PQ Holdings Under PEU Ownership

PQ Holdings can be examined under the lofty assessment of a Business Ethics professor at NYU's Stern School of Business who stated in DealBook:

"Private equity is all about coming in, finding the inefficiencies, ripping them out, putting in better procedures and making the thing more valuable.”

One of those "better procedures" is the annual management fee, consulting agreement or monitoring fee charged to PQ by its private equity underwriter (PEU) owners.

Consulting Agreement with Carlyle 

PQ Holdings Inc., TC Group IV, L.L.C., an affiliate of Carlyle, and PQ Corporation entered into a consulting agreement relating to the provision of certain financial and strategic advisory services and consulting services. We paid a one-time fee in the amount of $12 million on July 30, 2007 for structuring the acquisition of our company by Carlyle. In addition, we agreed to pay an annual monitoring fee equal to $2 million. In conjunction with the INEOS Silicas acquisition on July 2, 2008, the consulting agreement was amended to increase the annual monitoring fee to $3 million. TC Group IV, L.L.C. assigned the consulting agreement to Carlyle Investment Management L.L.C., another affiliate of The Carlyle Group, on June 7, 2012. We will pay Carlyle Investment Management, L.L.C. a $ fee to terminate the consulting agreement in connection with the consummation of this offering.

That's $29 million in management fees to Carlyle since 2007.  How many millions extra will Carlyle charge to terminate the consulting agreement?  Rest assured, it won't be cheap.

That said, PQ has more than one PEU owner.

Consulting Agreement with INEOS 

PQ Holdings Inc., INEOS (Capital Partners) and PQ Corporation entered into a consulting agreement relating to the provision of certain financial and strategic advisory services and consulting services. We paid a one-time fee in the amount of $6 million on July 2, 2008 for structuring the INEOS Silicas 2008 acquisition. In addition, we agreed to pay to INEOS an annual monitoring fee equal to $2 million. We will pay INEOS a $ fee to terminate the consulting agreement in connection with the consummation of this offering.

That's $16 million or more in additional annual PEU fees for PQ Holdings, bring the total to $45 million since 2007.

Add $5.2 million in PEU dividend distributions from 2009-2012 and PQ's sponsors sucked $50 million in cash from the firm.  These PEU efficiencies likely required headcount and benefit reductions.  The defined benefit pension plan was frozen right before Carlyle purchased PQ.

The Company’s funding policy is to fund the minimum required (defined benefit pension) contribution under local statutory requirements.

As of 12-31-12 the company's pension was underfunded by roughly $50 million.  The underfunded amount grew by $40 million under PEU ownership.  SEC filings show a pension plan contribution of $5.5 million in 2006

PQ did the same with its retiree health care retirement plan just prior to Carlyle's purchase.

These (retiree health care) plans were closed to new retirees in the United States and Canada as of December 31, 2006. 

As for making the whole thing "more valuable," Carlyle loaded PQ up with debt when it bought the firm for $1.5 billion.  Annual interest expense rose to the $110 to $120 million range under PEU ownership.  This helped put the company into a loss position, where it could obtain net tax subsidies from Uncle Sam.  Here's the picture going forward:

The Company has a net operating loss carryforward available of $241,053,000 to reduce future federal taxes payable from tax years prior to 2012. The federal carryforward period is 20 years.

This is the PEU way, which I characterized as:

"Ripping out inefficiencies" like people and pensions.  "Better procedures" like PEU annual management fees and special distributions.  "Making the whole thing more valuable" via debt balloons requiring affiliates to pay dramatically higher interest costs and significantly lower taxes.  All so they can flip the thing in one to five years time for a multiple of their original equity investment. 

I challenge business ethics professor's proffering standard PEU drivel through The Carlyle Group's ownership of PQ, doing so with data from PQ's S-1.  There are other ethics stories embedded in the public document, free for business ethics examination.  It merely takes time and an ethical framework.

Update 2-15-14:  PQ's history includes Carlyle buying it from JP Morgan's PEU division, CCMP Capital Partners. PEU CCMP put the pension plan and retiree healthcare on ice.  Also, Naked Capitalism pointed out the impact the greed/leverage boys had the last few decades as did The Herald Scotland on 2-17-14.

Update 9 -28-14:  Carlyle cancelled PQ's IPO.

Update  6-13-17:  Carlyle is taking another run at a PQ IPO.