During the course of the last year a debate on funds has erupted in Denmark, mainly due to the of the Danish telecommunications incumbent TDC by five large private equity funds. One of the most outspoken participants in the debate is Poul Nyrup Rasmussen, former Prime Minister of Denmark and current member of the European Parliament and President of the Party of European Socialists (PES). Private Equity Funds and the TDC Case Interview with Poul Nyrup Rasmussen

Interviewer: means that TDC now finds itself in a internal economic cash flow has been re- How do you see the TDC case? considerably depreciated competitive duced considerably. situation, compared to its situation be- Poul Nyrup Rasmussen: fore the takeover. These are the facts and are beyond dis- If we look at the facts and compare cussion, if you like. If you ask if TDC TDC before and after the takeover by Second, shortly after the new owners is in a stronger situation than before, the private equity funds, then first of all stepped in, they withdrew an extraordi- in terms of the challenges of globalisa- the strain of on TDC has risen no- nary dividend, an amount in the region tion but also with regard to the renewal tably. My information is based on find- of 43 billion DKK. This as such is not il- process that TDC is constantly witness- ings that have all been published. Today legal, but it is pushing the boundaries of ing, then by looking at the financial sit- TDC probably has a net debt of about the law, simply because it was not fore- uation, the answer is no. TDC is in a de- 60 billion DKK and a strain of net in- seen that such a situation would sudden- teriorated situation compared to before terest somewhere between 3.5 and 4 bil- ly occur. It would have been more within because its internal financial strength lion DKK, which is almost parallel to – the boundaries of reason, after a take- has been decisively weakened. Net cap- or at least close to – the annual earnings over, to have done a share addition. So ital has been reduced to a tiny size. As a of about 4.7 to 4.9 billion DKK. This here we have a situation in which TDC’s result, financial capability of investment

20 nb!¡ct has been lowered to a level that is unac- ceptable in comparison to the level of in- Poul Nyrup Rasmussen (1943 - ) vestment by the company seen until now. Furthermore, TDC will have to borrow Former Prime Minister of Denmark from 1993 until 2001 money on the market to maintain the Leader of the Danish Social Democrats from 1992 until 2002 previous annual level of investment, or else will have to postpone its plans. Member of the European Parliament and President of the Party of European Socialists (PES) from 2004 Interviewer: However, TDC says that its plans for Economist and CEO 1986-1988 of ATP, Denmark’s largest pension scheme and investment in the years to come are the major Danish investor same as previously, and that they pretty much will continue as before. sell off everything abroad as quickly as nal experts to control their cash flow to Poul Nyrup Rasmussen: possible. This is the next natural step for the optimum. Both claims simply can- Sure, but it will inevitably be at a dif- them. Not that I think it is natural, but not be right. So my point is that in re- ferent price, which means that it will we can see from other European com- ality, the story of TDC underlines the be harder for TDC. Having to invest panies, that it is the move that has been naivety that still marks the Danish po- at the same level as previously will cost used in similar situations. litical climate with regard to the trades the company. It will have to borrow and industries – this new phenomena of the money, as it does not have a cash Denmark Has Been large private equity funds – the so-called flow to match the level of investment. Unprepared for the leveraged (LBOs). Either TDC will have to borrow from Private Equity Funds a bank syndicate or will have to borrow The way the LBO takeover took place the money from the new owners. And, Interviewer: in cooperation with the management knowing the new owners, I highly doubt Why did TDC catch the attention of of TDC merely underlines my point. it will be for free. private equity funds? The payment methods and levels and, therefore, the questions of competence You could say that the way these private Poul Nyrup Rasmussen: which could be asked of the manage- equity funds persuaded TDC is con- There is no doubt that private equity ment of TDC in the case of the takeo- sistent with a number of cases around funds have been drooling over TDC’s fi- ver are very serious. This is very consist- Europe. They start off by contacting a nancial and market strength in the IT ent with cases of other around group of foreign banks to get their con- business in Denmark. It is not a mo- Europe. Private equity funds have scout- sent for providing liquidity to take over nopoly but almost – TDC has a very ed around to see whether management the company in question. The banks can dominant status. It has the copper and are willing to cooperate, which is to say, see that the company is well consolidat- a crucial part of the telecom market in whether they are willing to listen to the ed and the money lent will quickly be Denmark. Plus TDC has had optimal persuasions of the funds. returned. As a result, the company takes cash flow management, if you choose to over the debt financed by the banks, and believe the retiring management. It can- As I said before, the characteristics of we know the rest of the story. So what not be true that TDC was taken over due these private equity funds tell us that we have in this case is not an unknown to bad financial management when, at we in Denmark, and in Europe, have way of operating. As is also typical, the the same time, you can see in the annual to think through how we choose to deal first thing said by the new management accounts that they used the most mod- with this in the future. Having said this, of TDC is that now it is important to ern optimisation methods and had exter- I wish to mention that it is wrong to

