented the grocery loyalty/rewards program. And it was the first company to co-brand a credit card. ↩
- A jury awarded Sun Capital $2.2 million for former CEO Don Marsh’s misconduct. It get a lot of press coverage at the time, but, seriously, Don Marsh’s lifestyle had a tiny, tiny impact of the company’s bottom line. Marsh had lost $13 million in the preceding six months. It also represents a serious failure by Sun to perform its due diligence prior to buying the company. ↩
- Marc Leder is the co-founder of Sun Capital. He’s been dubbed by tabloids as “the Hugh Hefner of the Hamptons.” He claims the inspiration for Sun Capital was Mitt Romney’s Bain Capital. There’s another connection between Bain and Sun. Remember when Romney told an audience at a Boca Raton, Florida dinner that “47 percent of the people . . . who are dependent upon government, believe that they are victims.”? That fundraiser was sponsored by Sun Capital. ↩