PE Week Wire, Nov. 16, 2006

Collusion? What Collusion?

During the White House Correspondents Dinner earlier this year, emcee Steven Colbert said of President Bush: “He believes on Wednesday exactly what he believed on Monday, regardless of what happened on Tuesday.” Kind of reminds me of what I keep seeing on the private equity beat.

The first example came last month, when Sevin Rosen Funds suspended fundraising because the venture capital model was “severely damaged.” Three days later, Google agreed to buy venture-backed YouTube for $1.65 billion. Oops (I know, I know, one deal does not a market make…).

The second came yesterday, when 13 buyout firms were named as co-defendants in a class action lawsuit that accused them of violating federal antitrust laws (read: collusion). In short, the argument is that the big LBO firms no longer compete with one another for deals. Instead, they club up in order to preemptively shrink the buyer pool, and then drain it all together by making quid pro quo agreements that “We won’t bid against you on this deal, if you don’t bid against us on that deal.”

Pretty heady charge, particularly when the complaint – which you can read/download at – doesn’t include anything close to a smoking gun. But there it sits anyway, with the following explanation from the filing attorneys: Back in the 1980s and 1990s, most big buyout deals were competitive. Today they aren’t. Examples include Harrah’s, HCA and Univision – each of which was (or will be) sold to the sole bidder. It just can’t be coincidence. It must be collusion.

But, like Sevin Rosen, this class-action lawsuit has a timing problem. Namely, today’s announcement that Clear Channel Communications has agreed to be bought for around $26.7 billion (including assumed debt) by Bain Capital, Thomas H. Lee Partners and a group of its lending partners. This was no inside job, with Bain and TH Lee coming from the outside lane to knock off the favored team of Blackstone, KKR and Providence Equity Partners. And guess what Bain, TH Lee, Blackstone, KKR and Providence all have in common, besides an interest in owning Clear Channel? They each are named as co-defendants in the conspiracy lawsuit.

Just to make crystal clear: These firms are being accused of anti-competitive behavior, despite having spent the past month in fierce competition for one of the largest leveraged buyouts in history. Apparently the quid pro quo got lost in translation.

A few additional notes about the lawsuit, and about the Clear Channel deal:

*** The 13 defendants are Apollo Management, Bain Capital, Blackstone Group, Carlyle Group Clayton, Dubilier & Rice, Madison Dearborn Partners, Merrill Lynch, Providence Equity Partners, Silver Lake Partners, Texas Pacific Group, Thomas H. Lee Partners and Warburg Pincus.

*** The suit lists a variety of public companies that sold out at below “market rates,” but that apparently doesn’t mean below “public market rates” – since they all sold at premiums to public share prices. I mean they included SunGard, for goodness sakes. The attorneys acknowledge the irony, but insist that the true market rate could not be determined, because of the alleged anti-competitive behavior.

*** Most named defendants I spoke with declined to comment, but Carlyle spokesman Chris Ullman said: “This sets a new standard for frivolous lawsuits and we will vigorously contest it.”

*** It is possible that the I-banks and individual company board members will get added as co-defendants at a later date.

*** Hertz is also in the news today for its quick flip, but wasn’t that also a competitive bidding process?

*** Down & dirty analysis: This suit is designed to leverage any possible allegations of wrongdoing that might get filed by the Department of Justice. If DoJ does, indeed, have some conspiratorial evidence, then this suit will piggyback off of it. If not, it goes nowhere.

*** Moving on to Clear Channel: Lots of press reports – including here – suggest that Texas Pacific Group bailed out of the Bain/TH Lee consortium at the last minute. These reports – again, including mine – were wrong. It actually dropped out around ten days ago, in large part because its personnel resources were stretched too thin by deals like Harrah’s.

*** Don’t expect the losing bidders to get equity syndication on the deal. They made a very calculated decision as to what they were willing to pay, and I don’t sense that the winners need much check-writing help (if any, given the lender participation).

*** Popular perception was that Blackstone/KKR/Providence had the inside track, because Blackstone initiated the buyout discussion with Clear Channel. But it should be pointed out that members of Thomas H. Lee Partners had relationships going back years with senior Clear Channel folks. That said, it was still a three-week sprint from a standing start.

Today at Lots more to come on both of these situations. As I wrote above, the lawsuit is sitting on the site. In addition, NVCA president Mark Heesen (a member of the Vox Populi) writes about reaction to his group’s immigration study. Also, expect a bunch of new job adds to get posted in the Careers section later today. If you want to post your own ad, they are just $99 each, and can be done online.

