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Permira’s Hugo Boss Math Doesn’t Add Up

Yesterday we wrote about the pending Ohio factory closure by Hugo Boss, a publicly-traded retailer controlled by private equity firm Permira. The central issue, of course, is money.

What’s odd, however, is that Permira seems to be making a questionable financial decision.

Hugo Boss reportedly asked the workers to take a 25% pay cut from $12 to $9 and, when they refused, opted to shutter the facility and move the jobs overseas. Ohio officials tried to intervene with financial incentives, but it was too late.

In response, an Ohio public employees union that has invested in Permira’s past two funds said it “now has concerns about future involvement.” Local labor unions also are asking other state pension systems to reevaluate their future dealings with Permira.

Reports over the number of affected employees has varied, but the highest estimate has been 400. Assuming each of those employees is fulltime — working 40 hours per week, 52 weeks per year — they currently would make just under $25,000 per year (plus benefits). Hugo Boss wanted to cut them down to just under $19,000 per year (plus benefits). The total savings would have been $2.5 million per year.

Now compare that to how much money Permira makes off of its relationship with the Ohio pension system, which committed €60 million ($81.5m) to Permira’s latest fund. Assuming a standard 2% management fee, OPERS would have paid out €1.2 million ($1.6m) in the first year of the fund’s life. Moreover, Permira also likely was still collecting management fees from OPERS’ €50 million investment in a predecessor fund. Finally, Permira should — in theory — be collecting carried interest from profitable investments made possible, in part, by OPERS’ money.

Now throw in the possibility of other public pension funds following OPERS’ example. And also the startup costs of a new factory and of training a new workforce.

It’s impossible to say that Permira will or won’t make more money by closing the Ohio plant, but at best it looks like a wash. At worst, it could be disastrous, and certainly will do nothing to improve private equity’s image issues.

The firm isn’t talking, except to say that it is “sensitive to our investors’ concerns and always have an open line of communication with them.” Someone close to Permira tells me that its primary concern is interfering with a decision made by portfolio company management, but isn’t that imperitive of a controlling shareholder? We’re not talking about something piddling like removing bendy straws from the company cafeteria here.

Hugo Boss isn’t being much more forthcoming. It refusing to confirm or deny labor union assertions that the factory is profitable, except to say that it isn’t “globally competitive.” The former is objective, while the latter is subjective (guess which one is more compelling?).

Moreover, Hugo Boss adds that it “acted in the best interests of shareholders and customers by deciding to close the facility.” Well, we’ve already established that the best interests of Permira are in question. As for customers, have you seen the price of a Hugo Boss suit (which is what the factory makes)? I know every dollar counts, but no way does a Hugo Boss customer make a purchasing decision based on a $10 markup or markdown.

Permira still has a small amount of time to tell its portfolio company to reverse course. It should do so…