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Clash of the Titans
Take a walk within private equity circles (figuratively or literally), and you’ll hear incessant chatter about the lawsuit filed by Abry Partners against Providence Equity Partners. It has supplanted Refco as the industry scandal de jour, in large part because Thomas H. Lee Partners continues to be seen largely as a victim in Refco, whereas Abry v.
The transaction at issue is Abry’s $500 million buyout of Cincinnati-based magazine publisher F&W Publications from Providence Equity Partners. The deal included $150 million in equity from Abry, and a $350 million debt component from J.P. Morgan and CSFB (which also served as the deal’s auctioneer). Perhaps most importantly, it closed on
Shortly after taking ownership, Abry alleges that it discovered numerous bookkeeping irregularities. For example, it alleges that F&W began “channel-stuffing through volume discounts,” which means that it offered unusually high discounts to retailers in order to prompt additional orders and, therefore, increase Q2 revenue. Abry also alleges that F&W’s
Abry claims to have discovered these irregularities shortly after closing, and began a more in-depth look at the company financials. Abry filed suit against
Why So Fast?
One giant question is why this suit has been filed just three months after the original deal closed. Private equity firms typically like to keep such matters in house, in order to avoid both public (i.e., press) and private (i.e., LPs and other GPs) scrutiny. Out-of-court is the status quo. I would assume that there were at least some private discussions between the two sides, although neither one would comment when asked. After all, Abry had nothing to lose by at least asking for voluntary rescission.
What is important to remember, however, is that August 5 closing date, because the deal included a 90-day post-closing window for Abry to review F&W’s balance sheet. This is just an educated guess, but Abry likely felt that its legal position would be greatly enhanced if it filed suit within that window, which is why it filed on November 3 instead of spending additional time in private negotiations. There also must have been pressure from the banks, since the debt covenants are in trouble (does anyone think that it wasn’t an I-banker who first leaked word of the suit?).
Abry is obviously taking a hard-line here and, if the allegations are true, good for them. The private equity market’s secrecy is a silly vestige of a time when there were few purchases of public companies, and when most fund capital was committed by private institutions. Abry is not asking in its suit to renegotiate the deal, but for a complete hand-washing. If successful, it will be viewed as a general partner who LPs want managing their money.
But there is one giant problem with the Abry as white knight scenario: The firm’s due diligence seems to have been lacking. Abry is not a generalist firm that hires outside consultants to advise on this sector or that. Media is what they do, and publishing is a major part of that. The firm’s complaint doesn’t get too specific on the due diligence process, except to say that Abry requested, and received, all relevant financial data on F&W. How about talking to some actual retailers? You know, the customers who suddenly were receiving these major volume discounts? When a VC firm backs a revenue-generating company, it always talks to customers for an third-party opinion. Did Abry? If so, did they simply ask the wrong questions? Did they call the wrong people? If not, why not.
Passing The Buck?
There is an old legal maxim that a prosecutor’s case never looks better than on the day of indictment, since the accused has not yet told his side. Ditto for civil cases, so
More on this as it progresses. Until then, have a great weekend.
Silver Lake Partners has agreed to acquire enterprise software company Serena Software Inc. (Nasdaq: SRNA) for approximately $1.2 billion. Under terms of the agreement, Serena stockholders would receive $24 per share in cash, while debt financing would be provided by Merrill Lynch, Lehman Brothers and UBS. The deal is expected to close in the first quarter of 2006. Morgan Stanley served as financial advisor to Serena on the deal. www.silverlake.com www.serena.com
Advent Solar Inc., an Albuquerque, N.M.-based maker of solar cells and modules, has raised $30 million in Series C funding. Battery Ventures led the deal, and was joined by Firelake Capital and return backers EnerTech Capital Partners, @Ventures, New Mexico Co-Inv*stment Partners (managed by Fort Washington Capital Partners Group) and Angels with Attitude. www.adventsolar.com
Oaktree Capital Management of
Infinera Inc., a Sunnyvale, Calif.-based provider of digital optical networking systems, has secured $13 million of a $51.3 million Series G funding round, according to a regulatory filing. Infinera now has raised around $230 million in total VC funding since its inception, from such firms as Kleiner Perkins Caufield & Byers, Benchmark Capital, Applied Materials Ventures, Cypress Semiconductor, Mobius Venture Capital, Sprout Group, Venrock Associates, RWI Group, Worldview Technology Partners, Siebel Systems and Sutter Hill Ventures. www.infinera.com
Kovio Inc., a Sunnyvale, Calif.-based developer of semiconductor products using thin-film technologies, has received $3 million in venture funding from Harris & Harris Group. www.kovio.com
Newsvine Inc., a Seattle-based developer of online news content solutions, has raised just under $5 million in startup funding from Second Avenue Partners, according to The Seattle Post-Intelligencer.