Top Three

Clear Channel Communications Inc. (NYSE: CCU) has agreed to be acquired for $37.60 per share by a group co-led by Bain Capital and Thomas H. Lee Partners. The total transaction value is $26.7 billion, including the assumption or repayment of approximately $8 billion in net debt. Leverage commitments are coming from Morgan Stanley, Citigroup, Deutsche Bank, Credit Suisse, RBS and Wachovia – while Morgan Stanley, Citigroup, Deutsche Bank, Credit Suisse and RBS are also providing equity commitments.

Medio Systems Inc., a Seattle-based mobile search company, has raised $30 million in second-round funding. Accel Partners led the deal, and was joined by return backers Mohr Davidow Ventures, Frazier Technology Ventures and Trilogy Equity Partners.

Hertz Global Holdings Inc., a Park Ridge, N.J.-based automobile and equipment rental company, priced 88.235 million common shares at $15 per share ($16-$18 forecast), for an IPO take of approximately $1.32 billion. It will trade on the NYSE under ticker symbol HTZ, while Goldman Sachs, Merrill Lynch and Lehman Brothers serving as co-lead underwriters. Hertz was bought out from Ford Motor Co. last year for around $15 billion by Clayton, Dubilier & Rice, Carlyle Group and Merrill Lynch Global Private Equity.

VC Deals

AirDefense Inc., an Alpharetta, Ga.-based provider of enterprise WLAN security and monitoring, has raised around $14 million in Series B funding, according to a regulatory filing. Company shareholders include eHatchery and SYS Ventures.

Optaros Inc., a Boston-based provider of enterprise consulting and systems integration services, has secured $12.5 million of a $13 million Series B round, according to a regulatory filing. Globespan Capital Partners was joined by return backers Charles River Ventures and General Catalyst Partners.

LifeMed Media, a Westport, Conn.-based online consumer/patient education and marketing platform for the diabetes community, has raised $9.5 million in Series C funding. Cross Atlantic Partners led the deal, and was joined by Milestone Venture Partners and return backer Battery Ventures.

Aushon Biosystems Inc., a Burlington, Mass.-based developer of enabling technologies for life science research, drug discovery/development and clinical diagnostics, has raised $7.78 million in Series A funding led by North Bridge Venture Partners, according to a regulatory filing.

VeriCare Management Inc., a San Diego-based provider of mental healthcare services for older adults in skilled and residential settings, has raised $6.7 million in Series B funding, according to a regulatory filing. Backers include Salix Ventures and Acacia Venture Partners.

Real Girls Media, a San Francisco-based online publishing company, has closed its Series A funding with $6 million from 3i Group and WaldenVC.

Voyage Medical Inc., a Santa Clara, Calif.-based cardiac medical device company, has raised around $3.44 million in Series A funding led by RWI Ventures, according to a regulatory filing.

B-Side Entertainment Inc., an Austin, Texas-based independent film distributor, has secured $2.5 million of a $3.2 million Series A round led by Silverton Partners, according to a regulatory filing.

Apriso Corp., a Long Beach, Calif.-based global provider of adaptive software platforms for operations execution systems, has raised an undisclosed amount of fourth-round funding from firms like SAP Ventures, Wall Street Technology Partners, CMEA Ventures, Logispring and Brentwood Venture Capital.

Buyout Deals

Ripplewood Holdings LLC has agreed to lead a public-to-private buyout of The Readers’ Digest Association Inc. (NYSE: RDA) for $17 per share. The total deal is valued at $2.4 billion, with other members of the buying consortium including J. Rothschild Group, GoldenTree Asset Management, GSO Capital Partners, Merrill Lynch Capital and Magnetar Capital. Leverage is being provided by JPMorgan, Citigroup, Merrill Lynch and Royal Bank of Scotland, while Merrill Lynch advised RDA on the deal. It is expected to close in Q1 2007.

Industrial Growth Partners has acquired Microporous Products, a Piney Flats, Tenn.-based maker of rubber and polyethylene battery separators for the lead-acid battery industry.No financial terms were disclosed, except that Golub Capital helped finance the deal with $10 million in subordinated debt and equity.

North Castle Partners has acquired a controlling interest in Caleel + Hayden Inc., a Denver-based maker and distributor of mineral-based cosmetics and high-end skincare products. No financial terms were disclosed.

Shoreline Solutions, a Wallingford, Conn.-based provider of credit and debit card personalization and related fulfillment services, has received an undisclosed amount of private equity funding from G.L. Ohrstrom & Co.

