Tuesday, March 11, 2014

Another good company about to be wrecked by a hedge fund

Another good company is about to be trashed by a hedge fund. Cerberus Capital has agreed to acquire Safeway Supermarkets and we know what that means: you'll see workers fired, assets sold, investment in the operating company curtailed...in other words, the company will be driven to shit, all so a bunch of hedge fund partners can make their billions.

Remember what happened to American retailing icon, Sears, after Ayn-Rand-following "Bozo" Eddie Lampert took over? The company is a disaster.

Cerberus plans to merge Safeway with another supermarket giant, Albertson's. Here's what Bob Miller, CEO of Albertson's had to say:

“Working together will enable us to create cost savings that translate into price reductions for our customers,” Bob Miller, Albertsons’ chief executive, said in a statement.

"Cost reductions" is a euphemism for job cuts. And don't think those "reductions" will be passed along to consumers because they won't...they'll go to bottom line profits that will line the pockets of the guys at Cerberus.

#Hedgefundsdestroyingtheeconomy

15 comments:

Malmo's Ghost said...

They shut down a grocery store near my western suburban home outside Chicago---and many others in the Chicago-land area too. There were so many dedicated workers at my local establishment, some of who were developmentally handicapped, but nevertheless damn hard workers and so very kind and cheerful. Where do they and the other dedicated employees go now to find work?

BTW, the pig behind the closing is the same pig that Gordon Gekko was based on. I went on the last day of business there and was moved to tears in seeing the patrons hug and console many of these employees. When I read later about the corporate raiders who screwed this company all I could think of was how positively evil these schmucks are. I'm sure they'll be celebrated on CNBC and FOX as virtuous company reformers.

If there's a Hell, I hope they all rot there.

googleheim said...

Mosler is reporting a report that small business lending is UP

However, it is all refinance and no activity

in fact, Bank of America is purging former Small Business Express line of credit ( formerly Fleet products ) because they probably most likely rigged the margins which were supposed to be fixed but doubled in 2008 when they anticipated and knew ahead of time that they were going to rig the LIBOR to go down to destroy the Credit Unions.

So the prime rates + margin equaled the final composite interest rate for these lines of credit ... as we know the prime rate dropped 5% or so ... and so banks doubled the margin portions of the composite interest rates.

Now they are terminating these lines of credit and forcing the lines of credit into LOANS

The loans show up as "lending to small business" as per report
at Mosler's website.

However it is not real lending with real activity.

Unknown said...

In DFW, Albertson's a terrible supermarket with awful customer services and prices. They would be aggressively foolish to get rid of Safeway's Tom Thumb brand name and consolidate their stores under Albertson's brand. I flat out will not shop inside an Albertson's because I don't like having to go in there and argue at the counter over the posted prices on their shelves vs. what they're ringing me up for. Too many times and at different stores.

Ryan Harris said...

Chicago is a special case, though Malmo because the entire Metro area is like Detroit was 20 or 30 years prior where the whole place is losing population so quickly that even the wealthy suburbs can't hold on, maintain appearances for much longer before lending dries up. Even though the last year or two, the population outflows have stopped, nothing driving the longer term trend has changed and it will surely accelerate again as it has for the last decade or two. As the thousands of demolitions happen and more houses get boarded and more companies move out, the burden only gets heavier. Worse, much of the assets that Chicago has borrowed against aren't even real. Their Water and Sewer receivables are mostly un-collectable, levied against worthless property along with property taxes that are annually higher than the full value of property for large swaths of the city. I always see listings for Cheap beautiful old houses in Chicago but they are toxic assets because they will sell for 2 or 3 thousand dollars, with 30,000 tax bills and 20,000 water bills needing 30,000 in work and a total value after being cleaned up of maybe $40,000. Renting them out isn't possible because taxes and water are higher than neighborhood rents and wages. The macro problems aren't going away.

I'm sure people in Chicago will be watching with horror over the next year, as 250 miles to the East we see most of Detroit's 'prosperous' suburbs fall under state control in Michigan. I give the City of Chicago decade at most before the problem becomes completely undeniable and the (former) third largest city in the country files for bankruptcy amid partisan bickering over the causes, pension cuts, school closures. DECAY.

Tom Hickey said...

In Iowa City there are are no national or regional supermarkets. They all closed because they apparently couldn't hack the competition.

