Tuesday, July 19, 2011

Carlyle's Marchick Tells Kuhlman Story

Ex-Clinton White House staffer and Carlyle Group Managing Director David Marchick testified before Congress on The Power of Pensions: Building a Strong Middle Class and Strong Economy.

One of Carlyle’s earliest buyout funds, Carlyle Partners II, L.P., acquired Kuhlman Electric Corporation in October 1999.  Public and private pension funds accounted for 45 percent of the capital committed to that fund.  Kuhlman, which is based in Kentucky, was founded in 1894 and provides power transformers and related products to utility companies.

Carlyle managed our investment in Kuhlman through tough economic conditions resulting from California’s energy deregulation initiative, the collapse of Enron, major reductions in customer capital spending, falling wholesale prices, and the sector’s challenging credit crisis. As a result of these conditions, Carlyle valued the investment at zero.

However, Carlyle remained committed to Kuhlman. In fact, several investors and Carlyle employees personally invested additional capital to strengthen the company. Carlyle, together with management, helped turn the company around.  Nearly 10 years later, in August 2008, Kuhlman was sold by Carlyle to ABB, the global power and automation technology group, earning our investors an attractive return.For the fiscal years 2005, 2006 and 2007, Kuhlman’s revenue increased by approximately 26%, 26% and 45%, respectively. In 2007, Kuhlman experienced record results in all three of its operating divisions. In addition, Kuhlman’s overall employment levels increased approximately 25% during Carlyle’s ownership. At the time of the sale to ABB, the company had approximately 800 employees.  During the downturn, Kuhlman maintained a positive relationship with its unionized workforce, and organized labor was an important part of the turnaround.

Borg-Warner sold Kuhlman Electric to the Carlyle Group.  General H. Norman Schwarzkopf was on the board of Kuhlman Corporation before the deal frenzy began.  This is from Kuhlman's definitive proxy statement:

General Schwarzkopf is currently active as an author, lecturer and TV
consultant. He retired in August 1991 as a Four-Star General in the U.S. Army after having served as Commander in Chief, United States Central Command, Department of Defense, and Commander of Operations Desert Shield and Desert Storm. He currently serves as a director of Borg-Warner Security Corporation, The Washington Water Power Company, Remington Arms Company, Inc., and Home Shopping Network, Inc.

Did Stormin' Norman market Kuhlman to David Rubenstein in an early D.C. insider deal?  Borg-Warner's 1999 10-k stated:

The electrical products businesses acquired from Kuhlman consisted of Kuhlman Electric Corporation (“Kuhlman Electric”) and Coleman Cable Systems, Inc. (“Coleman Cable”). These businesses manufactured transformers for the utility industry and wire and cable for utilities and other industries. At the time of the Kuhlman acquisition, the Company announced that it intended to sell the businesses by the end of the year. As of December 31, 1999, the Company had completed the sales of both Kuhlman Electric and Coleman Cable. The Company received cash proceeds of approximately $227.1 million and $30.3 million face value debt instruments from the buyers of the businesses. The debt instruments were adjusted to a carrying value of $12.9 million because of their terms and credit-worthiness.
Carlyle gave face value debt of $30.3 million, revalued to $12.9 million?  That's junk debt, going for 42.5 cents on the dollar.  The 10-k had more to say about the sale.

Cash proceeds from the sales of Kuhlman Electric amounted to $105.1 million. 

Kuhlman Electric was sold to Carlyle Group, L.L.C. for a net sale price of $120.1 million, including debt securities with a face value of $15.0 million.

What about the compelling employee job numbers cited by Marchick? Kuhlman's pre-sellout to Borg-Warner showed:

Number of employees
1997 4,194
1996 2,782
1995 2,284
1994 2,375
1993 2,364

These numbers include additional divisions.  Kuhlman provided no figures specific to their electrical transformer division.  They can be deduced from Borg-Warner's employment information:

As of December 31, 1999, the Company and its consolidated subsidiaries had approximately 14,400 salaried and hourly employees (as compared with approximately 10,100 employees at December 31, 1998), of which approximately 9,900 were U.S. employees.

These numbers point to roughly 700 employees in Kuhlman's Electrical Division.  Carlyle claims it grew Kuhlman to 800 employees, a 14% increase.  A 100 person addition over 9 years equates to an annual increase of 1.5%.  Giving Carlyle their 25% claim, that's an annual employment increase of 2.8%.  How does that compare to Carlyle's investment returns, which Marchick referred to as "an attractive return."

Old stories can teach.  The question is what?  Carlyle's using Kuhlman to sell their upcoming IPO.  Carlyle's PEU ilk decimated the middle class during their decade of ascension.  Carlyle affiliate UCI's SEC filings show employment fell under PEU ownership from 6,900 in 2004 to 4,350 in 2009.

Carlyle just signed a deal for RAC, sans pension plan.   There are other stories that could be told before Congress. One is the story of Carlyle's sale of Standard Aero and Landmark Aviation to Dubai Aerospace.  Did David Marchick help that deal go through without Dubai Ports World (DPW) levels of public outrage?

Marchick can be thanked if it turns out Lenovo computers played a key role in Chinese cyber espionage.  Surely, a Congressional committee has information on Pentagon attacks by a nation state and how it was perpetuated.  It wasn't the committee providing Marchick a stand to conduct puffery.  So much remains undisclosed.

Update 7-16-22:  American University and just hired former Carlyle Group Managing Director David Marchick as Dean of AU's business school.