PE Week Wire, Jan. 23, 2007

Private equity is not, nor has it been, in the midst of a bubble. Its recent boom-times have been driven by legitimate market factors, and risk has been so mitigated – via debt securitization, among other techniques – that today’s private equiteers are unlikely to suffer the same fate as venture capitalists circa 2001. But, that said, I distinctly hear to dulcet tones of a plus-sized female, and they are growing louder.

Conventional wisdom has been that the private equity boom will eventually be curtailed by one of two happenings: (1) A series of mega-deal collapses based on fundamental misjudgments or; (2) A major bank loan squeeze. Some also have suggested a stock market collapse, but I’d argue that such a scenario would simply result in an LBO volume increase, with private equity firms gorging on under-valued assets while waiting for the public cycle to eventually return to the upswing.

None of the above has yet come to pass, of course, which is why most everyone is predicting that 2007 will top the deal-making records set in 2006. I believe I even did so just a few weeks back. But there is a clear and present danger presenting itself: LBO firms have become so successful – and so public about it – that sellers and alternate strategic buyers no longer believe initial LBO bids are adequate.

For example, imagine that Primack Corp. is trading at $10 per share, and The Blackstone Group offers to buy it out at $12.50 per share. That’s a traditional 25% premium, but Primack Corp. shareholders are worried that they’re being taken for a ride: “If Blackstone thinks it can make a major profit at $12.50, then the offer is clearly too low…” Ditto for possible strategic acquirers: “If Blackstone is willing to pay $12.50 just as a financial play, then perhaps we should bid $14 per share and make up the difference in consolidation value…”

In just the past few months, we’ve seen: the Harrah’s board force a major price raise, Fidelity Investments signal its intention to oppose the Clear Channel sale, Blackstone get topped for Equity Office and Carlyle engage in a stunning game of one-upmanship for Elkcorp. And these are just the ones that come to mind while I’m rushing to meet deadline.

All of this matters, particularly because the shareholders and strategic buyers are wrong. Private equity IRR expectations are not rising exponentially, despite popular belief. In fact, they have been declining as deals get richer. If sellers and strategics continue to force the prices higher – which they will – it simply must result in an end to the boom. Either firms will smartly slow down their deal-making activity (i.e., only compete where the price makes sense) or will foolishly lower their return expectations to the point where LPs are no longer comfortable with their current role as capital spigots.

So revel in the boom for a little while longer, but also begin girding for the long haul…

*** Venture capitalists invested more money into more companies last year than in any other year since 2001, according to MoneyTree Survey data released today by PwC, the NVCA and Thomson Financial. Go here for dozens of pages worth of data.

Top Three

HM Capital Partners has put meatpacker Swift & Co. on the block, just months after a federal raid on illegal immigrants resulted in 1,282 Swift workers being arrested. HM and fellow shareholder Booth Creek Management have retained JPMorgan to review strategic and financial alternatives. The two firms acquired Swift from ConAgra Foods in 2002 for approximately $1.4 billion.

Achronix Semiconductor Corp., a San Jose, Calif.-based fabless maker of field-programmable gate arrays, has raised $25.4 million in Series A funding. New Science Ventures and Battery Ventures co-led the round, and were joined by Entrepia Ventures and Easton Capital. Larkspur Capital advised Achronix and acted as its placement agent.

RRE Ventures of New York has closed its fourth fund with $300 million in capital commitments. Limited partners include the State of Michigan Retirement Systems, CSIM Private Equity and GKM. Its third fund closed in 2001 with $225 million.

VC Deals

Segway Inc., a Bedford, N.H.-based maker of two-wheeled, self-balancing vehicles, has secured $10.12 million of a $20 million Series C round, according to a regulatory filing. More info at

Bus Radio Inc., a Needham, Mass.-based provider of a national radio show for broadcast on school buses, has secured $10 million of an $18 million Series B round, according to a regulatory filing. Charles River Ventures is leading the deal, with Series A backer Sigma Partners also participating.

