Bankers Squeeze Burger King, and Tomato Pickers Lose
Hundreds of migrant farmworkers marched through Miami this past Friday to protest a Florida tomato grower maneuver that will cut some tomato picker wages by 40 percent.
The growers are refusing to honor deals the state's top farmworker group has cut with McDonald's and Taco Bell to pay pickers a penny a pound more for the tomatoes they pick -- over the course of workdays that often last 12 hours.
Fast-food chains just happen to be the biggest market for Florida's tomatoes. But one fast-food giant -- Burger King -- has resisted the penny-per-pound wage increase, and that resistance, says food industry analyst Eric Schlosser, "has encouraged tomato growers to cancel the deals already struck with Taco Bell and McDonald's."
Why is Burger King so up in arms against upping farmworker wages a penny a pound?
Here's a hint: The farmworkers started their nine-mile protest march Friday at the Miami office of Goldman Sachs, the Wall Street investment banking colossus whose top power suits will shortly be divvying up somewhere between $17 and $22 billion in annual bonuses.
How are Wall Street's power suits making all those billions? They certainly, of course, don't pick tomatoes -- or even flip burgers. They flip companies. And that flipping, maybe more than any other single factor, is driving the battle over pennies currently raging in Florida's tomato fields.
The flipping at Burger King, the nation's second-largest fast-food chain, has been going on for some time now, ever since 1967 when Pillsbury bought the then 13-year-old Burger King from the company's two independent founders.
But the Burger King flipping wouldn't become particularly frenetic until nearly two dozen years later. In 1989, Grand Met, a British company, bought out Pillsbury. Just eight years later, Grand Met merged with the Guinness beverage company to create a totally new corporation that became known as Diageo.
This new company knew something about selling beer, but next to nothing about burgers. By 2002, Burger King had become a basket case, with central headquarters and the chain's franchisees at each others' throats.
That's when three American big-money powers -- Wall Street's Goldman Sachs, the Boston-based Bain Capital Group, and the Fort Worth-based Texas Pacific Group -- partnered to shell out $1.5 billion to take the distressed Burger King off Diageo's hands.
Actually, the three partners did a good bit more borrowing than shelling. Only $325 million of the Burger King sale price came from the partners' own pockets. They borrowed the rest. That's standard operating procedure in today's big-time private equity deals.
Firms like Goldman, Texas Pacific, and Bain, typically buy up a hurting corporate property with borrowed money, then tap the company's operating cash flow -- fast food companies do generate plenty of cash -- to pay off the resulting debt.
But, wait, if that cash is going to pay off the debt the new owners of a hurting company like Burger King ran up buy the company, how are those new owners going to make the investments in marketing or research or customer service needed to make their dysfunctional company functional?
Now firms like Goldman, Bain, and Texas Pacific could always borrow still more money to pay for these needed corporate improvements. But those improvements could take years to show up in the bottom line of a company like Burger King.
Private equity wheeler-dealers don't have much interest in waiting years for results. But they have nothing against borrowing. So they do borrow -- but not to make lasting improvements in the companies they buy. They borrow to line their own pockets.
Last year, for instance, Burger King borrowed $350 million in February and then paid out $367 million in dividends to the company's owners, the good people at Goldman, Bain, and Texas Pacific. Then those good people, who had been collecting a $9 million annual fee for managing Burger King, collected another $30 million for agreeing to cancel that "management" contract.
Four months later, Goldman, Bain, and Texas Pacific unloaded a quarter of their Burger King ownership stake in an initial public offering of company shares that brought in $425 million. The three partners, once the dust settled, had nearly doubled their original out-of-pocket outlay for Burger King in just four years.
Meanwhile, Burger King remains a troubled company, deeply indebted, with per-restaurant revenues, notes Business Week, "just a little more than half the sales of a typical McDonald's."
But Goldman, Bain, and Texas Pacific aren't finished yet. They last month began selling even more of their Burger King shares, with none of the proceeds going back into the company. To make these sales as lucrative as possible, Burger King, naturally, needs to showtop-notch, short-term profits. And that brings us back to Florida and Burger King's hard-line against a penny-a-pound pay increase for the state's tomato pickers.
The more pennies for those pickers, Burger King management clearly understands, the fewer millions for Goldman, Bain, and Texas Pacific.
Last year, analyst Eric Schlosser points out, the over $200 million in holiday bonuses that went to the top 12 executives at Goldman Sachs more than doubled the entire combined annual wages of southern Florida's 10,000 tomato pickers.
This year, those top 12 Goldman executives will reportedly walk off with even more in their pay envelopes. Florida's tomato pickers, courtesy of Burger King, can now look forward to a future with even less.