Meriturn Partners has sponsored a recapitalization of Sustainable Solutions Inc., a Wagoner, Okla.-based company that enables manufacturers, processors and retailers to capitalize on their waste streams. Company management also participated on the deal, along with Capricorn Management, Granite Capital Management and the McLean family. No financial terms were disclosed.

Friend Skolar & Co. has made an investment in AllHeart Inc., a Camarillo, Calif.–based online retailer of medical uniform apparel, medical diagnostic instruments, footwear and accessories to healthcare professionals. No financial terms were disclosed for the deal, which also included equity participation by company management.

American Capital Strategies has invested $50 million in to a recapitalization of Varel Holdings Inc., a designer and manufacturer of roller-cone and polycrystalline diamond compact (PCD) drill bits for the oil & gas and mining industries. The deal also includes senior unirate loan and junior subordinated notes from Apollo Investment Corp., while KRG Capital Partners maintains majority ownership of the company.

PE-Backed IPOs

Allot Communications Ltd., an Israel-based provider of broadband service optimization solutions using DPI technology, priced 6.5 million ordinary shares at $12 per share ($9-$11 forecast), for an IPO take of approximately $78 million. It will trade on the Nasdaq under ticker symbol ALLT, while Lehman Brothers and Deutsche Bank Securities served as co-lead underwriters. Allot had raised nearly $26 million in VC funding from firms like Tamir Fishman Ventures, Gemini Capital, Genesis Partners, Partech International and Jerusalem Venture Partners.

Hansen Medical Inc., a Mountain View, Calif.-based developer of medical robotics for accurate positioning, manipulation and stable control of catheters, priced 6.25 million common shares at $12 per share ($11-$13 forecast), for an IPO take of approximately $75 million. It will trade on the Nasdaq under ticker symbol HNSN, while Morgan Stanley and JPMorgan served as co-lead underwriters. Hansen Medical had raised around $57 million in VC funding since its 2002 inception, from firms like Prospect Venture Partners, Skyline Ventures, Thomas Weisel Healthcare Partners, De Novo Ventures and Vanguard Ventures.

Targa Resources Partners LP, a Houston, Texas–based provider of midstream natural gas and NGL services, has filed for an IPO. The only listed terms are that Targa wants to sell 16.8 million common units. It plans to trade on the Nasdaq under ticker symbol NGLS, with Citigroup serving as lead underwriter. Targa was formed by Warburg Pincus in 2003 as an acquisition platform.

PE Exits

Apax Partners has sold its 71% stake in UK-based publishing services company Stationary Office to German postal services and logistics company Deutsche Post AG (via subsidiary Williams Lea Group). No financial terms were disclosed.

Pharmion Corp. (Nasdaq: PHRM) has acquired Cabrellis Pharmaceuticals, a San Diego-based oncology company that is in Phase 2 development of a third-generation synthetic anthracycline for small-cell lung cancer. The deal includes an initial cash payment of $59 million, plus the possibility of two regulatory-based milestone payments of $12.5 million each. Cabrellis raised $27.5 million in Series A funding earlier this year from Domain Associates, Forward Ventures, Lilly Ventures, ProQuest Investments, RBC Capital Partners, RiverVest Venture Partners and SR One Ltd.

SunPower Corp. (Nasdaq: SPWR) has agreed to acquire PowerLight Corp., a Berkeley, Calif.-based provider of large-scale solar power systems, for total consideration of $265 million (including $130 million in cash). PowerLight had raised around $20 million in VC funding from firms like Bay Area Equity Fund and New Energies Invest AG.

Firm & Fund News

RWI Ventures of Menlo Park, Calif. is targeting $100 million for its second fund, according to a regulatory filing. It already has secured over $56 million in capital commitments from LPs like St. Paul Teachers’ Retirement Fund Association.

MHS Capital Partners, a San Francisco-based VC firm focused on Internet and software companies, is targeting $40 million for its inaugural venture capital fund, according to a regulatory filing. It already has around $26 million in capital commitments. The firm is run by Mark Sugarman, who most recently served as interim VP of business development and marketing with Nutrisystem. Before that, he was a managing director with MKA Capital Group.

Human Resources

William Kilmer has been named CEO of Avinti Inc., a provider of e-mail outbreak threat protection. He previously was a managing director of Intel Capital Europe.

Saad Bargach has joined energy-focused private equity firm Lime Rock Partners as a Houston-based managing director. He previously served as chief information officer with Well Completions & Productivity.