The choices here are:

New Pioneer Co-op
Costco
Aldi's
Hy-Vee (employee owned)
Fairview (locally owned)
Ethnic grocery stores

Trader Joe's on occasion since the closest one is 110 miles away in Des Moines.

Walmart - i don't go there except rarely to get something something no one else carries.

Ryan Harris said...

I was driving through rural Iowa south of Minneapolis this Winter, and there aren't very many restaurants compared to other parts of the country too. From Algona to Blue Earth, a long drive, there was like 1 restaurant along the way that I saw. Surrounded by farms and food production but no restaurants to be found

Tom Hickey said...

Right, there aren't enough people anymore since the replacement of the family farm with agribusiness.

For example, I am familiar with a small town that in the Fifties had three car dealerships, two farm machinery dealerships, two lumber yards, two local banks, grain silos, feed stores, a grocery, a hardware-paint store run by the plumber's family, and a couple of restaurants. By the Eighties, just about all gone other than the grain silos, one bank that had sold to a regional bank, and one restaurant, if you could call it that. Oh, and a gas station and repair shop. The square was almost a ghost town.

Matt Franko said...

Tom a while back I priced some Roma tomatoes my wife uses for sauce and the same like 16 oz can of the Tutarossa tomatoes at the WalMart super center was going for like $1.09 for one can, the Safeway had them for like $2.79 and the COSTCO you could get them for like $1.15 per can but you had to buy 6 cans in a shrink wrappped box...

So people just cant afford the Safeway prices anymore as I believe "the rent is too damn high!" (where have I heard that before??? ;)...

I dont think Safeway capitalizes their real estate they leverage up buy leasing the properties for top dollar... Wal-Mart buys the land and builidngs same for Home Depot, many others....

So Cerberus better be VERY careful about what they are getting into here... they better check out what the lease terms are and also better not assume those leaseholds have any inherent residual value... big boxes are closing like crazy (Staples just announced they are closing 225 stores this year as that whole Bain Capital led mom and pop killing scam is coming to a close...)

The internet is KILLING commercial property values... this could be another one where just like Mike mentions with Sears, the Private Equity people are going to get burned eventually ... but probably not before insiders rob out all the cash they can...

rsp,

Tom Hickey said...

The Internet is killing the big box stores for sure due to the high rents and having to absorb the shipping costs to many locations. Places like Amazon is able to have low rent-low wage warehouses to which containers can be shipped directly, and the consumer pays shipping from there, or Amazon has a volume deal with UPS for its free shipping.

Sears closed its mall stores here and reopened its small catalog-type store it used to run decades ago. Office Depot just closed, leaving Staples the only big box office supply store in the area.

The face of retail is definitely changing.

Bullish_Bear said...

Matt,

"Wal-Mart buys the land and builidngs same for Home Depot"

Walmart and Home Depot rent many of their locations.

"(Staples just announced they are closing 225 stores this year as that whole Bain Capital led mom and pop killing scam is coming to a close...)"

Can you please explain the "mom and pop killing scam" that you mentioned above?

Bullish_Bear said...

Mike,

"the company will be driven to shit, all so a bunch of hedge fund partners can make their billions."

Can you please explain how hedge funds or private equity funds make money by buying companies and driving them to shit? Please give some examples.

Tom Hickey said...

@Bullish_Bear

I am personally acquainted with many small business owners, some actual mom & pop stores, that either went out of business or changed their business plan to serve a niche market. This happened mostly several decades ago, when Wan-Mart and the big box stores were proliferating.

I write it off to the changing face of retail. Consumers were willing to put up with less personal service for lower prices. Then they complain among themselves about crappy service and how it's not like it was and how all the stuff from China is just cheap shit and you can't even buy a good nail anymore.

There are some stores that survived by providing for a niche market. There is one lumber company-hardware store in town that not only has survived but is doing well, serving mostly contractors with high quality goods.

A friend of mine who was a bookseller and did carpentry on the side was telling me that he was over at this store after visiting the Menard's after it opened here and said how he could buy cheaper at Menard's. The clerk responded, Yeah, and I bet its less expensive too.

You get what you pay for.

BTW, most of my acquaintances that survived and prospered switched to an upscale niche that was willing to pay for pampered service. The others just close their doors and moved on.

Same thing happened when agribusiness pretty much wiped out the old family farm. Most either retired or took paid work in a city somewhere else. A few people switched to specialty products, like organic, and are doing well.

Similarly the face of retail is changing again with Interest sales increasing quickly not only in volume but also percentage-wise, cutting into the mall model.

