' You work an honest day , you get an honest deal '
--Safeway Stores Inc. slogan There are deals galore at Safeway--and not just at the neighborhood store.
The pending $4.1-billion takeover of the world's largest supermarket chain will bring at least $150 million to the bankers, lawyers and advisers that helped engineer the deal, making the takeover, in terms of fees, one of the nation's most expensive.
The size of Safeway's fees renews concerns about Wall Street's deal makers and the worth of their services. Thanks to the rash of takeovers and their increasingly large price tags, multimillion-dollar fees to deal makers have become common.
Kohlberg Kravis Roberts & Co., the investment company that has agreed to buy Safeway--rescuing it from a hostile takeover attempt by Washington's Herbert H. Haft family--will gain $60 million in fees alone.
Expenses are extra, as are its annual consulting fees, which will begin at $500,000--escalating 10% a year--when the takeover is completed.
Meanwhile, the banks that are arranging the financing for the takeover will collect $48 million--just for arranging the loan. Interest on the loan also will be extra.
Morgan Stanley & Co.--Kohlberg Kravis' financial adviser and manager for the takeover--will gain $10 million from the deal. Morgan Stanley & Co. also has been granted the opportunity to purchase as much as $10 million in equity in the new company that will own Safeway.
$3 Million for Printers
Lawyers and accountants will receive another $10 million for their work, while printers will get a total of $3 million for preparing documents, according to documents filed with the Securities and Exchange Commission.
An additional $33 million will have to be shelled out--largely to cover the sale of secured debentures--to complete the deal, Safeway said.
Even the U.S. Treasury will benefit, thanks to the $621,000 in filing fees that Safeway has to pay to the SEC before it can complete the deal.
Together, these fees appear to make the Safeway takeover one of the most expensive ever, dwarfed only by KKR's $6.2-billion takeover of the food conglomerate Beatrice Cos. last year. In that deal, KKR's own fees were less--$45 million. However, the bankers' fees totaled $130 million, according to Mergers & Acquisitions magazine.
"How can you justify those kinds of fees for anybody?" asked Andrew C. Sigler, chairman of Champion International Corp. and an outspoken critic of investment banking fees in his role as chairman of the corporate responsibility task force for the Business Roundtable, a trade group of the chief executives of the nation's largest businesses. The fee system has "gone totally out of control," Sigler said. "It is highway robbery."
Regarding the Safeway deal, Sigler charged that KKR is "taking the assets of a company and putting it into its own pocket. As the company passes through its hand, it is grabbing everything it can take and still have lenders willing to loan money." Safeway and KKR declined to comment on the size of the fees.
Sigler is one of the country's few corporate chiefs to openly criticize the size of these fees. While others also complain, few are willing to speak out against them publicly because they fear that one day they may need to pay similar multimillion-dollar fees to ward off a hostile takeover or win companies that they desperately want to buy.
With fees typically pegged as a percentage of the deal, it is easy for investment bankers to earn millions of dollars, even if they spend relatively little time on the transaction. Given the large size of many of the recent takeovers, even a fee that is calculated as a fraction of a percent of the deal can translate into millions for the deal makers.
Philip Morris Inc.'s $5.6-billion acquisition of General Foods Corp., for instance, earned Philip Morris' investment banker, First Boston Corp., $10.1 million in fees--0.18% of the deal. General Foods' two financial advisers--Goldman, Sachs & Co. and Shearson Lehman Bros.--each received 0.13% of the deal, or $7.1 million.
"With investment bankers getting paid by the job, not by the hour, there is an incentive that is created for business deals," said Robert Reich of Harvard University's Kennedy School.
"Although the fee system doesn't take money out of the economy--it only moves it from one segment to another--the time and attention it takes away from the development of new products and services is enormous," Reich said. "Look at the newspapers today. You don't see stories about new products or innovative breakthroughs. You see stories about the thrusts and paries of corporate law and finance."
Part of the problem behind the high fees is the lack of competition, said James C. Van Horne, professor of finance at Stanford University's Graduate School of Business. "There are only a handful of investment houses very active in this business, and because of prestige, size and experience, they are able to maintain very attractive fees."
Few deal makers are willing to talk about their fees. But those that do vigorously defend them, saying they are a small price to pay, compared to the gain that shareholders receive.