How’s this for profits. Asda’s private equity co-owner has announced that its stake in the supermarket chain is worth 20 times the amount it paid last year. Even the Financial Times newspaper says this is “an exceptional return enabled by the extensive financial engineering used in the takeover”.
Investment fund TDR Capital and billionaire Blackburn-based brothers Mohsin and Zuber Issa used only a small amount of their own money in the £6.8 billion purchase of Asda. They funded the rest by piling debt onto the supermarket chain and selling off some of its assets.
Now TDR has told investors that it has already marked its stake at 19.8 times its original investment and that it is worth £1.4 billion.
Together, the Issa brothers and TDR put in less than £800 million for the £6.8 billion deal. And TDR documents suggest that most of its £280 million contribution came not from its own fund, but from EG Group. It’s a petrol stations business also owned jointly by the Issas and the private equity firm.
The document shows that EG has already proved a boon for TDR. The private equity firm says it has extracted five times the amount it invested in 2014 and it ultimately expects to make 10.6 times its money.
Where do all these profits come from? It’s not, you may be surprised to hear, the result of entrepreneurial brilliance from the very rich people at the top.
One method is to sell off the assets of the firm you take over. Asda bosses grabbed a big cash windfall soon after the takeover when they sold 27 warehouse properties with a book value of £497 million to Blackstone for £1.7 billion last year. That’s the best part of a billion towards the takeover costs.
Another is to load up the debt. The takeover merchants borrowed around £3.8 billion for the initial purchase, with the money to be repaid through Asda revenues. They then borrowed another £500 million last October. All of that, with interest, they will extract from the firm they have grabbed.
But the root of their gains is the exploitation of labour. Without the sweat of store workers, warehouse workers, drivers and others there would not be a penny for the bosses and the shareholders. As Karl Marx explained, workers sell their labour power to the capitalist. They are paid less than the values they produce when they are at work. This “surplus value” is the source of profit.
The more the bosses can reduce the amount they pay out in wages, the greater the profit they collect. The great unspoken “secret” or private equity, outsourcing and indeed all capitalist production is that the creation of profit is the exploitation of workers.
When the private equity bosses take on a new company, they look immediately to see how they can “cut costs”. This is done through making people work harder, worsening conditions and holding down wages. That’s the route to more money for the gilded few at the top—and it’s exactly what has happened at Asda.
In February Asda announced it was imposing a below-inflation pay rise of 3.25 percent on its 150,000 retail workers. They earn just £9.66 an hour, well below the industry average.
Now thousands of warehouse and admin workers face cuts to their sick pay and a real terms pay cut. This has led to the GMB union calling a consultative strike ballot. The unions also says that managers are abusing a flexible working clause in their contracts to push unreasonable changes to rotas.
A GMB survey showed over half of Asda workers were forced to use payday lenders, foodbanks or borrow money from family and friends in the past 12 months. This is the other side of the “exceptional return” for the private equity wizards—and it’s how capitalism works.
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