PE Week Wire: 9.14.06

The following column contains a number of synonyms and euphemisms, for the purpose of getting through your “canned ham” filters. Apologies for the inconvenience…

Earlier this week, the producer of “Women Gone Wacky” pled guilty to violating federal laws related to the exploitation of children (he didn’t keep proper records of his booze-impaired actresses). He and his company agreed to pay $2.1 million in total fines, plus pinky swear to never ever do it again.

What you probably haven’t heard, however, is that several public pension funds and university endowments are now indirect shareholders in a company that exclusively distributes the aforementioned wackiness to mobile devices. Certainly gives a brand new meaning to public funding for the arts.

How did this happen? Boston-based Spark Capital recently invested $12.75 million into a Los Angeles-based company called TwistBox Entertainment. TwistBox is a new umbrella platform for a subsidiary called Waat Corp., which is considered the leading distributor of “late-night” programming to mobile devices (plus age verification and other related services). Spark limited partners, meanwhile, include such groups as the Massachusetts Pension Reserves Investment Management Board (MassPRIM) and the Los Angeles County Employees’ Retirement System (LACERS).

Certain limited partner agreements contain so-called “sin clauses,” in which the general partner either: (A) Is not allowed to investment in certain types of companies (typically things like late-night, weaponry, etc.); (B) Is strongly discouraged from making such deals or (C) Can offer certain LPs an escape clause whereby an LP needn’t commit to an objectionable deal.

What I learned yesterday, however, is that these clauses are far rarer than I believed them to be; maybe 5% or less of institutional LPs. The exceptions are Shar’ia-compliant LPs (of which there is a growing number) and certain public European LPs (mostly concerned with the defense industry), but that’s about it. Almost none of the U.S. public pensions or universities have them, and even major Christian organizations don’t request such language when making fund commitments. Doing a deal like Twistbox certainly might lessen the change of participation in a follow-on fund, but nothing preemptive.

Spark Capital has no such sin clauses with its limited partners, and no LP objected when apprised of this deal. Dennis Miller, a Spark managing director, said that the possibility of LP dissatisfaction was “never a consideration,” because TwistBox is leveraging a basic truth: Most new content distribution technologies are initially perfected in the late-night category. This was true for VCRs in the 1980s, and was equally true for online video streaming in the 1990s.

Moreover, TwistBox is not some basement shop run by boys in trench coats. Its management team is led by former TV Guide Channel chief Ian Aaron, has over 90 direct carrier agreements and is expected to generate in excess of $40 million in 2006 revenue. It also is significantly expanding its content offerings to include sectors like gaming, even though late-night remains its largest current holding.

When I first heard about this deal yesterday, I thought “How could public LPs allow this deal to go through? What will happen when certain segments of their constituencies find out?” I still feel that way from a political point-of-view, but the pragmatic realities support Spark’s position.

First, any lingering Puritanism over “late-night” investments is belied by institutions whose public equity portfolios include companies like Comcast or Hilton Hotels. Moreover, Spark’s primary job is to create value for shareholders. And this deal should do just that. Rival MobiTV recently raised $70 million in a Series C round at a valuation in excess of $400 million. For context, MobiTV was valued at just around $50 million following a $15 million Series B deal in 2004.

Expect a similar valuation ramp-up when Twistbox goes back for more capital to support acquisitions. Sure Spark will be diluted – as were Redpoint and Gefinor with MobiTV – but the new value will be worth it. The majority of limited partners have sided with absolute returns over non-universal moralities. It is a defensible position, no matter how many rocks get thrown at it.

Top Three

Apollo Management has agreed to acquire GE Advanced Materials (Silicones & Quartz) from General Electric (NYSE: GE) for approximately $3.8 billion. GE will retain a 10% stake in the resulting company, and will hold $400 million in notes. The deal is expected to close by year-end. GE Advanced Materials supplies silicone-based products, silanes, sealants, urethane additives/adhesives and fused quartz and ceramics materials. It is based in Wilton, Conn., and employs 5,000 people in 38 global locations.

Anthera Pharmaceuticals Inc., a San Francisco-based drug company focused on serious inflammatory diseases, has raised $36 million in Series B funding. VantagePoint Venture Partners and Sofinnova Ventures co-led the deal, and were joined by Pappas Ventures, Mitsubishi International and Series A-1 backers Sears Capital Management and SIM Equity. Eli Lilly and Co. and Shionogi & Co. also received equity as part of Anthera’s obligations under the recently announced license agreement.

Intuit Inc. (Nasdaq: INTU) has acquired StepUp Commerce Inc., a San Francisco-based provider of services that enable local businesses to convert online shoppers into in-store customers. The deal was valued at approximately $60 million in cash. StepUp had raised around $7 million in VC funding from firms like Allegis Capital, Granite Ventures and Pennsylvania Equity Partners.

VC Deals

Vyatta Inc., a San Mateo, Calif.-based provider of open-source networking products, has raised $7.5 million in Series A funding. Participants included JPMorgan Partners (advised by Panorama Capital), ComVentures and ArrowParth Venture Partners.

Portico Systems (f.k.a. FMG Technologies), a Conshohocken, Pa.-based provider of software solutions for regional and national health plans, has raised $6 million in private funding from Safeguard Scientifics Inc.

Smart Analyst Inc., a New York-based provider of outsourced custom research and analytics, has raised $3.75 million in its first round of institutional financing (Series C). Participants included Edison Venture Fund and Milestone Venture Partners.

Mocana Corp., a San Francisco-based provider of infrastructure software solutions for wired and wireless devices, has raised over $3.5 million in Series A funding led by Shasta Ventures.