BioPro Pharmaceutical Inc. has raised $5 million in Series A funding, according to a regulatory filing. Backers include Sanders Morris Harris. The company has offices in
6th Sense Software Inc. of
Inrix Inc., a Kirkland, Wash.-based developer of mobile traffic technology, has secured $6.1 million or a $6.44 million Series A funding round, according to a regulatory filing. Backers include b and Venrock Associates. www.inrix.com
Clovis Solutions Inc., a Petaluma, Calif.-based provider of a device infrastructure software platform for data communications, has received an undisclosed amount of strategic funding from AT&T. Clovis previously raised a total of $17 million in VC funding from firms like Sevin Rosen Funds, Walden International, Intel Capital, American River Ventures and Diamondhead Ventures. www.clovissolutions.com www.att.com
Man Group PLC won a bankruptcy auction for the last solvent subsidiary of Refco (Refco LLC), with a $282 million bid. The deal also includes $4 million in “other considerations” and $37 million in assumed debt. Refco’s other subsidiaries remain tied up in litigation. In other Refco news, former company CEO Philip Bennett was formally indicted on securities fraud charges. www.refco.com
Industri Kapital has agreed to acquire
Magellan Midstream Holdings LPof
GSI Technology Inc., a Santa Clara, Calif.-based provider of SRAM circuits for the networking and telecom markets, has withdrawn its proposed $103.5 million IPO, citing “unfavorable market conditions.” Merrill Lynch had been serving as lead underwriter for the company, whose significant shareholders include Monet Capital. www.gsitechnology.com
Global Secure Corp., a Washington, D.C.-based provider of products and services for the homeland security industry, has reduced its proposed IPO terms to 8.25 million common shares being offered at $6.50 per share (previous range was $8-$10 per share). It still plans to trade on the Nasdaq under ticker symbol GSEC, with Morgan Keegan & Co. and Jefferies & Co. serving as lead underwriters. Sky Capital Enterprises holds a 17.8% pre-IPO ownership position. www.globalsecurecorp.com
Promotora Ambiental SA de CV, a Mexico-based garbage collection company, is planning to raise up to $115 million via a public floatation in
SkyTerra Communications Inc. (OTC BB: SKYT), a portfolio company of Apollo Management, has agreed to acquire the remaining 50% of Hughes Network Systems Inc. that it doesn’t already own from The DirecTV Group Inc. (NYSE: DTV). The deal is valued at $100 million in cash, which SkyTerra will finance via a $100 million short-term debt financing from Apollo. SkyTerra acquired the initial 50% interest from DirectTV earlier this year for $246 million in cash and approximately $11.4 million worth of SkyTerra stock. Hughes provides broadband satellite networks and services to enterprises. www.skyterracom.com
Emcore Corp. (Nasdaq: EMKR) has acquired Phasebridge Inc., a Pasadena, Calif.-based photonics company. No financial terms were disclosed. Phasebridge has raised around $17 million in venture capital funding since its 2000 inception, from firms like Clearstone Venture Partners, Intel Capital and TriQuint Semiconductor Inc. www.emcore.com www.phasebridge.com
Firm & Fund News
Rosewood Capital of
Linden Capital Partners, a Chicago-based middle-market buyout firm focused on the life sciences market, has secured over $100 million in commitments for its inaugural fund. The firm was formed in 2002 by former One Equity Partners pros, and has an exclusive co-investment alliance with Madison Dearborn Partners. www.lindenllc.com
Portfolio Advisors reportedly has closed its third private equity fund-of-funds with $661 million in capital commitments. www.portfolioadvisorsllc.com
Davor Hebel has joined the
Babak Nivi has joined Bessemer Venture Partners as an entrepreneur-in-residence. He previously has served as a consultant to Atlas Venture and as an associate at Seed Capital Partners. www.bvp.com