Donald Mackenzie, managing partner at CVC, along with David Blitzer, senior managing director at Blackstone, Jon Moulton, head of Alchemy Partners, and Peter Taylor, the UK managing partner at Duke Street Capital, faced questions at the third Treasury Select Committee hearing into private equity.
CVC has been noticeable for its silence over several controversial deals that have attracted criticism from both trade unions and politicians, particularly over the AA transaction.
Despite leading the deal, it was not CVC but joint owner
However, yesterday there was no hiding as the committee, chaired by Labour MP for West Dunbartonshire John McFall, grilled Mackenzie over specific details off the deal.
First, the committee suggested that CVC, Permira and Charterhouse, the owners of Saga, had set up a newco in relation to the Saga and AA merger in order to trigger the 20% carry for the firms immediately.
Mackenzie rejected this, saying: “Every company is acquired through a newco. Can partners take 20% carry immediately? No. The carried interest is tied up in the 10-year life of the fund.” He added: “When we looked at that merger, we didn’t once talk about carry. It was all down to a business desire – whether the two businesses could grow well together.”
Earlier this week, the three buyout firms did reveal extensive details of the transaction in what is believed to have been an effort to quell criticism.
The deal values the AA at £3.35bn and Saga at £2.8bn. Permira, CVC Capital Partners and
Permira and CVC each made a profit of £630m, with both reinvesting £380m for their respective 21% stakes. Charterhouse generated a £1.15bn profit, with £640m reinvested for a 38% stake. Management and staff will own the remaining 20%.
In total, the three buyout firms have made about 3.5 times their original investment, including proceeds previously received from refinancings of both companies last year – Permira and CVC received £260m each from the AA’s refinancing, while Charterhouse netted £580m.
However, the combination of Saga and the AA comes with a refinancing deal that will heap £4.8bn of debt onto the Saga/AA balance sheet, supplied by Barclays Capital and Japan’s Mizuho Bank.
The committee asked Mackenzie to justify this debt level of 11x Ebitda.
“It is a testimony to the credit market and proves that it is still in good shape,” he said. “They are very keen on these two credits because the cashflow has been so high. But we have been very careful. On forecast cashflow, there is a hedge room of £80m so that the company can service its debts, pay its interest and still have £80m left to run the business. We think that’s sensible and conservative lending”, argued Mackenzie.
However another panellist, the controversial Jon Moulton, said: “It is a large and profitable deal but it has not been the finest PR for our industry at a time when it is under such scrutiny.”