Wednesday night, the long-running Market Basket drama ended and the good guys ostensibly won. Or did they?
When we last tuned in, the employees of the $4 billion family-owned New England supermarket chain were rallying behind a beloved boss, Arthur T. Demoulas, who had been ousted by a greedy board of directors. In the family feud, the board was led by a Demoulas cousin, also named Arthur, who controlled 50.5 percent of company shares.
The good Arthur was beloved for paying above-average wages, sponsoring a profit-sharing plan, and pumping earnings back into the chain, making it a favorite of customers as well as the company's 25,000 workers. The faction led by the bad Arthur, middle initial S., raided a $500 million cash surplus, and paid out $300 million as dividends to shareholders of the closely held company.
Now, under intense pressure from an employees' revolt that has paralyzed the business, Arthur T. is coming back, and is buying the whole company. The governors of two states, Massachusetts and New Hampshire, got involved to broker the deal. Workers are jubilant.
But there's a lot more to the story. The real, and under-appreciated player here is the private equity industry.
For two decades, well-run retailers with good employee relations have been sitting ducks for private equity takeovers. In the typical case, a private equity company borrows money, takes over the company (often in collusion with managers), pays itself exorbitant dividends and management charges-and gets all this money back by slashing employee pay and benefits.
Independent supermarket chains such as Market Basket are obvious prey. When the faction led by cousin Arthur S. Demoulas got control of the company and fired Arthur T., they brought in as top executives two people long associated with private equity clip-and-strip buyouts.
As CEO, they hired Felicia Thornton. The game plan was to ready Market Basket for a sale to either a private equity or to a larger chain, so that the Arthur S. faction could cash out for billions at the expense of employees. Thornton is emblematic of a breed of itinerant CEOs who come in to set up a well-managed company for a ruthless private equity deal.
In a previous job, Thornton worked in 2006 with Cerberus Capital, one of the most notorious in the private equity industry, to bust up another well run independent supermarket chain, Albertson's. In the bust-up merger, worth $17.7 billion, thirty-seven stores in Northern California were closed. For her part in the deal, Thornton, then the CFO of Albertson's, walked away with $17.2 million personally. Last March, in another deal orchestrated by Cerberus, Albertson's has been merged yet again.
The business press has reported that Arthur S. had been in talks both with Cerberus, and with a larger low-wage chain, Hannaford, which is owned by a Belgium conglomerate, Delhaize Group SA. Either deal would have allowed the shareholders to cash out for quick windfall, at the expense of Market Basket and its employees. Store closings would have likely followed, as the consolidation and low-wage path of the industry intensified.
One of the most remarkable things about this saga is that the revolt was started by top-level managers, not by checkout clerks and stockroom workers. When Arthur T. was fired in late June, top managers quickly understood the larger game plan and the stakes. On July 17, they confronted the board in a late afternoon meeting, and warned that if the firing was not reversed, they would quit.
That evening, they began networking on Facebook. The next morning, some 2,000 rank and file workers showed up in a parking lot to protest.
Now, Arthur T., benign paternalistic management, and the employees have won. Or have they? Under the deal, Arthur T. is buying the whole company. The Arthur S. faction will get their windfall, but directly from their estranged cousin.
But where is Arthur T. getting the money? He is getting at least $500 million of it from an unnamed private equity company, possibly Blackstone. There are rumors that this is in the form of a loan, however private equity does not get rich by making loans, but by taking equity positions.
At best, Arthur T. will continue the worker-friendly management that won such employee loyalty. Chris Mackin president of Ownership Associates, an expert on worker ownership and buyouts, is hopeful. "The dividend-sucking family is out, and there will no pressure to pay dividends for some time."
Until now, Market Basket has operated with no debt and lean management, which enabled it to combine good wages and low prices. Mackin views the Market Basket victory as the rare thwarting of a trend to rationalize retailing to the benefit of shareholders and middlemen at the expense of workers and independents that often manage more efficiently.
Yet the piper must be paid, and the money to pay back the private equity partners (whose entire business model is quick windfalls) must come from somewhere. Worse case, we have variant of Orwell's Animal Farm, where after a while you can't tell the humans from the pigs.
