PE Week Wire: Mon., March 19, 2007

I was in New York last month when Fortress went public, and it easily supplanted the weather as small talk du jour. One of my Buyouts Magazine colleagues kept calling out trading price updates, while most every phone call began with, “Well, whaddya think about that Fortress valuation?” One such call, however was more memorable. A fund-of-funds manager asked sarcastically: “Think Schwarzman is on the phone with Goldman yet?”

Apparently he was. As CNBC first reported on Friday, Blackstone Group is in deep discussions with Goldman Sachs about an IPO, with a filing likely by month’s end. The news quickly spurred the biz media whoredom to attention (including yours truly), and a series of storylines began to emerge. Here they are, along with some brief analysis:

The Blackstone Group is being hypocritical. How can it go public while simultaneously telling public companies that they’d be better off by going private?

There is certainly some irony here, but no hypocrisy. What this storyline misses is that the “go-private” argument does not assume eternal privatization. Instead, it is a relatively short-term fix that can give a company more flexibility for growth or restructuring. At some point, the company is most likely going public again. If private equity firms like Blackstone really looked down upon the public markets, they wouldn’t buy big companies in the first place.

This isn’t all that big a deal, considering that KKR already went public.

That would be accurate, if only it were true. KKR’s offering in Amsterdam last year was for a special purpose investment vehicle (mostly co-investment), not for a piece of KKR’s management company. Moreover, it matched up poorly to KKR’s more traditional private equity funds, in that it had less transparency, fewer investor protections and higher fees. Blackstone’s offering, on the other hand, is expected to be for the actual management company – not for specific portfolio plays. More brand equity than private equity.

Isn’t there some contradiction in a “private” equity firm going public?

Yes, except that Blackstone really is more an asset management firm than a private equity firm. Private equity is still its primary focus, but it also has large investment practices in real estate, mezzanine and mezzanine – plus corporate advisory and fund placements businesses. People also used to say I-banks shouldn’t go public…

This will lift Blackstone’s veil of secrecy.

No it won’t. If we use the Fortress IPO – or common sense – as a guidelines, the Blackstone IPO won’t tell us much more about the firm than we already know. The only exception would be executive compensation and more detailed management fee info – but the rest will just be a rehash of fund sizes and select portfolio names. Don’t expect the type of binder that a limited partner would receive. Blackstone doesn’t need to do it.

How will Blackstone’s limited partners react?

Most likely with ambivalence, particularly because this IPO would not dilute their existing LP positions (like the KKR offering arguably did). Only caveat here is that Blackstone needs to strike a balance between fiduciary responsibility to its limited partners and to it new public shareholders. This could become touchy when it comes to issues like management and transaction fees, and needs to be dealt with preemptively. Don’t ask me how, because I don’t know… Also, expect LPs to ask about senior exec dedication to the firm’s future now that they’ve taken out serious equity, plus additional questions about how junior partners are being incenivized.

Will this lead to other private equity firm IPOs?

Yes, or at least yes to filings.

*** The second round of tourney play is over, and our current leader is Justin Pollack, a director with secondary firm Newbury Partners. Justin has correctly picked 41 out of the first 48 games, and has a current score of 55. His final four has Kansas, Oregon, Georgetown and Ohio State, with Ohio State beating Oregon in the finals. Co-leaders after the first-round has been: Andy Brusman, co-founder and managing director of Westham Capital, and Danny Zouber, a vice president in the fund-of-funds team of Piper Jaffray & Co.

Top Three

Clayton Dubilier & Rice has agreed to acquire The ServiceMaster Co. (NYSE: SVM) for approximately $5.5 billion (including the assumption of debt). Under terms of the deal, ServiceMaster shareholders would receive $15.625 per share, which is around a 16% premium over Friday’s closing price of $13.47 per share. Banc of America Capital Investments, Citigroup Private Equity and JPMorgan Chase have committed to provide equity financing, while leverage will come from Banc of America Securities, Citigroup Global Markets and JPMorgan. Morgan Stanley and Goldman Sachs served as financial advisors to ServiceMaster, which provides residential and commercial customers with such services as lawn care and landscape maintenance, termite and pest control, home warranties, disaster response and reconstruction, cleaning and disaster restoration, house cleaning, furniture repair and ! home inspection.

