Left At the Alter: How Some Firms Get Around Contingencies

It’s a familiar story line these days: Once the masters of their domains, private equity pros have faded from power and prestige with the onset of the credit crunch. Et cetera, et cetera.

Yesterday’s news provided further proof of this narrative. Macrovision rejected One Equity Partners, the firm it had lined up to buy TV Guide Network, in lieu of a strategic buyer. The price, $255 million, was only a slight bump from One Equity’s $225 million. The biggest difference of course, is those pesky contingencies. Unlike One Equity, strategic suitor Lionsgate would pay it all in cash. Private equity has been abandoned at the alter, and frankly, it’s a bummer.

I can’t say I’m surprised with the number of things that can do wrong in the deal-closing process these days. The flood of stories claiming “Lender X is closed for business,” or “Layoffs of Lender Y” don’t help. But what a burn. Given this situation and probably countless others behind the scenes, it’s fair to say firms wanting to do deals this year need a steady source of financing.

Beyond bridging the deal ’til God knows when, I’ve seen two examples of ways to get around this roadblock and get deals done, in the face of strategic competition. The first is from Sun Capital. The second is ZM Capital’s purchase of Greenfield Online, which was one of my favorite deals of last year (nerd alert…).

Example One: Sun Capital
Last year Sun completed 26 deals, just about all of them with leverage. The firm plans to to barrel through its pipeline of turnaround targets in 2009, and it likely won’t have a problem closing those deals thanks to its financing plan as I understand it. Since the late ’90s, Sun Capital has had a line of credit with Bank of Montreal equal to the amount of Sun’s undrawn funds. That line is used to bridge each deal, hasten its close and remove uncertainty regarding the financing. After each deal’s closing, the firm refinances exclusively with ABL lenders, who remain in business, but slower at doing diligence. The bridge loan gives ABL lenders the extra time they need to do diligence.

Example Two:  ZM Capital
ZM Capital, a tiny subsidiary of ZelnickMedia, partnered with Microsoft to top Quadrangle Capital’s bid for Greenfield Online. ZM backed its way into a no-contingencies deal by partnering with Microsoft. As I wrote in September:

ZM Capital approached Microsoft to explore a potential joint bid. ZM Capital wanted Greenfield’s Internet survey solutions business, and the firm convinced Microsoft it could benefit from owning Greenfield’s comparison shopping solutions business.

But Greenfield wanted a simple transaction, with only one buyer, so Microsoft took the lead, agreeing to sell ZM Capital the surveys business in the aftermath.

On the final day of the deal’s 50-day go-shop, Microsoft topped Quadrangle’s bid by $2. The financing contained no contingencies, since it would consist of a “back-end merger of a subsidiary of Microsoft’s into Greenfield,” according to an SEC filing.

Brilliant. You can read the entire story in peHUB’s archives: Kind Of A Big Deal: The Go-Shop That Went Somewhere