Telegraph Writer Calls for Middle Class Revolution

[derspiess]

Oh I don't think they are exactly the same. Unlike you though, I don't really see the Dems as that much better with the urge of "Spend, Baby, Spend!"

They have other urges besides that.

Overregulate, Baby, Overregulate!

[The Minsky Moment]

An article I never thought I'd get to share

I'm not financially sophisticated enough to understand the labyrinthine ins and outs of private equity deals. But I don't think I need to be. Here, my relative ignorance is actually a plus. You took a viable company, ran up ridiculous levels of debt, paid yourselves millions and then walked away, leaving unemployment and unpaid tax bills in your wake. What's to understand?

It's an interesting sort of argument that begins by touting self-ignorance as a virtue.  As a rhetorical flourish it has some panache; as a persuasive argument it leaves something to be desired.

Let's look at the key premise "You took a viable company".  What is the basis for that statement?  The problem for Phones 4U as I understand it is that the big mobile operators it relied upon increasingly began opening their own stores, where there margins were higher.  Plus the company had a lease deal with one of the big Brit department store chains, but recently got booted out in favor of a competitor .

The answer to the questioon "What's to understand"?  is "the causal connection between the company's capital structure and the collapse of its business strategy."

[Warspite]

An article I never thought I'd get to share

I'm not financially sophisticated enough to understand the labyrinthine ins and outs of private equity deals. But I don't think I need to be. Here, my relative ignorance is actually a plus. You took a viable company, ran up ridiculous levels of debt, paid yourselves millions and then walked away, leaving unemployment and unpaid tax bills in your wake. What's to understand?

It's an interesting sort of argument that begins by touting self-ignorance as a virtue.  As a rhetorical flourish it has some panache; as a persuasive argument it leaves something to be desired.

Let's look at the key premise "You took a viable company".  What is the basis for that statement?  The problem for Phones 4U as I understand it is that the big mobile operators it relied upon increasingly began opening their own stores, where there margins were higher.  Plus the company had a lease deal with one of the big Brit department store chains, but recently got booted out in favor of a competitor .

The answer to the questioon "What's to understand"?  is "the causal connection between the company's capital structure and the collapse of its business strategy."

Business school shill.

[The Minsky Moment]

It's actually easy to test the hypothesis that the company was killed off by its debt burden.  Because if excessive debt was the problem, then they could just do a debt-equity swap and reorganize.  Which the bondholders were ready and willing to do.
But the administrator nixed it.  Why?  Because the company was losing GBP 1 million per day on operations.  Debt is no longer the issue.  Lack of a business is the issue.
The company basically acted as a commissioned sales agent and it just lost its last significant commission paying customer.

[Josquius]

Vaux beer was crap btw.

I've no idea. Nor will I ever know
It seemed to sell well enough though.

[Richard Hakluyt]

Vaux beer was crap btw.

I've no idea. Nor will I ever know
It seemed to sell well enough though.

I've just checked and they did make Double Maxim (which I recall as a decent strong brown ale) and Samson (a decent bitter that was only available in a fraction of the tied estate).

The rest of their stuff though was not so good.

I see that former employees have set up a successor brewery http://www.maximbrewery.co.uk/Default.aspx , lets hope they thrive 

[Josquius]

Samson wasn't widespread?
Interesting.
I recall SAFC had Vaux Samson on their shirts for a while.
And hell, their mascot is still called Samson.
Odd for a product the company weren't trying to sell much.

I'll have to look into this brewery when I'm home. I have a few Vaux bottles in my room (commemorative ones) despite never having drunk it

[Richard Hakluyt]

You may be right..............wait a minute.............you are right. I'm muddling up Samson with Strongarm, the bitter produced by Cameron's in Hartlepool, which I've only had at one pub in Seaham and on rare visits to Hartlepool.

[Martinus]

It's actually easy to test the hypothesis that the company was killed off by its debt burden.  Because if excessive debt was the problem, then they could just do a debt-equity swap and reorganize.  Which the bondholders were ready and willing to do.
But the administrator nixed it.  Why?  Because the company was losing GBP 1 million per day on operations.  Debt is no longer the issue.  Lack of a business is the issue.
The company basically acted as a commissioned sales agent and it just lost its last significant commission paying customer.

