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
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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