M&A Exits Continue To Dwindle; Education IPOs Shine

The exit market for U.S. LBO shops remained stagnant in the second quarter with the number of deals dropping 24 percent on both a sequential and year-over-year basis. And while the IPO market got off to a promising start in the period, it stalled quickly, illustrating that the pair of deals that made it to market were more indicative of the strength of the individual companies and their shared niche in education than any re-kindling of institutional interest in new offerings.

There were 29 M&A exits from April 1 to June 23 of this year. The five with disclosed financial terms had an aggregate value of $929.7 million. During the second quarter of last year, U.S.-based shops completed 38 exits through mergers and acquisition, a figure that coincidentally matched activity in the first quarter of 2009.

The scant number of M&A exits and IPOs during the latest period is further evidence that buyout shops are holding onto investments longer. Firms continue to wait for an improvement in overall economic conditions that should also give deal valuations a lift.

By far, the biggest splashes of the period were made by the IPOs of Bridgepoint Education Inc. and Rosetta Stone Inc., which are counted separate from the previously mentioned M&A exit figure. Both companies not only managed to complete their offerings after pricing their shares late in the first quarter, they’ve also seen their stocks post handsome gains. Both issues are trading well above their debut levels.

Bridgepoint Education arrived on the New York Stock Exchange on April 15, selling 13.5 million shares for $10.50 each. Warburg Pincus LLC holds a majority stake in the San Diego-based provider of education services. Its investment in the company dates back to 2003. Based on Bridgepoint’s closing price of $14.84 on June 23, Bridgepoint Education’s shares are up 41.3 percent from the IPO price.

A day later, Rosetta Stone Inc. sold 6.25 million shares for $18 each on the Big Board, coming in above the anticipated price range of $15 to $17 a share. ABS Capital Partners and Norwest Equity Partners are the Arlington, Va.-based language software provider’s sponsors. Based on its closing price of $24.31 on June 23, Rosetta Stone’s shares are trading 35 percent above the IPO price.

Since those deals, however, the IPO market as an exit strategy for buyout shops has dried up. No other portfolio company has moved ahead with plans to go public. In fact, a few portfolio companies pulled their IPO plans. One of those was Fortress Investment Group LLC’s SeaCastle Inc. subsidiary, which cancelled its proposed offering for a second time in May. The lessor of intermodal equipment didn’t disclose the reason for the withdrawal. SeaCastle originally filed to go public in September 2007, but postponed the offering in January 2008 because of unfavorable market conditions.

The biggest M&A exit of the second quarter was Polaris Acquisition Corp.’s merger with Apollo Management LP’s Hughes Telematics Inc. unit, which is an Atlanta, Ga.-based maker of electronic devices for automobiles. The transaction has a rank value of $726.8 million. The combined company now operates under the Hughes Telematics name.

Carlyle Group scored the next most valuable exit, selling Wall Street English, the Chinese unit of portfolio company Wall Street Institute, to Pearson plc for $145 million. Wall Street Institute provides language instruction services.

Just two buyout firms were able to complete multiple exits during the period. GMAC Commercial Holding SPV was the leader on a transaction basis. It sold Capmark Services Ireland Ltd., Capmark Services UK Ltd. and Capmark Asset Management GmbH to Capita Group PLC, a provider of outsourcing services based in the United Kingdom. These three deals had an aggregate value of about $16 million. GMAC Commercial Holding SPV is owned by Goldman Sachs & Co. and Kohlberg Kravis Roberts & Co.

Carlyle Group was the only other firm with more than one exit. Besides the sale of Wall Street English, it was also able to find a buyer for the polyurethane systems house of its indirect subsidiary Neochimiki SA, which is a Greek chemical manufacturer. Financial terms weren’t disclosed.