When Is a Leveraged Buyout Really a Success?
In my previous article, I wrote about Raleigh and asked how a company could become too poor to survive being bought.
The obvious response is that not every leveraged buyout ends like Raleigh’s parent company, Accell Group.
Some produce enormous profits. Some companies expand, employ more people and emerge stronger. Private-equity firms can provide expertise, impose financial discipline and give management the capital needed to grow.
There are genuine success stories.
But before calling any leveraged buyout successful, we need to decide what success means.
Is a takeover successful because the investors made money?
Is it successful because the company survived long enough to be sold again?
Or should we also ask what happened to its employees, suppliers, customers and ability to compete after the investors had gone?
Those questions can produce very different answers.
A success for whom?
Private equity measures performance primarily through the return made for its investors.
That is understandable. Investment funds exist to make money, and their managers are judged by how much value they create from the capital entrusted to them.
Leverage can make those returns spectacular.
If a fund contributes £300 million towards a £1 billion acquisition and borrows the remainder, it does not need the company to become three times more valuable to triple its own investment. It may only need the business to grow modestly, repay some of the debt and remain attractive to another buyer.
From the fund’s perspective, that can be an excellent result.
But the company has experienced something different.
It has used its earnings to service acquisition debt. It may have sold property, reduced investment, closed sites or cut jobs. It may then be sold to another owner while still carrying obligations created by the original transaction.
The investors can therefore succeed even when the company has become more fragile.
No example demonstrates this contradiction more clearly than Debenhams.
Debenhams: a profitable failure
Debenhams was taken private in 2003 by a consortium involving TPG, CVC Capital Partners and Merrill Lynch Private Equity.
The investors reportedly contributed around £600 million of their own capital. Much of the remaining purchase price was financed through borrowing.
During less than three years of private ownership, property was sold and leased back, debt increased and the owners collected substantial dividends. The company was then returned to the stock market in 2006.
For the private-equity consortium, the transaction was extremely profitable.
For Debenhams, the inheritance was far less attractive.
It returned to public ownership with more than £1 billion of debt and long-term rental commitments on stores it had previously owned. The company still had to confront the rise of online shopping, changing consumer behaviour and intense competition across the high street, but it had less freedom to adapt.
Private equity did not invent all of Debenhams’ problems. Management decisions, an oversized store estate and the transformation of retail all contributed to its decline.
But debt and inflexible leases reduced the company’s ability to respond to those problems.
Debenhams entered administration in 2019. Its remaining stores closed in 2021 and thousands of people lost their jobs. The name survived after being purchased by Boohoo, but the department-store business did not.
Was the leveraged buyout a success?
The original investors made a great deal of money.
The company eventually disappeared.
Both statements are true, which tells us that the usual definition of success is incomplete.
Toys “R” Us: debt does not care about competition
Toys “R” Us was acquired in 2005 by KKR, Bain Capital and Vornado Realty Trust in a leveraged buyout worth approximately $6.6 billion.
The company already faced serious competitive threats. Walmart and other large retailers were selling toys aggressively, while online shopping would later transform the market.
It needed investment in its shops, technology and customer experience.
Instead, it also had to service billions of dollars of debt.
By the time Toys “R” Us filed for Chapter 11 bankruptcy protection in 2017, it reported approximately $7.9 billion in debt against $6.6 billion in assets. The debt was not the only cause of the collapse, but it consumed money that might otherwise have helped the company modernise.
The American business was eventually liquidated. More than 30,000 workers lost their jobs, initially without severance pay.
The investors also lost money, and it would be simplistic to claim that a debt-free Toys “R” Us would certainly have defeated Amazon, Walmart and every change in children’s shopping habits.
But that is not the relevant test.
The question is whether adding acquisition debt improved the company’s chances of meeting those threats.
It plainly did not.
Manchester United: successful enough to carry the burden
Manchester United may be the clearest demonstration that a leveraged buyout does not need to destroy a company to impose an extraordinary cost upon it.
The club was effectively debt-free before the Glazer family’s takeover in 2005.
Malcolm Glazer acquired United in a deal worth approximately £790 million. Around £660 million of debt was subsequently loaded onto the club, with annual interest payments initially reported at approximately £62 million.
That borrowing did not build a stadium, develop a training ground or purchase players.
It paid for the change of ownership.
Manchester United was commercially strong enough to carry the burden. Its worldwide support, broadcasting income and sponsorship appeal allowed it to service debt while continuing to compete. Under Sir Alex Ferguson, it also continued winning trophies.
But survival is not the same as proof that the structure was beneficial.
Money that could have improved or rebuilt Old Trafford, strengthened the playing squad or remained within the club instead went towards interest, refinancing costs, dividends and other payments associated with its ownership.
Twenty years later, borrowings linked to the takeover had still not disappeared. United’s wider liabilities had also grown, although not all of those debts resulted from the Glazer acquisition.
The club’s sporting decline after Ferguson retired in 2013 cannot be attributed entirely to leverage. Recruitment, management, leadership and the growing strength of its competitors all mattered.
But the takeover created no corresponding asset for Manchester United.
The club paid to be bought and has spent two decades carrying the consequences.
Perhaps the most revealing thing about Manchester United is that the takeover can be defended because the club survived it.
A business should not have to prove its strength by absorbing a financial burden from which it received no obvious benefit.
Liverpool: a disaster narrowly avoided
Liverpool Football Club provides a further example in which the underlying organisation remained immensely valuable throughout a crisis.
Tom Hicks and George Gillett bought Liverpool in 2007 after promising investment and a new stadium.
Much of the borrowing associated with the acquisition was placed within the club’s ownership structure and had to be supported by income generated by Liverpool.
