Dunkin' Reassures Congress about Private Equity
On May 16, 2007, slightly over a year after a consortium of three U.S. Private Equity firms, which included Bain Capital Partners, The Carlyle Group, and Thomas H. Lee Partners, acquired Dunkin Brands, Inc., Chairman and [then-current] Chief Executive Officer, Jon L. Luther, provided statements for the U.S. House of Representatives Financial Services Committee on Private Equity’s Effects on Workers and Firms.
As referenced by Josh Kosman on page 196 in “The Buyout of America”:
Congressman [Barney] Frank [D-MA] – head of the House Financial Services Committee] said, “I assume the market is rational and that the private equity method increases value. I don’t think people make deals in large numbers for no good reason.” Soon after, the PE industry trotted out Jon Luther, CEO of Dunkin Brands’, the large Massachusetts company that owns Dunkin’ Donuts and Baskin Robbins, to explain how buyouts helped businesses. Frank was a big Dunkin’ fan, a source said, and the softball questions to Luther undermined the seriousness of the hearings.
The purpose of the hearing was to determine if private equity buyouts negatively impact workers and other “stakeholders” of the American companies they target, as a matter of public policy, by leveraging inequalities in the system. The Congressional Hearing was not a tribunal of high level elected public officials set out to investigate the flaws. Rather, the hearing was to explore whether or not the committee can play a constructive role in balancing the inequalities by enhancing competiveness in the U.S. capital markets. In reality, the event seemed more like an agenda with a bunch of boys gathering to chit-chat about the concerns to blanket the “real” issues in order to get back to their order of business – to rub shoulders with their constituents.
U.S. House of Representatives Financial Services Committee Explores The Effects of Private Equity Investments
Congressman Stephen Lynch (D-MA) gives the thumbs-up by acknowledging Jon Luther at the on-set of the hearing:
First, I would like to say I am pleased to notice that a constituent of mine is here today to testify, Mr. Jon Luther of Dunkin’ Brands, a Canton, Massachusetts-based company, who probably, I think, will offer a positive example of private equity involvement.
Prior to the Financial Reform Act of 2010 private equity portfolio companies were not regulated and had no disclosure requirements. As a franchise company, Dunkin’ Brands, Inc is only obligated to provide an annual Franchise Disclosure Document (FDD) according to consumer law protection regulation set forth by the Federal Trade Commission (FTC). The FTC does not review the accuracy of the annual FDD filed by franchisors since a franchise investment is a matter of consumer protection law, and not, securities law. Hence, the individual States are responsible for the protection of their State’s consumers and the only people who have a vested interest with the accuracy of the annual FDD are the individual potential “new” franchisees and the other “existing” franchisees.
The FTC regulatory environment itself provides an ideal platform to ferment half truths and manipulation of the American people by the private equity companies that invest in franchised brands, such as, Dunkin’ Donuts.
Congressman Edward “Ed” Royce (R-CA) highlighted the core fundamental shift for companies choosing to go private from a public reporting environment is to avoid the tedious disclosure requirements under the Sarbanes-Oxley Act of 2002.
Robert M. Rosenberg, former Chairman and CEO of Dunkin’ Donuts and a current managing partner at Bain Capital, participated in a roundtable discussion on the issues of the 2002 Sarbanes-Oxley Act, in November 2003, titled, “Restoring Trust in America’s Business Institutions.” His comments shed light on the disclosure practices of Dunkin’ Brands, Inc and their private equity sponsors.
I think compliance with Sarbanes-Oxley has limited beneficial value in and of itself. However, that being said, I think it will require a lot of work for confidence to be restored in the work of boards and I think that's still yet to be done. I don't think this legislation really touches on that yet. Boards aren't necessarily doing the right things. They aren't necessarily properly inducted into the companies. Members don't necessarily understand their companies and really can't do their job of governance correctly. What I see is people getting a packet of paper a couple of days before a meeting, reading it on a plane, with the agenda set by the CEO, and then sitting in a room for a few hours and calling that governance.
As a Managing Partner at Bain Capital Partners, Robert M. Rosenberg is intimately knowledgeable being behind the veil of secrecy at Dunkin’ Donuts, and Allied Domecq North America Corporation, since he was at the helm for over 35+ years. Bain Capital Partners led the Carlyle Group and Thomas H. Lee Partners in the acquisition of Dunkin’ Brands, Inc. Compliance under the 2002 Sarbanes-Oxley Act would force companies like DBI, and their private equity sponsors, to fully disclose all corporate activities and relationships if they were publically traded.
Franchisees would gain significant beneficial value with full disclosure. However, DBI’s Board of Directors chooses to promote a culture of secrecy when viewed from Mr. Rosenberg’s top down management style. This is also due to the fact that under Sarbanes-Oxley private equity companies can no longer charge their portfolio companies management fees - such as, the management fees Dunkin’ Brands, Inc currently pays to Bain Capital Partners, Carlyle Group, and Thomas H. Lee Partners.