nb!¡ct 21 subject everyone to the same treatment. point here is that the movements I see the big agreements on the labour mar- What I am talking about here are the and the declarations I hear constantly ket, and then look at the last 40 years of big LBOs. If, on the other hand, we talk seem to confirm what the strategy of the construction of our industrial and wel- about funds, then they LBOs is. It is focusing cash flow, with- fare society, then this is the biggest with- do a really good job, as they think long- drawing as much liquidity as possible. drawal of capital from one single, sound term and on the terms of the companies, And it is selling the company again as and well-functioning company that we whereas private equity funds think in quickly as possible. have ever seen. the short-term and on their own terms, and thereby promise the pension funds, Interviewer: Interviewer: especially in the US but also to an in- It is also possible that parts of the Turning to a more specific issue, TDC’s creasing degree in Europe, proceeds sub- Danish operations will be sold off. But management has subscribed to shares in stantially higher than what the market then one could argue that this would NTC (which now owns TDC) for 51.5 can traditionally offer. be good for competition on the Danish million DKK. What do you think of market. the management subscribing to shares As an economist, I have to say that you in NTC? can promise good proceeds that are sub- Poul Nyrup Rasmussen: stantially higher than those on the mar- Yes, if they brought new investment Poul Nyrup Rasmussen: ket for short periods, but not perma- thinking and a new boost of invest- The offer to buy shares in the moth- nently. If you do so, you constantly have ments and new technological develop- er company is a mix of interests that is to do something which is quite atypical ment, but that is not how it is. What ethically offensive. In reality, we can to the market. As a result, you strip the happens here is not that you get a new ask whether ordinary rules of compe- company of all it is worth if you are to opening of technology. Instead you get tence are handled in the best interest maintain an exorbitantly high level of the destruction of an otherwise well- of the company. I do not doubt that proceeds. functioning set of activities tied togeth- there are some, possibly the chairman of er in a company. It could be said that in TDC, and possibly the board, who will Strategy of Private the short term it would enhance compe- say: “Really, we are fully capable.” But Equity Funds tition on the Danish market, but the net that is not the point. The fact that you result afterwards will be a weakening of can question their competence is in it- Interviewer: the Danish IT market in international self a problem. The rules of competence So, to the best of your knowledge, the competition. in Denmark are such that if by looking first things they are selling off are the at the objective factors one can decide foreign parts? Interviewer: there is basis for questioning compe- But would you compare it to the com- tence, then you have a problem. Poul Nyrup Rasmussen: pany raiders that we saw in the Danish They have said it themselves in an in- market in the 1980s and early 1990s? You do not get the free and direct test- terview in the press. The new manag- ing of your dispositions and the test- ing director says that everything abroad Poul Nyrup Rasmussen: ing of the owners’ demands of you, due is up for sale and now they will focus If you look at the amount of money be- to the fact that you are now part own- on Denmark and the Nordic countries. ing withdrawn from the company and er. So it is a mix of interests and, there- And the new management has already the trading/selling of the company, it fore, also an enhancement of the image sent the message that there will be fur- does look like the biggest corporate raid unfolding since the beginning of the ther dismissals of staff – something that in the history of Denmark, at least since TDC case. However, I must say that I totally contradicts what was said at the the 1960s. If you start from the 1950s still do not know everything about the beginning of the takeover process. My when industrialisation really began with TDC case. I still feel like there are pag-