The Blackstone Group and The Carlyle Group are co-leading a possible rival consortium for TXU, the Dallas-based energy giant that recently agreed to be acquired for $45 billion by KKR and TPG. The Financial Times reports that Hellman & Friedman also is part of the group, but cautioned that a rival bid could be difficult to finance – given that so many banks already have lined up behind KKR and TPG.

iSoftStone Information Service Corp., a Beijing-based provider of IT outsourcing solutions, has raised $45 million in Series B funding. Fidelity Asia Ventures and Mitsui Ventures Global Fund were joined by return backers AsiaVest Partners and InfoTech Pacific Ventures. Bocom Capital Partners acted as financial advisor to iSoftStone.

VC Deals

Spaltudaq Corp., a Seattle-based biotech company focused on therapeutic human monoclonal antibodies, has raised $29 million in Series B funding. Arch Venture Partners, Canaan Partners and Healthcare Ventures co-led the deal, and were joined by Amgen Ventures, MPM Capital, and Alexandria Equities.

Jacent Technologies Inc., a Santa Clara, Calif.-based provider of on-demand ordering solutions for the restaurant industry, has raised $6.7 million in second-round funding. GIV Venture Partners led the deal, and was joined by return backers Alignment Capital, Azure Capital Partners and Wand Partners.

SecureInfo Corp., a McLean, Va.-based provider of information security assurance solutions, has raised over $5 million in Series C funding, according to a regulatory filing. Listed shareholders include Insight Venture Partners and Nortel.

Visible Measures Inc., a Cambridge, Mass.-based provider of application monitoring software, today announced that it has raised $5 million in Series A funding led by General Catalyst Partners. The news was first reported by PE Week Wire on March 2.

Kwiry Inc., a San Francisco-based interactive advertising startup, has raised around $1 million in Series A funding from Hummer Winblad Venture Partners.

Neuropure Inc., a Menlo Park, Calif.-based developer of treatments for neurological disorders, has raised $500,000 in Series A funding led by Mohr, Davidow Ventures.

Buyout Deals

CCMP Capital Advisors and GS Capital Partners might get bested in their efforts to acquire Triad Hospitals Inc. (NYSE: TRI). The two firms agreed on a $6.4 billion buyout last month (including $1.7 billion in assumed debt), but Triad was free to solicit superior proposals for next 40 days. And it may have found one, according to a Wall Street Journal report that Community Health Systems (NYSE: CYH) is nearing an agreement worth “several hundred million dollars” more than the existing offer. If Triad were to accept the CHS proposal, it would owe CCMP and GS a $20 million breakup f! ee and another $20 million in reimbursement for out-of-pocket expenses. Lehman Brothers is advising Triad on the sale.

The Carlyle Group reportedly has agreed to take a reduced stake in Xugong Group Construction Machinery, in order to help appease Chinese regulators. Carlyle originally agreed to acquire an 85% stake for $375 million, and later cut down its prospective ownership to 50 percent. But today’s Wall Street Journal reports that it has now offered to drop down to minority shareholder status with 45 percent.

Duke Street Capital has acquired Burton’s Foods, a UK-based provider of branded and private-label biscuits and snacks. No financial terms were disclosed. CIBC is providing leverage.

Svoboda Collins has acquired Border Construction Specialties, a Phoenix, Ariz.–based distributor of specialty construction products to contractors in the southwestern United States.

Tripos Inc. (Nasdaq: TRPS) shareholders have approved the sale of its Discovery Informatics business to Vector Capital, as part of a larger plan of company dissolution. The deal is expected to close this week.

The Carlyle Group has completed its acquisition of Philosophy Inc., a Phoenix–based maker of personal care products in the skin care, bath & body care, fragrances and color cosmetics spaces. No financial terms were disclosed.

AIG Global Investment Group has closed its acquisition of P&O Ports North America from DP World of Dubai. No financial terms were disclosed, although the asking price was reported to have been around $700 million. DP World acquired the assets last year, via its $6.8 billion purchase of UK-based Peninsular & Oriental Steam Navigation Company, but decided to sell after the idea of a Dubai-based company owning U.S. ports sparked political furor.

Ares Management and the Ontario Teachers’ Pension Plan have completed their acquisition of Pittsburgh-based nutritional products retailer GNC from Apollo Management for a total enterprise value of $1.65 billion. Apollo acquired GNC in 2003 for approximately $750 million, and later filed for a $345 million IPO that it later withdrew due to adverse market conditions.

