Madison Dearborn Boots Up Biggest Deal Yet

The fortunes of computer makers are in flux, but at least one PC retailer is making a fortune. And the siren song of strong revenue growth tempted Madison Dearborn Partners into making its biggest play ever—the acquisition of computer vendor CDW Corp.

Chicago-based Madison Dearborn agreed last month to acquire CDW in a public-to-private deal valued at about $7.3 billion. The deal’s per share price of $87.75 represents a 16.1 percent premium to the closing price on the last trading day before reports were published of a potential deal.

CDW is the largest and most profitable IT reseller in the world and the “most consistent performer” among its peers since 2000, according to Raymond James analyst Brian Alexander. Still, Alexander predicted that the “torrid” rise of CDW’s stock in the last three months—up nearly 45 percent—means that Madison Dearborn should expect little more than a 15.5 percent IRR on its money unless the buyout firm is able to significantly boost EBITDA. The same factors also mean that it’s unlikely a competitor will seek to top Madison Dearborn’s bid, Alexander wrote in a research note.

But analyst projections didn’t scare away Madison Dearborn, which secured debt financing on the deal from J.P. Morgan Securities Inc. and Lehman Brothers Inc. “Our decision to make the largest investment in the history of our firm is a real vote of confidence and an endorsement—the strongest possible endorsement we can make,” said Managing Director Ben Chereskin during a conference call with CDW analysts. Madison Dearborn didn’t return calls seeking further comment.

Vernon Hills, Ill-based CDW, whose customers include businesses, governments and schools, reported net sales of $6.8 billion in 2006, up from $6.3 billion in 2005. Profit dipped slightly over the same time period, but rebounded in the first quarter of 2007, when CDW reported earnings of $77 million, up from $62 million the year before. Revenue grew by more than 16 percent in the first quarter as well.

Pending shareholder approval, the deal is slated for completion either late in the third quarter or early in the fourth. CDW Founder Michael Krasny, the company’s largest shareholder, has agreed to vote his 22 percent of the company in favor the transaction, according to a statement issued by CDW.

Terms of the agreement give CDW a 30-day go-shop period (beginning May 29) to actively solicit third parties for higher bids. However, analysts suggest that Madison Dearborn’s offer will remain the highest, given CDW’s already high valuation and the fact that the deal was struck following a full-blown auction run by Morgan Stanley.

Madison Dearborn submitted the highest bid, CDW Chairman and CEO John Edwardson said in a conference call.

Madison Dearborn is currently investing out of Madison Dearborn Capital Partners V LP, which it closed last year with $6.5 billion. The firm’s specialty investment areas include communications, consumer, financial services and health care. CDW falls within the firm’s consumer niche, and joins existing retail investments such as Yankee Candle Co. Inc. and NWL Holding Inc., the holding company for National Wholesale Liquidators.—A.N.