22 nb!¡ct es of the book that we have not yet had have seen in this case will run the risk deliver. This was the case witnessed in a chance to read. I hope that in time we of becoming like a knife in the wound the US in the 1990s when the loans mar- will get to read them, but from the mo- inflicted on co-responsibility, which has ket collapsed. ment the story broke in The left its mark on labour market collec- Looking at these four factors – the abil- Journal and up until now I feel there tive bargaining for many years. I speak ity to handle globalisation, the ability to are aspects of this case that society has from experience. I have been part of an finance our welfare society in the future, a right to know. amazing number of collective agree- the ability to secure solidarity, which is ments and I have been part of introduc- one of our strongest parameters of com- Private Equity Funds ing income policy and real wage policy petition in Europe, and finally the as- in General in Denmark. Negotiators in collective pect of the pension funds – the conclu- bargaining are facing people who have sion is clear. I foresee a negative trend in Interviewer: taken options and paid cheques to all four of them. How do you see the implications of pri- themselves that are totally out of coher- vate equity funds in general, and not just ence with people’s daily salaries. We are There is also somethingfundamental. I in the TDC case? facing an ethical situation for which it is spend my time travelling around, giving very hard to convince these people that talks on Danish society, about flexicuri- Poul Nyrup Rasmussen: not a lot can be afforded while they see There are four observations that make other parties who have given themselves TDC me really concerned. First of all, I think sums at a whole other level. If it is a gen- Danish telecommunications there is a certain risk that it will weaken eral trend that the stock market is rising incumbent our long-term response to the challeng- and as a consequence of this you can add es of globalisation. If the net result of the stock options, then those who work with In January 2006, taken over by operations of the private equity funds – get an exorbitant bonus while reg- Nordic Telephone Company (NTC) owned by five international capital who all openly admit that they operate ular wage earners can look forward to a funds: Blackstone, Apax Partners, within a timeframe of three-to-five years couple of percent more. Then you have Kohlberg, Kravis Roberts & Com, and then back out – is that the compa- a pattern that in the long run will have Permira and Providence Equity nies are left in a much worse state than a destructive effect on Danish society. It before, which means the companies’ will work against the concept of Danish NTC presently owns 88.2% of the long-term globalisation strategies are solidarity. TDC shares greatly weakened, because their possi- Established in 1990 by the Danish The fourth element I bilities for investing in technological up- wish to mention is government as a dates, employee education and new mar- pension funds. Pension funds might be for the regional Danish telephone kets will be considerably weakened. tempted by the promise of the very high companies returns. There is a lot to indicate that the My second point is tax payment. The big international banks that are financ- 1994: 49% of shares sold on the open market tax yields that a society like Denmark ing these takeovers through the private

is missing out on are quite considerable. equity funds are willing to provide fi- 1998: Totally privatised with This is quite serious for a small country nancing on very easy terms. This means Ameritech as major share holder like Denmark that needs its welfare sys- that the loans market will suddenly pull tem to function properly. out of the pension funds, maybe not im- 1999: SBC takes over the Ameritech mediately but within three-to-five years, shares The third issue Iwould point out is what with losses far too huge for them to deal 2004: SBC sells all shares and all I would refer to as the force of coherence. with because the capital funds have TDC shares are on the open market I think that stock options as high as we promised them returns that they cannot

nb!¡ct 23 ty, about the forces of coherence, about but what about the rest of Europe? and I have realised how important this mutual understanding, about the sense company is. We did not prepare the of responsibility in ordinary people, Poul Nyrup Rasmussen: framework and the protection of public about the rights and the duties. And eve- British politicians are very concerned interest well enough. rywhere, in Eastern and Central Europe, about hedge funds and private equi- they are deeply committed, and this will ty funds. I can also see that the French Interviewer: also be the nucleus of the vision I call and the Italian politicians are very con- The idea back then was to have a strate- New Social Europe. I can see the pow- cerned. Regarding the Germans, a lot gic investor. But now it is another type er of solidarity emerging and that is why of people thought in the beginning that of investor. I speak up. this was just the concern of the SPD and Political Initiatives that it was part of an election campaign. Poul Nyrup Rasmussen: But from what I hear, it really is a wider I think there were very few people Interviewer: concern in the German business world ten years ago who were able to predict What do you think can be done about and the German government. the new phenomenon of private equity it? What initiatives are being taken? funds in Europe. Looking back, I have Historical Perspective to say that the state did not set enough Poul Nyrup Rasmussen: rules with respect to putting TDC in The first thing is to ask is what is the Interviewer: a new situation of competition. I did prerequisite for optimal functioning of Let’s return to TDC and look at it in a not see the need to do so at that point markets. And the prerequisite is to have historical perspective. Taking the recent in time, but looking back, I think there optimal information about what is go- developments into consideration, do you should have been some higher demands ing on. This was what earned Stieglitz think it was right to sell TDC fully pri- set. I clearly remember that we were his Nobel prize. He proved that the opti- vatise it in 1998? mainly preoccupied with securing uni- mum performance of the market is con- versal service. But there needed to be ditioned by us having all the informa- Poul Nyrup Rasmussen: some additional demands. There should tion we need. So my first point is that I do not think it was wrong to modern- have been some better thinking in the now we have to make decisions through ise, to contemplate a way to renew the Finance Ministry. legislation with a provision to ensure telecom sector, the public telecom sector that everybody can see what is going on. that is; a way to enhance its ability to be more competitive. Everyone could see Second, there is a lot to be done about that in the coming years the pressure of stock options, management fees, pro- competition would increase drastically, tecting the companies’ net capital, tax- and you could not really say that nobody ation, etc. private was allowed to enter the telecom sector. It was bound to happen. The We can do something – at a nation- question in reality was how the condi- al level as well as within the EU. It is tions of competition were to be between a question of political will and careful large companies from Europe and the regulation. Danish telecom companies. And keep- ing that in mind, I think it was right to Interviewer: say: Okay, let’s see if we can make the Is this something people are attentive transition of ownership in a sensible way. to when you travel around? You say the What I can see now is that there was a Danish politicians have fallen behind, failure to think five-to-ten years ahead,

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