Americans like low prices and are not very concerned with quality, unlike Europeans, who tend to value quality and are willing to pay for it. At least they were. That may be changing, too.

Tom Hickey said...

"Can you please explain how hedge funds or private equity funds make money by buying companies and driving them to shit? Please give some examples."

Not like this is new. I've had acquaintances that looked for companies to buy that they could break up and sell off the assets profitably. Those companies often did not survive since they tended to be in dying industries, which is why they were for sale. The owners, being sentimental, didn't want to break them up themselves, or it didn't even enter their minds. Some of these companies had a lot of cash on hand at the time of the buyout, too.

These were usually fairly small deals, under 50M. Then private equity and LBOs came along and saw that this was possible on a much larger scale. That came of age in the Eighties and some of those deals went bad.

I don't see any intrinsic issues with this in that its just capitalism at work, the whole idea of which is to get a better return for capital by increasing efficiency. Capitalism is not about "creating jobs." Never was and never will be. One of the hallmarks of good management is decreasing the wage bill by increasing productivity. It's foolish to fault capitalism for doing what it is set up to do.

However, there is reason to think that some of the private equity and LBO activity was pure rent-seeking that added no value in increasing returns through the use of leverage. See Matt Taibbi's Greed and Debt: The True Story of Mitt Romney and Bain Capital.

As Picketty shows in this just released book, when return on capital increases over growth in output, then the result is growing inequality. His research shows that Marx was incorrect about the falling rate of capital. The rate of return has generally been high historically, and it is seems that unless special circumstances apply or high progressive taxation, the tendency is toward greater inequality.

But, hey, that's not the fault of capitalists, who are just doing their job under the institutional arrangements of capitalism. It's set up that way.

Ryan Harris said...

It isn't that simple though, Tom. Society has an interest in ensuring that resources are utilized and managed over longer time periods. When talking about forests, fish stocks, soil, water resources, oil wells, orchards, power plants, pension funds, banks, cemeteries, transmission lines, highways... it is clear that society has an interest in the stable long term production and maintenance of the resources. Most resources can be plundered or managed irresponsibly for short periods to make insane profits for a year or two but inevitably the resource is damaged for permanently or for very, very long periods. Some MBA can always come in an engineer a strategy to put in a few dollars of investment, take out a bunch of money and leave a depleted resource with a hand shake and smile. From TXU, to Harry & David, to Archstone there are so many cases where valuable public resources, where businessmen have been poor stewards and reaped rewards while raping the public's interest. It takes work, creativity and innovation to imagine ways to manage and use real resources productively. Responsible use is not always the most efficient use of capital/dollars... economists like to talk about capturing positive negative externalities but I find that framework obtuse and unhelpful...

Tom Hickey said...

Yes, but that is not capitalism. The theory is that privatization solves the issues of the tragedy of the commons and automatically provides optimal stewardship through the operation of the invisible hand of natural laws.

Of course we see from results that either this assumption is untrue or we con't actually have capitalism but something else.

The opposing answers are 1) that capitalism is flawed (my position) or 2) that we don't have capitalism because the heavy hand of government is no allowing the invisible hand of natural law to operate freely, which I think is tenable in certain cases but not tenable in the case of negative externalities.

If there is not intelligent regulation, then firms will do what they must to meet the competition and that means offloading expense onto society where possible. Any firm that doesn't compete by doing this will be priced out of the market. Negative externality is a fact of capitalism. There is no mechanism in capitalism to resolve it other than the social responsibility of capitalist and socially responsible capitalists are driven out by a Gresham effect, so to speak.

On the other hand, I don't think that it is the responsibility of firms to create jobs either, but rather to increase productivity through technological innovation. This increases real wealth with less work. The issue is how to distribute the increased opportunity for leisure as well as to absorb redundant worker who choose to work but cannot find jobs owing to a job shortage. Again, capitalism has not risen to the challenge but rather seeks first to preserve and increase capital, as it should under capitalism.

A job shortage is a glut in the labor market shown by UE. This is a chronic issue under NAIRU and an economy with a chronic market glut cannot be said to be in equilibrium. The labor glut affects aggregate demand resulting in gluts in other markets as well, and an economy with idle resources is underperforming, i.e., is inefficient.

So capitalism has at least these two flaw — socializing negative externalities and a chronic glut of the labor market.

These are major flaws and there are others as well. We need to revisit capitalism as an economic institution and devise something more efficient and effective.