PEU Council Adds Consonants

The Private Equity Council added members and letters to their greed oriented trade group. They are now the Private Equity Growth Capital Council (PEGCC). It rolls off the tongue in vomit like fashion.

I offer the following mnemonic (memory aid). Picture your head over a trash can (or toilet). From deep in your gut, you're feeling queasy. Here it comes:

Peuuu, gh, ch, ch = PEGCC

Joining the council are:

Welsh, Carson, Anderson & Stowe- Tom Scully
Crestview Partners- Bob Rubin
MidOcean Partners- George Pataki
GTCR- connected to Rahm Emanuel

Membership is up to 30 private equity underwriters (PEU's). The group that has been slashing jobs and benefits wants to become even less of a household name. It's called reverse branding, at least for the general public.

Political officials know PEGCC well. Their best friends are PEU's and many hope for high paying employment after public service. Watch where Peter Orszag, Evan Bayh and Chris Dodd land.

Update:  Peter Orszag landed at Citigroup, with a $2 to $3 million pay package.  Evan Bayh is now Senior Advisor for Public Policy for Apollo Global Management, which briefly had Tom Daschle.   Only Chris Dodd remains free to catch.  He'll be tough to land, given Dodd's slippery-ness.

Update 3-30-11:  Chris Dodd is the CEO and Chairman of the Motion Picture Association of America, Inc. (MPAA), which has a number of PEU connections.  The question is how Dodd will get Congress to subsidize movie making or enforce their franchise.  

Update 8-1-23:  Chris Dodd is a Senior Advisor for Teneo. 

Tylenol Past & Present

Johnson & Johnson's McNeil division has a history with removing dangerous Tylenol from the shelves. Flash back to fall 1982:

Wednesday, September 29, 1982--seven people in the Chicago area ingested cyanide laced Extra Strength Tylenol capsules. All died, three of the seven were in the same household. A hospital nurse made the connection based on those three deaths. She went with the police to the home, found the Tylenol bottle and counted out the remaining pills. Six were gone, three adults-two pills apiece, all dead. She sounded the alarm. The media picked it up.

Thursday, September 30--Johnson & Johnson executives learn of the poisonings. It’s estimated 200 million Extra Strength Tylenol capsules were on the shelf or in distribution centers. CEO James Burke started his legendary crisis management effort. He sent the McNeil Consumer Products Chairman to their plant in Fort Washington, Pennsylvania. He formed an Executive Strategy Group, which met twice a day to make decisions on the rapidly developing situation. Based on the bottle lot number, Tylenol recalled 4.7 million capsules.

Friday, October 1--J&J recalled another 8.5 million capsules from their Round Rock, TX plant. McNeil officials urged consumers across the country to discontinue using the capsules pending further investigation. They posted a $100,000 reward for information leading to the arrest and conviction of the person or persons responsible for tampering with the drug. McNeil set up a telephone number with recorded information and another number to call for answers to further questions.

Monday, October 4--J&J announced it halted Tylenol production and advertising.

Tuesday, October 5-J&J recalled all Tylenol products, an estimated 31 million bottles at a cost of $100 million. That happened within a week of the deaths.

What message did the customer get? If J&J can’t sell a safe product, they won’t sell anything.

What happened? At the time of the scare Tylenol’s market share collapsed from 35% to 8%. It rebounded in less than a year, a move credited to J&J's prompt and aggressive reaction. In November, it reintroduced capsules but in a new, triple-sealed package, coupled with heavy price promotions and within several years, Tylenol had become the most popular over-the-counter pain medicine in the US.

Flash forward to the present state of Tylenol, McNeil and Johnson & Johnson. Consider the spate of recalls in the last year:

Recall #1 September 2009--J&J recalled liquid Children’s and Infants’ Tylenol Products due to “an unused portion of one inactive ingredient not meeting all quality standards.” The recall covered 21 products and 57 production lots.

Recall #2 November--The company recalled five lots of its Tylenol Arthritis Pain 100 count with the red EZ-open cap due to reports of an unusual moldy, musty, or mildew-like odor that led to some cases of nausea, stomach pain, vomiting and diarrhea.

Recall #3 December--McNeil expanded that recall to include all available product lots of Tylenol Arthritis Pain caplet 100 count bottles with the red EZ-open cap.

Tylenol conducted three official recalls in 2009 and an unofficial one. In summer 2009 contractors hired by J&J carried out a scheme to secretly recall damaged Motrin by going store by store and quietly buying every packet. Moving on.

