Direct Marketer Rings Up 12x Return For Halyard Capital

Target: Tranzact

Price: $185 million

Seller: Halyard Capital

Buyer: Veronis Suhler Stevenson

Financial Adviser: Seller: BMO Capital Markets

Legal Adviser: Seller: Paul Weiss Rifkind Wharton & Garrison LLP

Exit Multiple: 12x

Halyard Capital missed out on a chance in 2000 to buy the marketing services company that eventually became Tranzact. But that ended up working to the advantage of the New York firm, which bought the company in a fire sale two years later and is now poised to score a 12x return.

In a deal slated to close later this month, after four years of building Tranzact, Halyard Capital is exiting the company with an 85 percent IRR. Media specialist Veronis Suhler Stevenson has agreed to buy Tranzact for $185 million.

The profits go to Halyard Capital’s first fund, a vehicle raised in 2000 with a single limited partner behind it, the Bank of Montreal. The exit gives Halyard Capital a boost as it seeks to close out fundraising by early 2008 for its second pool, which has a $400 million target. The Bank of Montreal has already committed $150 million to the second fund, and Halyard Capital has collected enough commitments from other sources to have held a preliminary close on roughly $250 million. Halyard Capital invests in media, communications and business services.

Halyard Capital got its first look at Tranzact, then known as Paradigm Direct, in 2000 when the company put itself up for sale. The firm lost out in the bidding to Mosaic, a publicly traded Canadian vehicle that was rolling up smaller marketing companies.

Mosaic paid some $200 million for Paradigm Direct in 2000. By 2002, Mosaic had taken on too much debt and began selling off pieces at a steep discount. The management of Paradigm Direct was given the opportunity to buy back the company, and Halyard Capital entered the scene as a majority-stake sponsor, plunking down $10 million of equity in 2003 to take control of the entity that was renamed Tranzact.

The company serves as a one-stop direct marketer for Fortune 1000 businesses. A wireless phone carrier, for instance, might promise to pay Tranzact a few hundred dollars for every new customer the company signs up. Tranzact finds the customers and sets them up with new phones; if the customers are still on board with the phone carrier three months later, Tranzact collects its per capita fee.

By employing a sophisticated, data-backed analysis of consumer patterns, Tranzact aligns its own profit-driven interests with the direct-marketing needs of its clients. “A lot of the big consumer brands aren’t great marketers,” said Bruce Eatroff, a founding partner of Halyard Capital.

During Halyard Capital’s four-year hold period, the firm folded in a company that specializes in generating leads for new mortgages and another that specializes in gathering customers for insurance companies. “These were nice little businesses that could be supercharged by the Tranzact business model,” Eatroff said.

For Veronis Suhler Stevenson, Tranzact is still a work in progress. Kevin Waldman, a managing partner, described the company as a “unique asset in a fast-growing part of the marketing services industry,” and one that would profit from additional acquisitions.

Financing for the Tranzact deal is being provided by BMO Capital Markets, CIT Financial Group and the Bank of Ireland.—J.H.