FOOTNOTE TO AN OLD CONTROVERSY: "LOCUST" BECOMES MODEL

UNCLAS DUSSELDORF 000034 SIPDIS E.O. 12958: N/A TAGS: EINV ECON ELAB PGOV GM SUBJECT: FOOTNOTE TO AN OLD CONTROVERSY: "LOCUST" BECOMES MODEL INVESTOR ¶1. (SBU) Summary: Germany watchers will recall the politicization surrounding the takeover in 2004/2005 of the well known North Rhine Westphalia-based company Grohe by the U.S.-based Texas Pacific Group (TPG),which prompted former SPD party chair Franz Muentefering to coin the term "locusts" (Heuschrecken) to describe equity capital firms and hedge funds. This perjorative term has entered the German political lexicon and surfaces from time to time in connection with the acquisition of German assets by foreign investors. This controversy may be ancient history, but Grohe Managing Director told CG recently that the reality has been much more positive than critics predicted, as the "locust" is now widely seen as a model investor. All may be well that ends well, but this is a case that needn't have happened. End Summary. ¶2. (U) In 2004, the proposed takeover by a consortium of foreign investors led by the Texas Pacific Group of the firm Grohe, a well known, family owned producer of high quality bathroom fixtures, unleashed a major controversy in Germany over the role foreign investors should be allowed to play in the national economy. Led by former SPD Chair Franz Muentefering, opposition to the sale reached a crescendo in Spring 2005, just prior to Bundestag elections in which former Chancellor Gerhard Schroeder sought reelection. Rhetoric became heated and nasty, with charges primarily by SPD and DGB trade union leaders that foreign equity capital firms and hedge funds should not be allowed to purchase German assets, on the grounds that they would allegedly swoop down, strip them of value, fire employees, and move on to their next prey. Amcham and USG officials spent considerable time and energy combating this vivid metaphor (and still do so),using public diplomacy and other means to demonstrate the many ways U.S. investors contribute to the German economy and society. ¶3. (U) It is against this background that we were pleased to learn recently that Grohe has not only emerged stronger than ever after the takeover, but that the firm would have gone bankrupt had an investor not stepped in at that time. Managing Director David Haines told us that the large firm, located in Hemer, a rural town in the Sauerland region of North Rhine Westphalia with relatively few employers nearby, had been poorly managed and had been operating under threat of bankruptcy for years. The family had withdrawn a large amount of the firm's capital, neglected to modernize its products and production processees, taken on massive debt, and then sold it to UK-based BC Partners in 1999, which in an attempt to return to profitability shed hundreds of workers and fed anxieties about the role foreign capital plays in the German economy. When the turnaround still was not successful, the UK firm proposed to sell its share to the consortium, led by TPG, which set off the controversy. ¶4. (U) The sale went through, despite major political opposition and negative coverage in several major national media outlets, and Grohe employees and regional politicians prepared for the worst -- which did not happen. Gaines described the great lengths through which he went with labor, management and NRW-based power brokers to make the turnaround a success, but that difficult decisions had to be made regarding products and production processees. Rather than shedding 3000 jobs, as McKinsey had proposed, the new owners backed a restructuring plan that have restored the firm's position a leading international producer of premium sanitary fittings, with employees, revenues, profits and market share at historic levels. Not only did the negative scenario not materialize, but an independent study by White & Case, the Technical University of Munich, and the European Busines School commissioned by the Federal Finance Ministry called the takeover "an example for a successful restructuring of a German Mittelstand (SME) company." The media have also begun to write positively about this case. Comment -------------- ¶5. (SBU) The Grohe case is now ancient history, but the perjorative "locust" metaphor continues to surface from time to time in Germany, despite the fact that even former opponents now consider TPG a model investor, and American investors in general (including equity capital or hedge funds) positive for the national economy. "Anglo-Saxon" investors, a term that usually refers to U.S.-based but also to British firms, continue to have a lingering but undeserved reputation in parts of the populace as allegedly less concerned with social issues than German employers. All may be well that ends well, but this was a controversy that needn't have happened. According to the firm, the only former player in the deal who does not acknowledge the success is Muentefering, who declines to meet with Grohe managers, despite the fact that they are major employers in his region. BOYSE