Recall #4 January 15, 2010--McNeil recalled an undisclosed number of containers of Tylenol, Motrin and other over-the-counter drugs after consumers complained of feeling sick from an "unusual" odor. The list of recalled products is 15 pages long. The public story is a chemical got transferred to the product from wooden pallets.

Recall #5 April 30--McNeil recalled some 50 children's versions of non-prescription drugs (136 million bottles), including Tylenol, Motrin and Benadryl. Johnson & Johnson suspended production at the Fort Washington, Pennsylvania plant.

The FDA detailed dusty and filthy conditions at the plant, including "incubators with a large amount of visible gray and brown dust/debris, a large hole in the ceiling and thick dust covering the grill inside a filtered cabinet."

In addition, the FDA said some drums used to transport raw materials to the Fort Washington facility were contaminated with a bacteria identified as B. cepacia. It’s dangerous to people with weak immune systems. However, no bacteria was found in the final product.

McNeil failed to follow up on 46 consumer complaints received from June 2009 to April 2010 "regarding foreign materials, black or dark specks."

The FDA stated the plant "does not maintain adequate laboratory facilities for the testing and approval (or rejection) of components of drug products." (CNN)

These FDA findings are serious. They speak to problems with suppliers and processes.

May 4—-J&J said it is working in close consultation with the FDA.

May 27--Congress held a hearing on the recalls. CEO William Weldon sent Colleen Goggins, Chief of J & J’s consumer products division to testify. Fortune stated: “Goggins's approach -- one part apology and promise to do better to three parts disclaimer and evasion -- embodies J&J's recipe for addressing the crisis. The company has been less than forthcoming about the Motrin recall, which it still defends, and was rebuked by a Congressman for failing to respond quickly to requests for information. "At every step in this process J&J has not been transparent," says Don Riker, a consultant to OTC drug companies. "Every bit of information is cagey, secretive, and micromanaged."

June 24—J&J said in a press release: “it does not anticipate having sources of supply before the end of 2010 for most of the products that were produced at its Fort Washington manufacturing facility.

Recall #6 July 8-—J&J recalled 21 lots of over-the-counter medicines as follow up to its January recall.

July 9--J&J was sued by US consumers for fraud and racketeering. The suit demands cash compensation for recalled children’s cold and allergy medicines. The four cases were brought in the Northern District Court of Illinois, Chicago. (Bloomberg) There’s irony in the case being brought in Chicago, the site of the 1982 Tylenol poisonings.

September 5--Financial Times interviewed J&J CEO William Weldon.

September 9--Weldon went on CNBC, speaking with Maria Bartiromo

Nearly a year after the first official recall, Weldon talked solutions. They closed the Fort Washington plant, laid off 300 workers, and replaced a number of senior executives. Weldon established an executive position responsible for J&J's supply chain. The position reports directly to him. J&J expects a loss of $600 million in revenue due to the recalls.

Reading between the lines, J&J has major supplier quality problems. They faced other significant problems, according to Fortune magazine. Consider the stories revealed in a series of articles:

1. CEO William Weldon stayed behind closed doors, granting interviews only in the last few weeks. Weldon became CEO in 2002. His leadership mark has been mergers and cost cutting.

2. McNeil quality began to slowly weaken in 2002. “The culprit was a familiar one -- cost cutting -- but in a subtler form. There were no wholesale layoffs in quality control. Instead experienced staffers were repeatedly laid off and replaced with newbies who mostly lacked technical pharmaceutical experience. By 2008 the analytical laboratory, formerly staffed almost entirely by full-time scientists, was half-full of contract workers.

"Once stricter than a schoolmarm, the department grew lax. The team that tested the production lines was dubbed the "EZ Pass system." In one instance an engineering flaw on a line made it difficult to clean liquid-medicine bottles. Rather than find a way to fix the problem, an engineer says, the team instead tried to simply eliminate that check from the test. "They were trying to take a lot of short cuts.”

3. One day in 2005 a batch of more than 1 million bottles of St. Joseph aspirin failed a quality test because a sample didn't dissolve properly. Following company procedures, two employees blocked the batch from being shipped. Their manager then called them into his office. "He said, 'You like working here? This should pass. There's no reason this should fail.'" Ultimately the two quality workers were ordered to retest the drugs, then average the new scores to arrive at a passing grade so that the pills could ship. Says one of them: "You get to the point where, like me, you end up doing what you're told."

