Analysis: Street fighting man and the Gate Gourmet battle

Far away from the furore at Heathrow lies the controlling hand of a tough-minded investor. Ben Schneiders and Abigail Townsend report on the private equity set at Texas Pacific
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The Independent Online

But while Mr Bonderman could spend millions on a birthday party, the dispute plaguing Gate Gourmet at Heathrow is all about attempts by management to slash staff costs and reform labour practices in its UK operations, which lost £22m last year.

Gate Gourmet may be only one investment of many at Texas Pacific, the private equity firm co-founded by Mr Bonderman. But since he bought the struggling caterer in late 2002, it has become a thorn in his portfolio.

The deal was not unusual for Texas Pacific, which has a reputation for buying troubled or loss-making enterprises. "They often target, although not exclusively, under-performing companies that they can buy on the cheap," says David Carey, a senior writer on The Deal, a New York magazine that covers private equity. "They then turn them into winning investments by turning the operations around."

One institutional investor says of the group's style: "When they buy companies, they are aggressive, and when they are looking to [float] them, they are aggressive."

Based in Fort Worth, Texas, the group employs around 70 professionals, with its most high-profile investments including Burger King and the clothing retailer J Crew. It was formed in 1993 by Mr Bonderman, Jim Coulter and William Price and has raised $15bn (£8.4bn) since its inception. The group, which does not even have its own website, mostly keeps a low profile.

One City insider, who has worked with Texas Pacific, says: "They are bright but tough. The people who work there don't suffer fools gladly and most people are fools compared to them, in their eyes at least. They believe they are the elite of the private equity firms."

That reputation has attracted a lot of support from institutional investors. "With their last fund, they looked to raise $5.3bn and that was over-subscribed," says Mr Carey.

Texas Pacific and the sector in general have expanded rapidly in recent years. In 2004, private equity groups announced deals worth $300bn - 60 per cent up on the previous record high in 2003.

Investor interest in the industry is helped by its lower profile. "[Private equity firms] are not reporting to the market every quarter or six months and are owned by a small number of people," says a private equity expert at a leading City law firm.

"You have got a structure where you have short lines of communication, strong financial management discipline, a business that's focused on cash and not profit. And therefore it is more intolerant of inefficiency."

The lack of transparency has brought the sector under scrutiny, particularly in Germany, where the chairman of the ruling party described some private equity groups and hedge funds as acting like a "plague of locusts".

"As private equity becomes bigger and bigger, it's going to face questions about transparency," says a senior adviser to private equity firms.

But while Texas Pacific keeps a low profile, Mr Bonderman doesn't, which makes him a little unusual in the sector. "The man who runs Texas Pacific is flamboyant and you could argue that that is going to get people's backs up," says one private equity fund manager. "If you take Mike Smith, say, of CVC, we don't know much about him. It's the same for others, like Simon Palley at BC - they have a much lower profile. They are slightly low key whereas the Americans like to flash it about."

They have certainly raised hackles at Gate Gourmet. "They're a bunch of anti-union bastards," says Andrew Dodgshon from the T&G.

Gate Gourmet's chairman, Dave Siegel, denies these claims, saying the company had held 30 detailed meetings with the T&G. "Nothing could be further from the truth. We have looked to work co-operatively with the union for the last year."

But Texas Pacific's approach makes it vulnerable. Because it invests in companies that other private equity firms would not touch, and banks on improving their performance, it can produce some spectacular returns. But it can also get too tough for some people's tastes.

One European observer says Texas Pacific is more secretive and aggressive than its rivals and takes bigger risks. "Traditional private equity is about finding a fairly solid company with solid cashflows, which just needs some supplementing. Texas Pacific is probably at the extreme end [of risk-taking]."

While the fate of Gate Gourmet, and its UK operations in general, remains in the balance, it would not be the first setback for Texas Pacific. Its previous biggest failure was its $400m purchase of Zilog, a semiconductor group, in 1998; this had to be written off.

It also suffered blows with its investments in Genesis ElderCare and Favorite Brands International, a confectionery maker. But its success at picking winners far outstrips those setbacks.

In a memo to investors at the end of 2004, obtained by The Wall Street Journal, Texas Pacific said that its returns, before fees, had averaged 55 per cent a year since 1993.

A source close to the firm would not confirm that figure but says it has posted strong returns since its inception.

The source adds that the perception that all of the firm's activities are in distressed companies is wrong. Around one third of its investments are in this area, he says, while the rest are in companies with better prospects. It has invested in companies including Beringer Wines, Punch Taverns and Debenhams.

"A lot of private equity firms will not do turnarounds; Texas Pacific likes deals that are complex," he explains. "The thing about Texas Pacific is that it is a patient investor. Not all of them turn out, but some will."

One spectacular example of its success was MEMC Electronic Materials, a German manufacturer of computer chips. Its owner, E.ON, was willing to give away that business as long as the new owners took on the debts. Texas Pacific paid just $6 for MEMC; that investment is now worth $2bn.

While Gate Gourmet's employees face an uncertain future, its chairman, Mr Siegel, points to the investment it has already made in the business. "[The company] should have been liquidated six to eight months ago," he says. The private equity fund manager backs this view.

"It's not as if Texas Pacific is trying to asset strip. They are trying to make something they own work - though they could arguably do it slightly more subtly," he concedes.

"But I'm not sure what else they could do, and I don't think they would encroach on breaking the law. They would have looked at all their options closely."

The Gate Gourmet staff may have little idea who David Bonderman is. But if they do, they probably have little "Sympathy for the Devil".

SERVING UP A STORM: HOW A CATERER HAS GONE FROM BRITISH AIRWAYS TO THE BRINK

1997: British Airways spins off catering operations to Gate Gourmet, part of Swissair and the world's second-largest in-flight caterer.

2001: the airline industry is thrown into a tailspin by the 11 September attacks. Swissair collapses less than a month later.

2002: Texas Pacific buys Gate Gourmet for an undisclosed sum. Gate Gourmet claims BA invoked a change-of- ownership clause which "reduced the economic benefit of the contract to Gate Gourmet substantially".

2003: the company, already suffering from the rise of low-cost airlines - which serve little or no food - is hit by the outbreak of the Sars virus and its subsequent drag on the industry.

2005: negotiations start between management and the T&G. UK staff at Gate Gourmet, which employs 22,000 people worldwide, earn between £12,000 and £16,000 a year but management claims working practices are stuck in the 1970s. Gate Gourmet has around 32 per cent of the £16bn global in-flight catering market but is expected to make a £25m loss this year.

March: Virgin terminates its contract.

June: management and unions agree a restructuring that includes redundancies. Members vote against endorsing the deal.

10 August: 120 temporary workers arrive to cover the summer rush, prompting the union to ask why permanent staff are being made redundant.

The company says staff then walked out illegally; the union says they were waiting for the situation to be clarified. Around 600 of the 2,000-strong workforce are sacked.

11 August: 1,000 BA baggage handlers walk out in support, prompting the cancellation of all flights.

19 August: talks continue between the union and management with arbitration service Acas. Concerns mount that Gate Gourmet will be unable to service debts of around £200m, which could prompt senior lenders to call in loans and force it into administration.

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