PE Week Wire: Fri., July 27, 2007

The Dow is plunging, credit is crunching and new high-yield issues are looking less likely than a victory in Iraq. If only there was a way to pin it all on Schwarzman…

But here’s the thing: This isn’t yet the perfect storm that could destroy the buyout rush. All of the above are certainly elements, but we’re still missing a couple of high-profile PE-backed company collapses. I’m not saying that they aren’t coming –particularly given the sudden yield hikes– but buyouts will keep coming until they do. And, to be specific, these companies need to collapse under the weight of their own debt, or for some other reason specifically related to financing structure. Another Atkins or Refco won’t matter.

I know that this sounds like I’m whistling past the graveyard, so let me explain my tune. First, I don’t believe that most pending deals are going to fail. That includes First Data, TXU, Alliance Data and all of the other companies whose stocks are currently being battered by pessimists (although they probably call themselves realists). Why? Because the participating banks have already put too much skin in the game to pull out now. Not just their money (think breakup fees & legal fees), but also their reputations.

The issue, therefore, is future deals. Conventional wisdom is to expect a severe slowdown, because of the aforementioned absence of high-yield debt (which soon will be known again as junk bonds). And there are a handful of transactions that LBO firms could sign in March that they couldn’t sign today (particularly mega-market deals). But LBO firms can do most of them, so long as they are willing to accept less favorable terms – and buyout firms have proven quite apt at acceding to such requests. Remember Clear Channel and all those other deals where public shareholders kept demanding higher prices? Well, now it’s the lenders’ turn.

Most buyout firms already have warned their limited partners to expect lower returns than have been produced over the past few years, so there already is some built-in price flexibility. Moreover, it cannot be overlooked that the stock market is tanking. In other words, companies are becoming cheaper to buy – and buyout firms might be able to offset pricier debt with cheaper equity (particularly given that there is no shortage of fund capital).

To be clear, the buyout market is facing challenges that it has happily avoided for the past several years. But it really isn’t a crisis yet, no matter how much it might look like one.

*** Thanks to everyone who came out to the Dutch Goose in Menlo Park last night. It might not have been swanky like tonight’s TechCrunch gala, but you won’t be seeing any deviled eggs on the August Capital grounds… Top question asked: “When will you begin writing more about early-stage VC, instead of buyouts?” Answer: I dunno, but I promise to pay more attention to Wire content drift.

*** Well, it seems that Grover Norquist does have an official position on the carried interest tax. One more brick in the GOP fort.

*** Yesterday I moderated a panel at the Private Equity CFO Conference, which we turned into an audience debate on carried interest taxes. Lots of thoughtful points, and three interesting demographic notes:

1. About 30% of the attendees believe that carried interest deserves to be treated as ordinary income, which is a much higher percentage than I expected. To be clear, they were asked to pick the side they could best defend, not the one that was to their firm’s benefit.

2. An audience member’s position was uncorrelated to their political affiliation. Plenty of self-described Democrats felt it was capital gains, while plenty of Republicans felt it was ordinary income.

3. Audience members who actually receive carried interest (or who would if their firms made any money), were more likely to subscribe to the capital gains argument.

*** The Sofitel in Redwood City is in the middle of nowhere, but has two winning features: First, the food is phenomenal. Second, there is almost always an empty elevator waiting on the ground floor. Don’t know how they manage the last part, but it’s fantastic.

*** Who propped up Blackstone’s stock yesterday just before the closing bell?

*** I’ll be back in Boston on Monday morning, and am tentatively scheduled to do a CNBC spot at around 8:30am. Have a great weekend…

Top Three

iCrossing Inc., a Scottsdale, Ariz.-based digital marketing company, has raised $62 million in fifth-round funding. Goldman Sachs led the deal, and was joined by return backers Oak Investment Partners, RRE Ventures and StarVest Partners. The capital will be used to finance both acquisitions and organic growth. iCrossing previously had raised around $76 million in VC funding since 2000.

Bear Stearns Merchant Banking has agreed to sell Seven For All Mankind LLC to VF Corp. (NYSE: VFC) for $775 million in cash. Seven For All Mankind is a maker of premium denim and other apparel, with offices in both Los Angeles and The Netherlands. It is being advised by Lehman Brothers and Bear Stearns & Co.

Lululemon Corp., a Vancouver-based athletic apparel designer and retailer, raised $327.6 million via its IPO. The company sold 18.2 million common shares at $18 per share (above revised $15-$17 range and original $10-$12 range), for an initial market cap of approximately $1.24 billion. It will trade on both the Nasdaq and TSX, while Goldman Sachs and Merrill Lynch served as co-lead underwriters. Shareholders include Advent International, Highland Capital Partners and Brooke Private Equity Advisors.

VC Deals

Xanodyne Pharmaceuticals Inc., a Florence, Ky.-based drug company, has raised $25 million in additional Series A-1 recap funding. Return backers included Aisling Capital, Apax Partners, Blue Chip Venture Co., Essex Woodlands Health Ventures, HealthCare Ventures and MPM Capital. Xanodyne originally raised around $170 million for the Series A-1 round in mid-2005 at a post-money valuation of approximately $254 million. That deal helped finance the $210 million acquisition of aaiPharma’s pharmaceutical division out of bankruptcy.

Medivance Inc., a Louisville, Ky.-based developer of therapeutic temperature management products for treating critically-ill patients, has raised $23 million in Series D funding. A “significant institutional investor” led the deal, and was joined by MDY Healthcare and return backers Cross Atlantic Partners, Camden Partners, Skyline Ventures and Partisan Management. Medivance has now raised around $55 million in total VC funding since its 1998 inception.