4. The last few stories show McNeil already had a compromised internal quality function. Then came the integration with Pfizer’s consumer products division. The target was $500 to $600 million in cost savings from combined production lines. One former executive described the environment. "I was given savings goals that were mind-boggling, unheard-of. They were raised by 25% to 30%."

5. A Vice President remembers arguing with McNeil executives about how much it would cost to transfer Pfizer production lines to McNeil's Fort Washington plant, an arduous process that is heavily regulated. "The normal cost to do a transfer for a product might be $600,000" he says. "Those folks would say, 'That's way too expensive. It's only going to cost $250,000.'" McNeil employees knew it would be nearly impossible to meet those demands, he says, without screwing the process up. But they did it anyway for fear of being fired.

That same year, 2007, J&J announced it was laying off more than 4,000 people. The workforce at the Fort Washington plant was slashed by 32% between 2005 and 2009. The biggest cuts came on the factory floor.

A layoff casualty was the corporate compliance group, a SWAT team meant to keep the various quality-control groups in line. A former executive said after the group was cut, some divisions lost their focus on quality. "The heads of the operating companies let their hair down."

6. Weldon’s plan to hire a chief quality executive rankled staffers, given the 2007 elimination of J&J’s corporate compliance group, which rode herd on quality.

7. Weldon gave two drastically different messages to Fortune, “We hope we never experience this again.” “Quality remains our #1 focus.”

It's clear William Weldon's focus has not been quality. Weldon's mark is a never ending cycle of been doing more with less, interspersed with stretch goals. William Weldon isn't alone.

Four years before the Texas City refinery explosion, BP issued a stretch goal. "Reduce business unit cash cost for the year 2001 by at least 25 percent from the year 1998 levels."

BP CEO Lord John Browne oversaw that decree with its deadly consequences. Browne is doing the same for the British government. William Weldon is in good company. It's a club, one producing a record "wealth gap" along with "buyer beware."


Update 1-14-2011: Yet another Tylenol recall due to insufficient or undocumented equipment cleaning.

Carlyle Partner Bob Johnson on Wealth Gap

Robert L. Johnson will speak at Johns Hopkins University on “A Society Divided: The Growing Wealth Gap and the Role of American Business.” Johnson is famous for his founding of Black Entertainment Television (BET). He's less well known as a private equity underwriter (PEU).

Bob Johnson partnered with The Carlyle Group in 2005. Carlyle provided seed equity for RLJ Equity Partners.

Carlyle experienced astronomical growth in the new millenium. PEU's benefited mightily from carried interest taxation, one factor contributing to America's soaring "wealth gap." Will Mr. Johnson speak to this tax feature? Will he tout the private equity model, now ubiquitous on the world greed stage?

RLJ Equity's investments include a Brazilian tour operator, industrial vinegar and precision engineered components and assemblies. Their latest deal involves Enhanced Recovery Company, LLC, the largest minority owned accounts receivable management company in the country.

Who provides Enhanced Recovery Company more business, the have's or the have not's? Johnson mines the wealth gap and political connections to further his mountaintop position. It's the PEU way.

Dubai World Holdout: Aurelius Capital

FT reported:

Aurelius Capital Management, a US distressed debt fund, is the only creditor of Dubai World not to have approved a restructuring agreement on the troubled conglomerate’s $25bn of liabilities, according to people close to the talks.

Dubai World said on Friday that it had reached a formal agreement to restructure a total of $24.9bn, which includes $10bn owed to the government, with more than 99.9 per cent of its creditors.

Dubai World's total indebtedness was reported as high as $39.9 billion by Reuters. FT went on to describe other Dubai debt restructurings:

Dubai World’s developer Nakheel is still separately negotiating with banks about its $10bn debts, and last week a unit of Dubai Holding – a conglomerate owned by Dubai’s ruler – announced that it was for a second time to defer the payment of a revolving credit facility, as it attempts to reach a wider settlement on as much as $20bn of debt.

As for Aurelius Capital, the distressed debt hedge fund was established in 2005 by Mark Brodsky and Adam Stanislavsky. They could've purchased Dubai World debt for as little as 55 cents on the dollar. Also, Aurelius may have held credit derivatives on DW debt. Would it be in relation to their holdings, a hedge? Or might they be a risky bet? That's not the kind of thing debt holders have to share.

Aurelius surfaced in regard to Ambac and Argentinian bonds. They hold an interest in Citadel Broadcasting and Visteon. Aurelius' most recent 13F-HR was filed in November 2009.