HyperQuality Inc., a Seattle-based provider of contact center quality assurance solutions, has raised $10 million in Series B funding. Ignition Partners led the deal, and was joined by return backers Miramar Venture Partners, Rustic Canyon and Divergent Ventures.

Mobile Content Networks Inc., a Mountain View, Calif.-based provider of mobile search solutions, has raised around $10 million in Series B funding. Meritage Funds led the deal, and was joined by, Netage Capital Partners, UniqueLab, Suneight, Intellect Capital Ventures and Angel Forum.

Clarabridge, a Reston, Va.-based maker of text-mining software, has raised $7.2 million in Series B funding. InterSouth Partners led the deal, and was joined by return backer Boulder Ventures. The company spun out of Claraview in January 2006.

Buyout Deals

The Carlyle Group has once been topped in its efforts to acquire Dallas-based roofing and building products company ElkCorp (NYSE: ELK). Building Materials Corp. of America has raised its bid from $42 to $43.50 per share, and said that JPMorgan has been added to a financing consortium that already included Deutsche Bank and Bear Stearns. Carlyle yesterday had raised its bid to $42 per share, which was its second increase. It had originally bid $38 per share.

Metalmark Capital has agreed to acquire the North American packaging operations of SCA (Nasdaq: SVCBY) for $400 million. The group has annual sales of approximately $430 million, and focuses on protective packaging, consumer packaging and temperature-assurance packaging solutions.

Candover has agreed to acquire Parques Reunidos from Advent International for around Euro 900 million. Parques Reunidos operates a total of 22 parks – including amusement parks, animal parks and water parks – in Spain, Italy, France, Belgium, Norway and Argentina.

J.W. Childs Associates has agreed to acquire Houston, Texas-based Mattress Holdings Corp. from Sun Capital Partners, according to a Moody’s report. The total deal is valued at $450 million (including repayment of existing debt), with a financing package that includes a $185 million senior-secured term loan and a $25 million senior-secured revolving credit facility.

Weston Presidio has agreed to acquire Evenflo Inc. from Harvest Partners, according to an FTC clearance. Evenflo is a Vandalia, Ohio-based maker of baby products like carseats, strollers and highchairs. LBO Wire reports that Credit Suisse is syndicating a $205 million financing package for the deal.

GF Capital has acquired Trade Service Company LLC, a San Diego–based database provider of product and pricing solutions to subscribers in the electrical, plumbing/HVAC, automotive and office product markets. The deal was financed via a $55 million one-stop financing package from Golub Capital.

Lone Star Funds has completed its sale of restaurant chain Shoney’s to Royal Capital for an undisclosed amount. Lone Star had agreed to sell Shoney’s last year to Centrum Properties, but the deal later fell through and got mired in litigation.

Time Inc. on Monday received multiple second-round bids for the 18 titles it put on the block last year, according to The NY Post. Suitors include Bonnier Publications, Quadrangle Group, Boston Ventures, Intermedia Advisors and Active Media/Windpoint Partners. Elevation Partners also might be in the mix.

PE-Backed IPOs

Neutral Tandem Inc., a Chicago-based provider of tandem interconnection services to competitive carriers, has filed for a $75 million IPO. It plans to trade on the Nasdaq under ticker symbol TNDM, with Morgan Stanley and CIBC World Markets serving as co-lead underwriters. It has raised around $29 million in VC funding from firms like DCM-Doll Capital Management, New Enterprise Associates, Mesirow Capital Partners, Montagu Newhall Associates and Wasatch Venture Fund.

Accuray Inc., a Sunnyvale, Calif.-based developer of a robotic radio-surgery system, has set its proposed IPO terms to 13.33 million common shares being offered at between $14 and $16 per share. It plans to trade on the Nasdaq under ticker symbol ARAY, with JPMorgan and UBS serving as co-lead underwriters. Shareholders include BVI International Investment and Maubeni Corp.

Synta Pharmaceuticals Corp., a Lexington, Mass.–based small-molecule drug company focused on cancer and chronic inflammatory diseases, has set its proposed IPO terms to six million common shares being offered at between $14 and $16 per share. It plans to trade on the Nasdaq under ticker symbol SNTA, with Bear Stearns and Lehman Brothers serving as co-lead underwriters. The company has raised over $196 million in venture capital funding from firms like Caxton Group, Galleon Group, AIG SunAmerica, Wyandanch Partners and Aperture Partners.

Optimer Pharmaceuticals Inc., a San Diego-based developer of anti-infective products, has set its proposed IPO terms to 5.25 million common shares being offered at between $12 and $14 per share. It plans to trade on the Nasdaq under ticker symbol OPTR, with Piper Jaffray and Jefferies & Co. serving as co-lead underwriters. It has raised $67.7 million in VC funding from firms like ProQuest Investments, Formose Healthcare Investments and BB Biotech.

St. Francis Medical Technologies Inc., an Alameda, Calif.-based developer of motion-preserving technologies and procedures for orthopedic and neurological spine surgery, has withdrawn registration for an $86.25 million IPO. The move comes after St. Francis agreed to be acquired by Kyphon Inc. (Nasdaq: KYPH), in a deal that could be worth up to $725 million. St. Francis has raised over $27 million in VC funding, from firms like U.S. Venture Partners, Versant Ventures and Essex Woodlands Health Ventures.

Harbin Pharmaceutical Group Co. said that it is considering an overseas IPO. The Chinese drug-maker already is listed in Shanghai, and is controlled by a consortium led by Warburg Pincus.

PE-Backed M&A

LiquidNet Inc., a New York–based electronic global marketplace for block trading, has agreed to acquire Miletus Trading, a New York-based agency-only brokerage firm that provides quantitative execution strategies and analytics to institutional investors. No financial terms were disclosed. LiquidNet shareholders include T.H. Lee Putnam Ventures, Technology Crossover Ventures and Summit Partners.

Seaport Capital has sponsored the merger of content marketing agency Story Worldwide with Byte Interactive, a strategic digital marketing agency. No financial terms were disclosed.

PE Exits

The Procter & Gamble Co. (NYSE: PG) has acquired HDS Cosmetics Lab Inc. from North Castle Partners and Easton Capital Group. No financial terms were disclosed. HDS is a Yonkers, N.Y.–based maker of branded products for specific skin concerns such as anti-aging, acne, hyperpigmentation and sun protection.

TSG Consumer Partners has put Irvine, Calif.-based hair products company PureOlogy Research LLC up for sale, as first reported by The Deal. Barrington Associates is advising TSG on the sale, which could generate between $250 million and $300 million.

Firms & Funds

Wellington Partners of Germany has held a Euro 50 million first close on its third life sciences venture capital fund. Limited partners include EIF, Bear Stearns, Credit Suisse, Merifin Capital, the Messerschmitt Foundation and the National Technology Enterprises Company of Kuwait. A final close on Euro 120 million is scheduled for this summer.

Greycroft Partners, the New York-based venture firm founded by Alan Patricof, has raised the size of its inaugural fund to $75 million, according to a regulatory filing.

Human Resources

Charles Berg, former CEO of Oxford Health Plans, has joined Welsh, Carson, Anderson & Stowe as a New York-based senior operating executive.

Philip Curatilo has joined Key Principal Partners as a Richmond, Va.-based principal. He previously was a managing director with Westham Capital Partners and, before that, was a general partner with Riverside Partners.

Larry Stevenson has joined Toronto-based private equity firm Callisto Capital as a managing director. He previously was CEO of Pep Boys and, before that, helped launch and run the Canadian practice of Bain & Company.

TVM Capital has promoted Jens Eckstein to partner. He joined the firm’s Boston office in 2004, and has been involved in deals for companies like CoNCERT Pharmaceuticals, Magen BioSciences, SelectX Pharmaceuticals and Sirtris Pharmaceuticals.

Scott Minick, a managing director with Arch Venture Partners, has been elected chairman of the board for the California Pacific Medical Center. He has been a director on the board since 2003, and is a former executive with both Baxter and Eli Lilly.