Two Face, Private Equity and Saving Jobs In Philadephia

                                 Bloomberg News

Rumor has it that Two-Face was seen hanging around the Sunoco refinery in Philadelphia (pictured above), hoping to work the dark side, to see the owner close the plant, raising Northeast gasoline and heating oil prices and eliminating 850 lucrative union jobs. 

But wait!  The Wall Street Journal reports that the White House Economic czar got on the Batphone and called an evil private equity group, Carlyle which was the only viable bidder for the refinery.  Did he berate Carlyle for stealing money from widows, exporting jobs, and bringing global climate to the tipping point? 

No, the White House was instead a catalyst for a tri-partite process involving Sunoco, Carlyle, and a Republican Governor of Pennsylvania in which Carlyle took a two-thirds equity stake in the refinery alongside Sunoco, investing $200 million to upgrade the facility and preserving 850 union jobs with modest concessions from the unions.  Carlyle negotiated a good deal for itself because it paid nothing for its majority stake, but it also contributed the cash and expertise to the upgrade, something few players could provide.

Governor Corbett (R) brought $25 million in subsidies and incentives to the table to make the deal work. In one of the many ironies of this story, a 2005 EPA consent degree with Sunoco regarding limiting emissions from its plants would have scuttled the deal from Carlyle's view.  The White House elected to have the EPA modify its own consent decree to let the project go forward, by creatively transferring emission credits from Sunoco's closed Marcus Hook facility.  In fact, Carlyle will not need to use the credits, and net/net the revamped refinery will end up having lower emissions under its new owners than it did under Sunoco.

Even Two-Face must have had a migraine at this point.  Governor Corbett puts it well when he says,

 "... the lesson "is that private-equity firms are not evil. Even though campaigns may say that, administrations understand they're necessary to get deals done." There were no other realistic buyers for the refinery, he said, and if Carlyle didn't invest, a deal to save it "just wouldn't have happened."

But no!  The union boss whose workers had jobs saved said that he wouldn't have taken the same deal if "Bain had been across the table."  There's a class act.  Why?  Because he knows that "they (Bain) strip and flip and walk out with as much as they can." 

Since Carlyle was identified as the only viable bidder, it had to have been because Bain was unwilling to provide capital for the upgrade, wasn't perceived to have the expertise to handle the project, or had other terms that were not acceptable to Sunoco.  Not every private equity firm is equally adept in every industry, and Sunoco may have had its own preferences for operating partners.

However, if Bain had been switched for Carlyle in this same deal, what or how could they strip and flip?  Sunoco would still have a one third stake in the venture, and any joint venture document acceptable to Sunoco would have constrained the private equity partner from pulling the rug out from under the venture. So the union leader's comment, just like White House rhetoric and campaign fog on private equity, was meaningless and unseemly.

A Bain spokesperson notes, 

"During a campaign, some may distort our record for political purposes, but the truth is that revenues have grown in 80% of the more than 350 companies in which we have invested,"

Overall, this project was a good example of the political machinery acting rationally to help private interests achieve an economically and socially superior outcome to Sunoco's closing the plant, as it had done with Marcus Hook.  It looks like Two-Face's coin came up heads for adding value through private equity.