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Private Equity Funds and the TDC Case Interview with Poul Nyrup Rasmussen

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Private Equity Funds and the TDC Case Interview with Poul Nyrup Rasmussen During the course of the last year a debate on private equity funds has erupted in Denmark, mainly due to the takeover 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 debt 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 buyouts (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 takeovers 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 venture capital 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.
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