House Testimony of Jon L. Luther – Chairman and Former Chief Executive Officer of Dunkin’ Brands, Inc.
Jon Luther was asked soft ball questions by Congress' Financial Services Committee because no one knew the truth behind this private company except for a limited handful of executives at Dunkin’ Brands, Inc, the private equity sponsors [primarily Bain Capital Partners], and those who are fortunate enough to extract inside information from them through the courts.
Jon Luther makes numerous contradicting statements that are not supported by either the 2007 Dunkin’ Donuts Franchising LLC (DDF) Franchise Disclosure Document dated March 30, 2007 or the 2006 DB Master Finance, LLC (DBMF) 144a Private Placement Memorandum (PPM) dated May 22, 2006 or Pernod Ricard Financial Report of Fiscal 2005/2006 ending September 20, 2006.
Luther testifies:
Our talented team of executives and employees, together with our thousands of franchisees and licensees, predominantly small businesspeople, has built a $6.4 billion enterprise operating in 47 States and in 50 countries.
But Dunkin' Donuts 2007 Franchise Disclosure Documents (FTC Disclosure) declares total capitalization of DB Franchising Holding Company, LLC is US$3.6 billion.
Luther testifies:
During the period when we were an Allied Domecq subsidiary, we were considered, for lack of a better term, a ``cash cow.'' We were assigned yearly growth targets. We were usually last in line for attention, and certainly for capital to fuel our growth.
2006 DBMF 144a PPM (Wall Street Disclosure):
Dunkin’ Brands’ franchised business model also allows it to grow its earnings with limited capital investment, as expansion is mainly funded by Franchisees.
Operating as a franchisor of brands in the QSR industry allows Dunkin’ Brands to generate substantial cash flows from its franchisees, therefore requiring limited investment by Dunkin’ Brands.
Since Dunkin’ Brands is nearly 100% franchised and licensed, it primarily utilizes franchisee capital to drive new POD growth.
Dunkin’ Brands’ model is also capital efficient. Because Franchisees fund the majority of new POD development, Dunkin’ Brands is able to grow the System with lower capital requirements than its competitors by utilizing Franchisee capital for growth.
In addition to the stability and capital efficiency of the business model, a significant portion of Dunkin’ Brands’ cost structure is fixed and will not require a proportionate investment in corporate resources as new PODs are added. The scalable nature of this business model historically has led to increased profit margins for Dunkin’ Brands as the Franchised Brands have grown.
Dunkin’ Brands Franchisees fund substantially all of the advertising that supports the Franchised Brands. The Advertising Funds contribute to the cost of Dunkin’ Brands’ corporate advertising and marketing personnel.
Luther testifies:
Just to weigh in, my experience is that there has been a lot of equity put into our deal, so it is not leveraged quite as it was in the 1980's.
2006 DBMF 144a PPM (Wall Street Disclosure):
Dunkin’ Brands accounted for the Allied Domecq Acquisition under the purchase method of accounting. Effective July 26, 2005, Dunkin’ Brands adjusted its assets and liabilities to their fair market values. Such fair values were determined by internal and external valuation specialists and the management of Dunkin’ Brands. Of the total consideration paid for Allied Domecq plc, $2,425.0 million was allocated to Dunkin’ Brands. Dunkin’ Brands is in the process of finalizing the fair value assessments of certain long-lived assets and anticipates completing this assessment during the third quarter of fiscal 2006.
2007 DDF FDD (FTC Disclosure):
Long-term debt 1,599,976 - Total liabilities 2,589,956 - Total stockholders’ equity 1,053,238
Fiscal 2005/2006 Pernod Ricard Financial Report (Shareholder Disclosure):
Facility B – a euro denominated term loan of €225,000,000 [US$275,625,000] and a US dollar denominated term loan facility US$1,185,000,000 available to any borrower as defined in the Credit Agreement. [Total Loan Facility B = US$1,460,625,000]
Following the sale of DBI, Facility B was repaid in full in March 2006.
Congresswoman Carolyn B. Maloney (D-NY), lobbed the most challenging softball question to the panel of private equity experts.
….how are their private equity deals helping the middle class do better? Are the workers sharing in the increased profits of these private equity firms through increased wages or benefit packages? How are these deals helping Middle America?
Luther testifies:
Yes, my experience might be a microcosm of the overall economy, but in our case when private equity acquired, the opportunity for many of our employees who worked for Dunkin' Brands, not our franchise organizations, we distributed some of that wealth to them in the form of stock and options to over 150 people in our organization; that is 15 percent of our company that now has some opportunity perhaps for their children to go to college without borrowing money or whatever. Our goal is to continue to distribute those stock options and equity opportunities into our organization deeper and deeper, so we distribute the wealth in that regard.
This is part two of a three-part series
- Franchise topic:
