PE Week Wire: Tues., July 24, 2007

The Blackstone Group hasn’t been faring too well in the public aftermarket, and a story in yesterday’s New York Post led with the following: “Investors in The Blackstone Group are feeling swindled by boss Stephen Schwarzman and are hoping the ‘King of Wall Street’ does something soon to boost the buyout giant’s beaten-down stock.”

Let’s break this lead down into its two parts: (A) The swindle and (B) the requested restitution.

(A) There was no swindle. Blackstone offered a long-term growth play that some institutions misread as an immediate bonanza. Don’t blame Schwarzman because you bought something on hype instead of on fundamentals, or because you still don’t understand the difference between shares in a listed private equity firm and LP interests in a private equity fund.

It would be like buying season tickets to the Celtics because you like the Ray Allen trade, and then complaining when they lose games because Doc Rivers can’t run a rotation. Had you done your research, you would have known that Doc’s coaching deficiencies will always be greater than his on-court talent. You swindled yourself.

(B) This is related to A, but more important: Anything Schwarzman could do to boost the short-term stock price would be a further reflection of public market ignorance. For example, Blackstone experienced a brief stock price surge after word spread that it had agreed to buy Hilton. But Blackstone itself hadn’t actually become more valuable. Instead, it had simply agreed to pay more for a public company than the public markets were currently willing to pay for it.

Someone forgot to remind public buyers of the J-curve. Smart investors wouldn’t have bought Blackstone — they would have bought Hilton two weeks earlier.

Moreover, any short-term moves to boost stock price could be a betrayal of Blackstone’s limited partners – who are in this for the long haul. Premature exits or artificially-overpriced purchases might boost the stock price today, but will reduce IRR in the long run. Thus the conflict of interest between public shareholders and LPs – although the latter should win out because their continued support is more important to Blackstone’s future successes. I doubt too many LPs care that Blackstone’s stock was down at $26 per share as of this writing. After all, they did their due diligence.

Top Three

Merrill Lynch Global Private Equity has agreed to acquire radio broadcaster Cumulus Media Inc. (NASDAQ: CMLS) for approximately $1.3 billion. Cumulus stockholders would receive $11.75 per share, which is a 40.4% premium to last Friday’s closing price. Lew Dickey, president, chairman and CEO of Cumulus, is working on the buy-side with Merrill Lynch, and would stay on in his current roles. Shareholder Banc of America Capital Investors will vote its shares in favor of the transaction.

Picis Inc., a Wakefield, Mass.-based provider of healthcare software for high-acuity areas of the hospital, has agreed to acquire Lynx Medical Systems, a Bellevue, Wash.-based provider of revenue cycle management solutions to hospital emergency departments. No financial terms were disclosed, except that Goldman Sachs will partially finance the deal through an equity investment in Picis and a senior debt issue. Picis shareholders include Brown Brothers Harriman and Camden Partners, while Lynx was acquired in January 2006 by Francisco Partners. Picis is in registration for an IPO.

Morgan Stanley has hired Graham Keniston-Cooper to lead its European private equity business. He will build a team based in London, and establish Morgan Stanley’s European private equity business for third-party investors. Keniston-Cooper previously was a managing partner with Lazard European Private Equity Partners and, before that, spent 11 years with Cinven.

VC Deals

hi5 Networks Inc., a San Francisco-based social networking site with strong international presence, has raised $20 million in Series A funding led by Mohr, Davidow Ventures. The news was first reported by GigaOm.

Plato Networks Inc., a Santa Clara, Calif.-based developer of ultra low-power 10Gbps Ethernet products, has raised $20 million in Series B funding. Granite Ventures led the deal, and was joined by STIC International and return backer Crosslink Capital.

deCarta Inc., a San Jose, Calif.-based provider of software for the location-based services industry, has raised $15 million in Series C-1 funding. Norwest Venture Partners led the deal, and was joined by fellow return backers Mobius Venture Capital and Cardinal Venture Capital. DeCarta has raised over $32 million in total VC funding since 2003.

Respectance, a San Francisco-based social network for sharing memories of loved ones, has raised $1.5 million in Series A funding co-led by Solid Ventures and Big Bang Ventures.

GuildCafe Entertainment Inc., a Cambridge, Mass.-based social media site for online gamers, has raised an undisclosed amount of first-round funding from IDG Ventures Boston.

Transpera Inc., a Santa Monica, Calif.-based mobile video company, has raised an undisclosed amount of first round funding. Backers include First Round Capital, IDG Ventures Boston and Intel Capital.

LiquidPiston, a Cambridge, Mass.-based developer of an internal combustion engine that utilizes thermodynamic design, has raised an undisclosed amount of seed funding from Adams Capital Management and Northwater Capital.

Buyout Deals

3i Group has acquired Bestinvest, a UK-based financial advisor with client assets in excess of £3.7 billion. No financial terms were disclosed.

General Atlantic has acquired Dutch e-payment service provider GlobalCollect from Waterland Private Equity Investments and Prime Technology Ventures. No financial terms were disclosed for the deal, which results in GlobalCollect management continuing to hold a “substantial stake in the business.” GlobalCollect provides payment options in over 200 countries including methods such as credit cards, debit cards, bank transfers, direct debits, cheques, eWallets, prepaid methods and cash solutions via retail outlets.

Myers Industries Inc. (NYSE: MYE) shareholders have approved a $22.50 per share buyout by GS Capital Partners. The total deal is valued at approximately $1.07 billion, including assumption or repayment of approximately $276 million in debt. Myers is an Akron, Ohio-based manufacturer of polymer products for industrial, agricultural, automotive, commercial and consumer markets.

The Princeton Review Inc. (Nasdaq: REVU) has received a $60 million PIPE from Bain Capital Ventures and Prides Capital. The preferred stock will be convertible into common stock at $6.00 a share and for four years will accrue a six percent annual dividend. Additionally, in connection with the agreement, the company will retire its B- 1 convertible preferred stock. Princeton Review also named former The Learning Company CEO Michael Perik as its new CEO, succeeding company founder John Katzman, who will remain executive chairman.

Stirling Square Capital Partners has agreed to sell its controlling stake in Dutch plastic maker Schoeller Arca Systems to One Equity Partners at an enterprise value of €428 million. The founding family Schoeller and management will keep their respective stakes. Schoeller manufactures a broad range of plastic materials-handling products including foldable large containers, intermediate bulk containers, large boxes, pallets, crates and trays for beverages, returnable plastic containers and UN certified pails.

PE-Backed IPOs

BladeLogic Inc., a Lexington, Mass.-based provider of data center automation software, has raised its IPO pricing range from $12-$14 per share to $16-$17 per share. It still plans to offer five million common shares, and trade on the Nasdaq under ticker symbol BLOG. Morgan Stanley and Merrill Lynch are serving as co-lead underwriters. BladeLogic would be valued at over $440 million, if it were to price at the high end of its range. The company has raised around $35 million in total VC funding since its 2001 inception, from firms like Battery Ventures (21.3% pre-IPO stake), Bessemer Venture Partners (21.7%), Globespan Capital Partners (17.2%) and MK Capital (7.2%).

Cumberland Pharmaceuticals Inc., a Nashville, Tenn.-based specialty drug company that acquires and commercializes niche products, has set its IPO terms to 6.25 million common shares being offered at between $14 and $16 per share. It would have an initial market cap of around $285 million, if it were to price at the high end of its range. The company plans to trade on the Nasdaq under ticker symbol CPIX, with UBS serving as lead underwriters. Shareholders include Scout Healthcare Fund.

DemandTec Inc., a San Carlos, Calif.-based provider of consumer-centric merchandising software, has set its IPO terms to six million common shares being offered at between $10 and $12 per share. It would have an initial market cap of around $314 million, were it to price at the high end of its range. The company plans to trade on the Nasdaq under ticker symbol DMAC, with Credit Suisse and Morgan Stanley serving as co-lead underwriters. DemandTec has raised around $50 million in total VC funding since 1999, from firms like Crosspoint Venture Partners (34.8% pre-IPO stake), Cargill Ventures (15.9%), Altos Ventures (8.3%) and Athena Technology Ventures. Late last year it acquired TradePoint Solutions Inc., a Pleasanton, Calif.-based provider of online deal management software.

Maxcom Telecommunications, a Mexican telecom services provider for residences and SMEs, has filed for a $175 million IPO. It plans to trade on both the Mexico Stock Exchange and an undetermined U.S. exchange, with Morgan Stanley serving as lead underwriter. Shareholders include Banc of America Equity Partners.

PE Exits

Aruba Networks (Nasdaq: ARUN) has agreed to acquire the wireless security business of Network Chemistry, a Palo Alto, Calif.–based company that will refocus on its IT management business. No financial terms were disclosed. Aruba went public earlier this year, and still lists shareholders like Matrix Partners, Sequoia Capital, Trinity Ventures, WK Technology Funds and Artis Capital Management. Network Chemistry has raised around $6 million in VC funding from Geneva Venture Partners, In-Q-Tel and Innovacom.

TSG Consumer Partners has sold its stake in Alexia Foods Inc., a Long Island City, N.Y.-based natural foods company, to ConAgra Foods Inc. (NYSE: CAG). No financial terms were disclosed. Alexia was founded in 2002, and generates around $35 million in annual sales.

PE-Backed M&A

Algeco SA, a French modular construction company owned by TDR Capital, has agreed to acquire Baltimore-based Williams Scotsman International Inc. (Nasdaq: WLSC). Williams Scotsman stockholders would receive $28.25 per share, or a 21% premium to last Wednesday’s closing price. The total deal is valued at around $2.2 billion, including $1.24 billion in equity. Williams Scotsman is being advised by CIBC World Markets and Banc of America Securities, while Algeco is being advised by Morgan Stanley and Citigroup.

BlueSocket Inc., a Burlington, Mass.-based provider of WLAN security and management systems, has acquired Pingtel Inc., a Woburn, Mass.-based provider of IP telephony platforms for businesses. No financial terms were disclosed. BlueSocket has raised around $67 million in VC funding since 1999, from Vesbridge Partners, Menlo Ventures, Boulder Ventures, Ascent Venture Partners, Ridgewood Capital and Ironside Capital Group. Pingtel has raised around $31 million in total VC funding since 1998, from firms like St. Paul Venture Capital, Dain Rauscher Corp., Intel Capital, SAIC Venture Capital and Wind River Ventures.

Firms & Funds

CIT Group Inc. (NYSE: CIT) has completed its acquisition of Edgeview Partners, a Charlotte, N.C.-based M&A advisory focused on serving financial sponsors and middle-market companies. No financial terms were disclosed.

Human Resources

Mark Floyd has joined El Dorado Ventures as a venture partner, with a focus on the communications sector. He previously served as CEO of Entrisphere, a communications equipment company backed by EDV that was recently acquired by Ericcson.

Kennet Partners has promoted Max Bleyleben to partner. He has been a director with the London-based firm since 2000, and has been involved with portfolio companies like Aspective, TradingPartners, Adviva Media and FRS Global.