Of course Aurelius has investment vehicles in the Cayman Islands. Their dance with Dubai has a Caribbean World beat.

Carlyle to Take ARINC Public, Scraps Sale

Reuters reported:

Private equity firm Carlyle Group has scrapped plans to sell Arinc Inc after failing to find a buyer for the defense and aviation company in the past six months, several people familiar with the matter said.

Instead Carlyle will take ARINC public.

Arinc's earnings have grown 25 percent annually in the past four years, a source close to the company said.

How did the private equity underwriter (PEU) grow earnings with higher interest expenses? How much did they milk ARINC via management fees and special dividends? Did Uncle Sam stimulate ARINC, besides taking much of the risk for early retiree health coverage?

The S-1 should be interesting, if it's anything like Nielsen's.

As The Carlyle Group is bidding for McKechnie Aerospace, Hartwell employees might want to call their peers at ARINC to find out how three years under Carlyle can age people. That's if they don't disappear altogether.

Update 11-11-12:  Carlyle scrapped plans to take ARINC public.  It sold ARINC's defense division to Carlyle affiliate Booz Allen Hamilton for $154 million.   I wonder how much pressure Booz got to monetize a sister Carlyle company?  Only PEU's know for sure.

Update 2-26-13:  Carlyle plans to sell the rest of ARINC, i.e. back to their original plan. 

Bob Geldof Goes PEU

Sir Bob Geldof joins U2's Bono as a private equity underwriter (PEU). Geldof is partner in a fund raising $750 million for African buyouts. The fund, called 8 Miles, will invest in agribusiness, financial services and telecommunications.

Like Bono, Geldof was the lead singer for the Boomtown Rats. Ironically, Geldof sung this in 1982 as Pink in the movie The Wall:

Tell me is something eluding you sunshine? Is this not what you expected to see? If you wanna find out what's behind these cold eyes, you'll just have to crawl your way through this disguise!

Who expected yesterday's rock rebels to be today's greed men? Bono's Elevation Partners and Geldof's 8 Miles symbolize the infection of PEU's on the world economy. Micro finance, with its lofty uplifting goal, brought 23% annual returns to PEU Shorecap International. Those returns are government aided. 8 Miles is funded by the African Development Corporation and the International Finance Corporation.

The fund has been named 8 Miles – the distance between the southern tip of Europe and northern Africa.

The 2002 movie 8 Mile had this as the theme:

The people of Detroit know 8 Mile as the city limit, a border, a boundary. It is also a psychological dividing line that separates Jimmy Smith Jr. from where and who he wants to be.

Border, boundary, and psychological dividing line symbolize private equity. It's the line between the have's and the have not's. Despite his admirable history of philanthropy, Geldorf's move puts him on the PEU side of the line, where the have more's are never satisfied.

Update 9-5-11:  Forbes reported Geldof's 8 Miles is up to $200 million of its $1 billion target.  The story closes with Africa's higher rate of return, the aphrodisiac for PEU's, and how "everyone wants a piece of the action."  That includes Adam Ant, who simply wants a piece of Geldof.  The world continues to fracture around deadly sins of anger and greed.

Update 2-19-12:  Fundraising stalled since the last update.  8 Miles closed its African Fund at $204 million (155 million euros).     Investors include the World Bank, the African Development Bank, UK state overseas investment firm CDC Group, as well as institutional and private investors.

One World, One Carlyle

Carlyle Group news from across the world:

Carlyle's FRSGlobal was selected by the Central Bank of Oman.

Carlyle is believed to be bidding with Cardinal Capital for EBS Building Society, an Irish bank.

Carlyle's Repco Home Finance, an Indian company with OPIC funding, will offer special loans to government employees and micro finance loans to farmers.

It seems ShoreCap International isn't the only private equity underwriter (PEU) with an interest in micro finance.

Carlyle's Olivier Sarkozy lamented the lack of bank deals since his BankUnited FDIC fleecing. Are they looking at New Mexico's First State? ABQJournal reported:

New but unnamed investors "in all likelihood" would invest "a fair amount more" than the $150 million injection required to adequately capitalize the bank.

"The potential investors we've had very detailed discussions with are some of the most sophisticated private equity bank investors in the United States, if not the entire world," First State president H. Patrick Dee said. "These people are very knowledgeable about banks. They have large amounts of money they would like to invest in banks where they think they can achieve attractive returns."

Attractive returns, indeed.