PE-Backed IPOs

Gafisa SA, a Brazilian homebuilder, priced around 39.7 million American depository shares at $24.88 per share, for an IPO take of approximately $987 million. It already trades on the Soa Paulo exchange, and will begin trading today on the NYSE under ticker symbol GFA. Lynch, Banco Itau BBA and Citigroup served as co-lead underwriters. Shareholders include GP Investimentos and Equity International Properties.

Authentec Inc., a Melbourne, Fla.-based provider of fingerprint sensors, has filed for an $86.25 million IPO. It plans to trade on the Nasdaq under ticker symbol AUTH, with Lehman Brothers serving as lead underwriter. It has raised $52.5 million since 1999, from firms like Sierra Ventures (21.2% pre-IPO stake), Harris Corp. (19.1%), Carlyle Venture Partners (13%), Advantage Capital Partners (8.7%), Newlight Associates, TI Ventures, Knickerbocker LLC, Bencas Capital and Stonehenge Capital.

Nimblegen Systems Inc., a Madison, Wis.-based maker of microarrays for the life sciences market, has filed for a $75 million IPO. It plans to trade on the Nasdaq under ticker symbol NMBL, with JPMorgan serving as lead underwriter. The company has raised around $66 million in VC funding since 2000, from firms like Skyline Ventures (14.04% pre-IPO stake), Cargill Ventures (13.37%), Schott AG (12.71%), Brookside Capital Partners (7.77%), Venture Investors LLC (6.55%), the State of Wisconsin Investment Board and Baird Venture Partners.

Veraz Networks Inc., a San Jose, Calif.-based provider of VoIP products to wireline and wireless service providers, has set its proposed IPO terms to nine million common shares being offered at between $10 and $12 per share. . It plans to trade on the Nasdaq under ticker symbol VRAZ, with Lehman Brothers and Credit Suisse serving as co-lead underwriters. Shareholders include ECI Telecom, Norwest Venture Partners, Battery Ventures, Argonaut Private Equity, Liberty Mutual and Levensohn Venture Partners.

This week’s IPO calendar includes expected pricings from PhotoWatt Technologies Inc., Cheniere Energy Partners LP and Glu Mobile Inc.

PE-Backed M&A

Visant Corp. (a.k.a. Jostens), a portfolio company of KKR and DLJ Merchant Banking, has acquired Neff Motivation Inc. from Linsalata Capital Partners for an undisclosed amount. Neff is a Greenville,! Ohio–based provider of provider of custom award and recognition products for the scholastic market segment including chenille and sewn awards, award plaques, certificates, letter jackets, and custom decorated apparel. It was acquired by Linsalata in 2003.

GateHouse Media Inc. (NYSE: GHS) has agreed to acquire nine publications from The Copley Press Inc. for $380 million. The pubs include seven daily and two weekly newspapers in the Springfield, Ill., Peoria, Ill and Canton, Ohio markets. Their combined circulation is around 275,000. GateHouse was acquired by Fortress Investment Partners in 2005 from Leonard Green, and then went public last year. Fortress still holds a majority ownership position.

PE Exits

Eaton Corp. (NYSE: ETN) has completed its $695 million acquisition of aerospace company Argo-Tech Corp. from Greenbriar Equity Group and Vestar Capital Partners. Argo-Tech makes engine fuel pumps, airframe fuel pumps and ground fueling systems used by operators of commercial and military airplanes.

Plug Power Inc. (Nasdaq: PLUG) has agreed to acquire Cellex Power Products Inc., a Canadian developer of fuel cells for industrial vehicles, for $45 million in cash. Cellex has raised VC funding from such firms as GrowthWorks, Conduit Ventures and Ventures West.

Firms & Funds

AIG Capital Partners has closed its New Europe Fund II with Euro 525.5 million in capital commitments. The fund’s Warsaw-based team will focus on private equity opportunities in Central and Eastern European countries like Poland, Czech Republic, Slovakia, Hungary, Romania, Bulgaria, and the Baltics.

Baird Capital Partners has closed its fourth middle-market with $300 million in capital commitments. Limited partners include American Family Mutual Insurance, Hexagon Investments, LLC, Robert W. Baird & Co., Northwestern Mutual Life and Thrivent Financial for Lutherans.

Human Resources

Firas Nasir has joined The Carlyle Group as a Dubai-based managing director on the firm’s Middle East and North Africa team. He previously was an executive director with UBS.

Jeff Johnson has joined Yucaipa Cos. as a principal overseeing the firm’s current and future media properties. He previously was fired as editor of the Los Angeles Times, after refusing a Tribune Company order that he lay off editorial employees.