The football club had not lost its supporters. It had not ceased to be one of the most recognisable sporting institutions in the world. Its fundamental business remained valuable.
Yet by 2010, only five years after winning the Champions League and three years after reaching another CL final, acquisition debt threatened its future.
Liverpool’s board fought a legal battle to complete a sale to New England Sports Ventures, now Fenway Sports Group, against the wishes of Hicks and Gillett. The £300 million transaction eliminated the acquisition debt and reduced annual debt-servicing obligations from approximately £25 million to £30 million to around £2 million to £3 million.
Liverpool survived because it was valuable enough to attract another buyer and because directors, lenders and the courts enabled the sale to proceed.
Hicks and Gillett lost heavily.
Supporters were relieved.
But survival should not disguise how close an otherwise viable institution came to a crisis created largely by the way it had been purchased.
Hilton: when leverage accompanies improvement
There is another side to this argument.
In 2007, Blackstone acquired Hilton Hotels in a transaction valued at approximately $26 billion. The timing appeared disastrous. The global financial crisis followed, travel declined and the value of hotel property fell.
Hilton could easily have become another cautionary tale.
Instead, Blackstone restructured the company’s debt, changed its leadership and supported a strategy focused increasingly on managing and franchising hotels rather than owning every property. Hilton expanded internationally, strengthened its brands and improved its operations.
The company returned to the stock market in 2013. Blackstone completed its exit in 2018 and reportedly made around $14 billion in profit, more than tripling its original investment.
That was clearly a success for Blackstone.
It was also more than a piece of financial engineering. Hilton remained a substantial operating business, expanded its global presence and continued growing after Blackstone’s departure.
The debt created risk, particularly when the financial crisis arrived, but the owners did not rely solely on cutting costs, selling assets and waiting for another buyer. The company itself became more valuable because its operations and strategy improved.
That is much closer to what investment ought to mean.
Dollar General: the company grew too
KKR’s acquisition of Dollar General in 2007 provides another widely cited success.
The transaction valued the American discount retailer at approximately $7.3 billion. Around $2.8 billion came from investors, with much of the remainder financed through debt.
Dollar General closed hundreds of underperforming shops, improved merchandising, remodelled stores and strengthened its distribution and transport operations. These were not painless decisions, and store closures inevitably affected employees and communities.
But the business did not simply shrink until it could be sold.
After initially slowing expansion to repair its existing estate, Dollar General began growing again. It increased its store count, improved profitability and returned to the stock market in 2009.
KKR and its partners made substantial returns, but the company also emerged as a larger and more competitive retailer.
Market conditions helped. The financial crisis encouraged consumers to seek cheaper products, making a discount chain particularly attractive.
Private equity did not create that demand.
It did, however, leave Dollar General capable of taking advantage of it.
The difference between Hilton and Debenhams
Every company is different, so neat comparisons should be treated cautiously.
Hilton, Dollar General, Debenhams and Toys “R” Us operated in different markets and faced different economic conditions. Some benefited from changes in consumer behaviour while others were damaged by them.
No financial structure can guarantee success, and no business has an automatic right to survive.
But the contrast still teaches us something important.
In the strongest private-equity successes, the company improves alongside the investor’s return.
Its operations become more efficient. Its products or services become more competitive. It invests, grows and remains capable of surviving after the original owners leave.
In the weakest, the return is created partly by transferring value out of the business.
Property is sold. Debt increases. Dividends are paid. Costs are cut without creating a sustainable advantage. The company reaches the end of the ownership period with fewer assets and less room to respond to change.
Both transactions may be described as successful if the investors make money.
Only one has necessarily created a stronger company.
A better test of success
Perhaps a leveraged buyout should have to pass more than one test.
Did the investors receive a good return?
Did the company become more productive and competitive?
Was debt reduced to a level the business could support through an ordinary downturn, rather than only under optimistic forecasts?
Did investment in staff, technology, products and infrastructure continue?
Did employees and contractors share in the value created by greater productivity and growth?
Were suppliers paid and pension promises protected?
Was the company still capable of thriving after the private-equity owners had departed?
If the answer to those questions is yes, it is reasonable to call the takeover a success.
If the investors multiplied their money while the company was left indebted, stripped of assets and unable to adapt, we should use a different description.
The investors succeeded.
The investment did not.
The next test of success
That distinction leads to another apparent private-equity success story, and one I know personally.
In 2020, Advent International reportedly paid approximately £850 million for a 75 per cent stake in Hermes UK, although the terms were not officially disclosed.
Under Advent’s ownership, Hermes became Evri and expanded rapidly. Parcel volumes, revenue and profits increased. In 2024, the company was sold to funds managed by Apollo in a deal reportedly valuing it at £2.7 billion.
By conventional private-equity measures, Advent succeeded.
But a profitable exit does not tell us where the additional value came from.
Sometimes private equity creates value by improving operations, investing in growth or making a company more productive.
Sometimes it extracts value that already existed.
And sometimes costs and risks are transferred from the company to its employees, suppliers or contractors.
While Evri became larger and more valuable, I came to earn less from delivering its parcels than I had when I started with them six years earlier, even as I delivered more parcels at greater personal expense.
That does not by itself prove that Advent’s returns came at the expense of couriers. But it does raise an important question.
How much of Evri’s increased value was genuinely created, and how much depended upon transferring the costs and risks of delivery to the self-employed people completing the final mile?
My next article, Who Really Pays for Cheap Delivery?, will examine Evri’s growth under Advent, the role its courier model played in creating that growth and where Apollo might now find the additional returns expected from a £2.7 billion acquisition.