Pintail Technologies Inc., a Plano, Texas-based provider of test management solutions for the semiconductor industry, has raised $3 million in Series C funding, according to a regulatory filing. Shareholders include Austin Ventures, Duchossois Technology Partners and Verigy.

EastMed Inc., a Halifax, Nova Scotia-based medical device company focused on female control stress urinary incontinence, has raised Cnd$1.5 million in first-round funding from Innovacorp and BDC Venture Capital.

ClickCaster Inc., a Boulder, Colo.-based provider of turnkey podcasting solutions, has raised $500,000 in Series A funding. Individual backers include Brad Feld, Neil Robertson and Jerry Colonna.

Buyout Deals

H.I.G. Capital has agreed to acquire PetroCom LLC, a New Orleans-based cellular carrier in the Gulf of Mexico and a full-service telecom solutions provider for the offshore industry. No financial terms were disclosed. Following the acquisition, H.I.G. will merge PetroCom with Sola Communications, which it acquired earlier this year.

The Blackstone Group has become the odds-on favorite to win the £1.7 billion auction for United Biscuits, after rival bidder Premier Foods dropped out. Premier’s group originally included both NPM Capital and Lion Capital, but came up short on cash once Lion withdrew.

HgCapital is sponsoring a £99.87 million management buyout of SHL Group, a listed UK-based provider of psychometric assessment services.

TA Associates has acquired a majority stake in Professional Warranty Service Corp., a Chantilly, Va.–based provider of new home warranty products and administration services to residential construction firms. No financial terms were disclosed.

Frigorífico Mercosul, a Bagé, Brazil-based beef processor, has raised $21.5 million in private equity funding from AIG Capital Partners.

Montagu Private Equity has agreed to acquire a 50.1% stake in Sebia International, a France-based provider of clinical electrophoresis. The seller is Astorg Partners, which acquired Sebia by sponsoring a management buyout in 2001. Astorg will retain a 16% interest, while company management will retain 20 percent. Intermediate Capital Group, which provided mezzanine capital in 2001, will hold 13 percent.

PE Exits

Fenway Partners has agreed to sell its remaining minority interest in jeweler Harry Winston to Aber Diamond Corp. (Nasdaq: ABER) for approximately $99 million. The deal is expected to close later this month.

The TriZetto Group Inc. (Nasdaq: TZIX) has agreed to acquire Phoenix-based healthcare software company Quality Care Solutions Inc. The deal includes a $133 million cash payment, the assumption of $1.2 million in debt and up to $12 million in possible future payments ($7m earnout and a $5 million holdback). QCSI has raised over $8 million in VC funding from firms like Dominion Ventures, Grayhawk Venture Partners, Horizon Ventures and Sundance Venture Partners. Its last round was in 2000 at a post-money valuation of $30 million.

PE-Backed M&A

American Fiber Systems, a Rochester, N.Y.-based provider of data networks to carriers and large enterprises, has acquired a significant equity position in USCarrier Telecom Holdings LLC., an Atlanta-based provider of telecom services in Southeastern US. AFS becomes the largest single shareholder in USCarrier, with the ability to gain majority ownership within a few years. No financial terms were disclosed. AFS has raised VC funding from firms like Sierra Ventures, Lucent Venture Partners, North Atlantic Capital and Hudson River Capital.

GreatWide Logistics Corp., a Dallas-based provider of non-asset-based transportation and third party logistics, has acquired Gollop Logistics Corp., a Toronto-based freight brokerage company. No financial terms were disclosed. GreatWide is a portfolio company of Fenway Partners.

MicroGroup Holding Co., a supplier of metal tubing and precision components for medical devices and analytical instruments, has acquired Bolt Bethel LLC and Bolt Blaine LLC, manufacturers of precision metal components and assemblies for medical device, aerospace and defense products. No financial terms were disclosed. MicroGroup was acquired by Kirtland Capital Partners in August 2005.

Hansen Information Technologies, a Rancho Cordova, Calif.-based provider of software applications for the public sector market, has acquired an Australian Advanced Asset Management module from Hansen Technologies Ltd., an Australia-based public company not affiliated with Hansen Information Technologies. No financial terms were disclosed. Hansen Information Technologies is a portfolio company of Golden Gate Capital.

Firm & Fund News

The California Public Employees’ Retirement System (CalPERS) approved five private equity fund commitments: $150 million for Carlyle Asia Partners II; $50 million for New Enterprise Associates 12; €100 million for Rhone Capital III; $300 million for Thomas H. Lee Partners Fund VI; and $750 million for TPG Partners V.

The Pennsylvania State Employees’ Retirement System yesterday authorized three private equity fund commitments: $50 million for Thomas H. Lee Partners Fund VI; $25 million to Artiman Ventures II; and $20 million for Devon Park Bioventures.

Human Resources

Bill Rastetter and David Molowa have joined Venrock Associates as venture partners focused on the biotech and healthcare fields. Rastetter will be based in Menlo Park, Calif., and previously was executive chairman of Biogen Inc. (Nasdaq: BIIB). Before that, he was director of corporate ventures for Genentech. Molowa will work out of New York, and previously was a managing director at UBS, overseeing life science equities research. In other Venrock personnel news, the firm has promoted Bryan Roberts to managing general partner and Brian Ascher to general partner.

Russell Pullan has joined Nomura International as director of new energy and clean-tech ventures. He previously was head of venture capital with The Carbon Trust.

Scott Borenstein has joined Spark Capital as a senior associate. He recently received his MBA from Harvard Business School, and before that worked at both Overture and Yahoo.

Jens Christensen has joined Stream Communications Network & Media Inc. (OTC BB: SCNWF) as chief financial officer. He previously was finance director at Lafarge Gypsum Poland and, before that, was finance director with private equity fund AIG-CET Capital Management.