PowerFile Inc., a Santa Clara, Calif.-based provider of online archive solutions for digital content, has raised around $10 million in Series C funding, according to a regulatory filing. Northgate Capital was joined by return backers Sequoia Capital and Silver Creek Ventures.

MicroBlend Technologies Inc., a Gilbert, Ariz.-based developer of a paint mixing machine for retailers, has raised $3.1 million in follow-on funding from Amerivon Investments.

Buyout Deals

Aeroflex Inc. (Nasdaq: ARXX) shareholders have accepted a $14.50 per share buyout offer from Veritas Capital. In addition, the $1.1 billion deal was approved by the European Commission. Aeroflex is a Plainview, N.Y.-based provider of high technology solutions to the aerospace, defense, cellular and broadband communications markets.

Fortress Investment Group has acquired Florida East Coast Industries Inc. (NYSE: FLA), for approximately $3.5 billion. FECI stockholders received $62.50 per share in cash, plus a one-time special cash dividend of $21.50 per share. FECI is a Jacksonville, Fla.-based company that operates two distinct businesses: A commercial real estate development group, and a regional freight railroad.

Gryphon Investors is nearing an agreement to sell Nursefinders to Goldman Sachs Urban Investment Group, according to LBO Wire. The $250 million deal could close within the next month, with GE Capital providing leveraged financing. Nursefinders is an Arlington, Texas-based nurse staffing company acquired by Gryphon in 2004 for approximately $50 million.

Ford Motor Co. confirmed yesterday that it is exploring a sale of its Jaguar/Land Rover business. Codenamed “Project Swift,” Ford is understood to have appointed Goldman Sachs, HSBC and Morgan Stanley to find buyers. The automaker also said that it is conducting a strategic review of Volvo that will likely conclude by year-end.

Oak Hill Capital Partners has agreed to acquire Southern Air Inc., a provider of air cargo services to airlines worldwide. No financial terms were disclosed for the deal, which will result in Southern Air being merged with existing Oak Hill portfolio company Cargo 360 Inc. Southern Air founder and CEO James Neff will serve as the combined company’s CEO, and will retain a minority equity interest. Oak Hill was advised by CIBC World Markets, while Southern Air was advised by Bear Stearns. The deal is expected to close in November.

Permira denied that it is interested in Anglo-Danish security firm G4S PLC, following press reports that it was mulling a Gbp3.5 billion bid.

Sun Capital Partners has agreed to acquire a majority interest in nonprime mortgage lender First NLC Financial Services from Friedman, Billings, Ramsey Group Inc. (NYSE: FBR). The deal is structured as a recap, with Sun to provide $60 million and FBR to commit $15 million. FBR also is providing a $3 million indemnification to Sun Capital for certain potential liabilities, and will retain ownership of around $250 million worth of conforming and non-conforming mortgages recently originated by FNLC that are expected to be sold or securitized during this quarter.

Webster Capital has agreed to acquire CK Franchising Inc. (a.k.a. Comfort Keepers), a –based franchisor in the non-medical, in-home care market for seniors and other adults. The overall deal value was not disclosed, but Allied Capital said that it committed $44.3 million to support the buyout, in the former of senior notes, subordinated notes, a revolving credit facility and equity.

Apax Partners is in talks to sell Dallas-based home healthcare company Encompass Home Health to Thoma Cressey Bravo, according to LBO Wire. CIT Group is arranging the $180 million debt package.

Great Offshore Ltd., a Mumbai, India-based provider of offshore services to the oil and gas industry, has raised $41.1 million in private equity funding from The Carlyle Group.

PE-Backed IPOs

Entropic Communications Inc., a San Diego-based provider of home networking for digital entertainment, has filed for a $100 million IPO. It plans to trade on the Nasdaq under ticker symbol ENTR, with Credit Suisse and Lehman Brothers serving as co-lead underwriters. Entropic has raised over $75 million in total VC funding since 2001, from firms like Anthem, CMEA, Comcast, Revolution, Cisco Systems, Intel Capital, Liberty Associated Partners, Mission Ventures, Motorola Ventures, Panasonic Ventures, Redpoint Ventures, Time Warner and YAS Broadband Ventures.

K12 Inc., a Herndon, Va.-based provider of online education curricula and learning programs, has filed for a $172.5 million IPO. It plans to trade on the NYSE under ticker symbol LRN, with Morgan Stanley and Credit Suisse serving as co-lead underwriters. K12 has raised around $45 million in VC funding, from firms like Constellation Ventures.


PlattForm Holdings Inc., an Olathe, Kansas-based provider of Internet marketing and enrollment solutions to the post-secondary education industry, has acquired both VentureDirect Worldwide Inc. and Zuma LLC. No financial terms of either deal were disclosed. VentureDirect provides lead generation and customer acquisition services to advertisers and list brokerage, plus provides management services for publishers and list buyers. Zuma is a recruitment and enrollment lead generation company for the cosmetology school industry. PlattForm is a portfolio company of Arlington Capital Partners. Arlington provided additional equity to support the acquisitions, while LaSalle Bank served as lead agent for the debt financing and CIT Group served as syndication agent. VentureDirect was represented by The Jordan, Edmiston Group, while Zuma was advised by DeSilva + Phillips.

Firms & Funds

Advent International has closed its fourth Latin America private equity fund with $1.3 billion in capital commitments.It is believed to be the largest such fund ever raised.

Thomas H. Lee Partners has filed suit against law firm Mayer, Brown, Rowe & Maw LLP – alleging fraud in connection to the latter’s representation of Refco. TH Lee is seeking at least $245 million in damages.

Human Resources

Dag Skattum, former co-head of global M&A for JP Morgan, has agreed to join TPG, according to Dow Jones.