I think it is a little bit of both, to be honest. I do not think the PE fund deliberately set out to just strip-mine the company and move to greener pastures. But they were perhaps overconfident in their leverage, and the fact that they (likely) indebted it to service the acquisition debt (and not the investment/development debt) did not help. So I'm thinking greedy overzealous fools rather than evil masterminds.

[Berkut]

I think regulation of big business and regulation of financial markets are completely different things and completely different debates.

The argument for regulation of big business is based on the inequality of actors (big business on one hand vs. a consumer or an employee on the other), and the argument that the state should empower the latter to level the playing field. There are legitimate arguments for it and against it (e.g. that in fact there is no reason to empower the weaker actor, as he or she is still able to make sovereign decisions) - and also possibility to reach middle ground (e.g. by empowering the weaker actor only if the stronger actor passes a certain threshold of power, e.g. is dominant in the market and there is no alternative for the weaker actor).

This is however completely different from regulation of financial markets (banks, PE, hedge funds etc.), where you have independent professional actors (whose interests, even if not always aligned, are also not usually contradictory) entering with each other into transactions that have the capacity of benefiting them immensely while wreaking great havoc on the state of the market and the society as a whole (with the latter not having any say in such transactions). The argument for regulation here is much stronger because without it there is absolutely no countervailing force to curtail such behaviour.

Great post.

[Zanza]

The main thing is, that state intervention and tweaking for the greater good is a false concept. Why? Because the state (or more precisely, the people wielding its power) is VERY far from being free of influences. And who can extort influence on the state (again, more precisely, the people wielding its power)? The ones with the means to do it.

No matter the intentions, it will be the financial and political aristocracy who will steer and benefit from the state's interventionist power (regardless of the exact field).  That is inevitable. The only remedy for this, is to keep that interventionist power to the bare possible minimum.

I don't think it is inevitable. We are able to build societies and political institutions that do not favor the financial and political aristocracy alone. The question is whether our current societies actually develop in that direction. I don't think so.

[The Minsky Moment]

The bonds were PIK-toggle and paid a 10% coupon.
That is what I would consider pretty extreme on the speculative end.  No sane "middle class" investor should have been touching that paper.  It also suggests that the markets had a pretty realistic view about the precariousness of this business.  It is an unfortunate outcome for the bondholders but you do get what you pay for.

The employees are more sympathetic but again even under a different captial structure the outcome would still be the same - liquidation.  The only difference would be more cash on hand to pay out bondholders.

The PE firm certainly didn't cover itself in glory here.  There is a broader question about what real value these firms provide to the market, and this particular episode is not good anecdotal evidence that PE firms are providers of useful management acumen.  But the case for revolution seems understated, unless the proposal is for the Revolution of the Junk Bond Speculators.

[Berkut]

so that the plutocrat 1% will have more than 1% of the people voting for the policies that only favor the 1%. 

How often do "the people" get to vote on these policies?

Not often do they get to vote directly, but they vote by proxy by electing their politicians.

However, the current system by which those politicians need funds to get elected means that we mostly get to pick between electing politicians all of whom are already committed to not changing anything.

[Berkut]

Oh I don't think they are exactly the same. Unlike you though, I don't really see the Dems as that much better with the urge of "Spend, Baby, Spend!"

They have other urges besides that.

Overregulate, Baby, Overregulate!

Whatever problems our financial markets might have, overregulation does not appear to be one of them.

[The Minsky Moment]

Also - Marti - there is another way to look at this.
The big carriers are an oligopoly.  Their topline growth is slowing because mobile voice and data is a saturated market in Europe.  They are looking to defend margins and so the obvious move is to cut out the middleman and the associated commission expense. 
Now look what happens when EE follows Vodaphone and the others and ditches Phones 4U.
Days later EE and Vodaphone turn around and scoop up the best store locations at liquidation values.  So they expand their retail presence on the cheap and keep the margins up.

So is this story about rapacious financiers strip mining assets?
Or is it about monopolistic rent-seeking behemoths in a regulated industry abusing their market power over a business partner to grab their prize assets on the cheap?

Or maybe it is just about developments in the market rendering a business model obsolete, prompting an avalanche of overblown journalistic rhetoric?

Lots of ways to spin it.