ImpactAlpha, August 18 — KKR’s acquisition of New York-based book publishing giant Simon & Schuster earlier this month signals that investors with employee-ownership strategies have a competitive advantage on deals.

When Simon & Schuster’s Jonathan Karp explained to staff why KKR had won the $1.6 billion auction for the publisher, he touted the private equity firm’s pledge to let employees participate in the benefits of ownership. KKR will implement a broad-based equity ownership program that will give all of Simon & Schuster’s more than 1,600 employees access to shared ownership in the company.

Since 2011, KKR has implemented broad-based employee ownership programs at more than 30 companies.

Deal background

Paramount Global, the parent company of Simon & Schuster, put the company up for sale in March 2020. Late last year, the media giant nearly signed off on a much-larger $2.2 billion transaction for the publishing company to rival publishing giant Penguin Random House, which is owned by German media conglomerate Bertelsmann.

Paramount pulled out of the deal several weeks after a federal judge rejected the merger, ruling that the consolidation of two of the world’s publishing giants could “lessen competition” for “top-selling books,” reported CNBC.

Paramount received a $200 million termination fee from Penguin when the deal was terminated. Paramount says it will use the proceeds from Simon & Schuster’s sale to KKR for paying down debt.

Ecosystem building

KKR helped launch Ownership Works last year and enlisted TPG, Apollo and dozens of other private equity investors to pledge to give equity shares to employees at some portfolio firms. The goal: to create $20 billion in wealth for low- and moderate-income workers over the next decade.

Impact investors are skeptical about the plan, arguing that if employees only receive a small percentage of equity shares, while private equity executives get a lion’s share, it will widen the wealth gap.

In KKR’s $3 billion sale of C.H.I. Overhead Doors to steel company Nucor Corp. last year, 800 workers received average cash payouts of $175,000. The employee payout represents a small portion of KKR’s 10x return on its investment in C.H.I in 2015.

Ownership Economy

This week, UK-based facilities management firm Churchill Group became an employee-owned business; 53% of the company’s shares have been placed in an employee ownership trust. “When considering ways in which to take the company, we were impressed by the benefits of becoming an employee-owned business,” says Churchill’s CEO James Bradley.

Separately, Ownership Catalyst Fund, co-managed by Mission Driven Finance and Project Equity, made an investment in CT3 Education to transition to an employee stock ownership plan. The San Francisco-based company provides education services for teachers, principals and other educators in underserved communities.