PE Week Wire, Nov. 28, 2006

In 2001, the Boston Red Sox hiked ticket prices just 24 hours after the New England Patriots had won their first Super Bowl. It was an egregious increase, but no one noticed.

People also don’t notice much on the day after Thanksgiving, because they either are suffering tryptophan hangovers or are in pre-stampede mode at the local Best Buy. Even the public markets take half the day off.

So it isn’t terribly surprising that hospital chain HCA picked Friday to disclose additional terms of its $21 billion sale to Bain Capital, KKR and Merrill Lynch. After all, $175 million in transaction fees and $15 million annual management fees aren’t something to promote (or list in the small print on an ER visit bill). In addition, the management fee can increase annually beginning in 2008, while new owners will be entitled to: “a fee equal to 1% of the gross transaction value in connection with certain subsequent financing, acquisition, disposition, and change of control transactions as well as a termination fee based on the net present value of future payment obligations under the management agreement in the event of an initial public offering or under certain other circumstances.”

Once again, we are watching new private equity owners raid the corporate coffers for their own benefit (as opposed to for the company’s benefit). Let me repeat that word: “Owners.” Shouldn’t it be implicit that owners will participate in company management? Do they deserve extra financial credit for paying active attention to their own control investment? And, even worse, why do they get paid to terminate said agreement? It’s a pre-baked golden parachute that presumes KKR is just as valuable to HCA while “not managing” as it is “managing.” I wonder if Daddy Thomson would agree that I’m as valuable when “not writing” as when “writing?” Methinks not.

The counterargument here is: “Hey, the private equity firms now own HCA, so they’re the only ones who get hurt if the company’s valuation is reduced.” Yes and no. First, value also is being reduced for any HCA employee holding company options (for the inevitable flip). More importantly, not all private equity firms share either the transaction or management fees with limited partners. You remember limited partners, don’t you? They’re the ones who actually funded the buyout’s equity tranche.

Bain, for example, almost never shares any of those fees with LPs. Well, it officially does, but then takes out all of the unaccounted for consulting fees generated by affiliate Bain & Co. Even firms with more generous sharing – which usually means 50/50 or 60/40 in the LP’s favor – still apply carried interest, which means that even firms that give 100% to LPs may only end up giving 80 percent. It’s worth pointing out that buyout firms all used to take 100% of such fees for themselves, but progress in this area has still moved like stubborn molasses.

The solution: End management fee agreements, and probably transaction fees as well. Private equity is supposed to be about building portfolio company value over time – not about getting rich on Day 1.

*** The Times of London suggests that U.S.-based companies going public on the AIM are underperforming their British counterparts. This is a bit troubling, since many U.S. VCs view AIM as a solution to NYSE/Nasdaq IPO pricing troubles – although some recent IPO successes might be suppressing the need for such a solution. Paul Kedrosky also weighs in.

*** Want an audio private equity primer from an Australian perspective? Here you go.

*** Fred Wilson of Union Square Ventures on building a good board of directors.

*** DFJ and Partech International have settled a lawsuit leveled at them by the former CEO of portfolio company Agentis International, according to court documents obtained by PE Week. Alex gives a bit more info at, while PE Week subscribers can read the entire piece in this week’s issue.

*** Dennis Shelly writes at about some revised environmental regulations that might end up costing businesses a bunch of cash (if not handled correctly). As always, the site’s news and blog sections will be updated throughout the day.

*** Finally, remember that you can Personalize your PE Week Wire news. To do so, just click here. You also can use this link to change current preferences.

Top Three

EMI Group PLC, a UK-based record company, said today that it has received a buyout offer. No additional details were disclosed, but came after a Financial Times report that KKR and Goldman Sachs Capital Partners were considering a bid. EMI had been in back-and-forth merger talks with Warner Music Group over the summer, but they ultimately fizzled.

NeuStar Inc. (NYSE: NSR) has acquired Followap Inc., a UK-based provider of mobile instant messaging products in Europe and Asia, for approximately $139 million in cash. NeuStar said that it projects Followap revenue to exceed $25 million in 2007 and to more than double in 2008. Followap raised $12 million in a 2001 Series B funding round, at a post-money valuation of approximately $34 million. Backers include Sequoia Capital, Carmel Ventures, Koor Corporate Venture Capital, SVM Star Ventures Israel and Siemens Venture Capital.

Scott Kapnick yesterday said that he plans to step down as one of Goldman Sachs’ three co-heads of investment banking, effective at year-end. There are no current plans to name a replacement, with remaining co-heads John Weinberg and David Solomon continuing to serve in their positions.

VC Deals

Alimera Sciences Inc., a San Diego-based ophthalmic pharmaceutical company, has completed the $15.9 million second-tranche of its Series B round. The initial $15.9 million tranche was called down in November 2005, with backers on both deals including BA Venture Partners, Domain Associates, Intersouth Partners, Polaris Venture Partners and Venrock Associates.

PowerGenix Inc., a San Diego-based nickel-zinc rechargeable battery maker, has raised $17 million in Series C funding, according to VentureWire. Agenleno Group led the deal, and was joined by Braemar Energy Ventures, DFJ Element, Granite Ventures, OnPoint Ventures and Technology Partners.

Quinnova Pharmaceuticals Inc., a Newtown, Pa.-based dermatological drug company, has raised $13.6 million in Series A funding. Participants include Thomas, McNerney & Partners, H.I.G. Ventures and a syndicate led by Omnivest (Bermuda) Ltd.

First Coverage Inc., a Toronto-based provider of coverage optimization software for the institutional investment community, has raised US$5 million in first-round funding. GrandBanks Capital and J.L. Albright Ventures co-led the deal.

Neurostar Solutions Inc., an Atlanta-based provider of a virtual radiology network and community website, has raised $5 million in funding from Eastside Partners.

Myconostica Ltd., a UK-based developer of diagnostic tests for life-threatening respiratory fungal infections, has raised Gbp1 million in VC funding from Ampion Innovations PLC.

Chongqing Haifu Technology Co Ltd., a Chongqing, China-based manufacturer of therapeutic ultrasound devices, has sold a 20% ownership stake to CMIA Capital Partners. No financial terms were disclosed.

Takkle Inc., a New York-based online social network for high school sports, has raised an undisclosed amount of Series A funding from WMG Investments, Greycroft Partners and Jack Schneider (managing director of Allen & Co.).

Buyout Deals

AIG Highstar Capital has acquired Interstate Waste Services Inc., a Sloatsburg, N.Y.-based municipal solid waste company, from backers like Summer Street Capital and Ironwood Capital. No financial terms were disclosed. Goldsmith Agio Helms advised IWS on the deal.

Nautic Partners has sponsored a management buyout of Precision Engineered Products Inc. from The Jordan Co. PEP is an Attleboro, Mass.-based maker of fabricated parts, technical surface finishes, specialty and clad metals and micron tolerance-molded plastic components. No financial terms were disclosed for the deal, which included senior leverage arranged by GE Antares Capital.

Abraaj Capital has acquired an 80% stake in MS Forgings, Pakistan’s largest steel-forging company. No financial terms were disclosed. This is the first deal for the $300 million-targeted Abraaj BMA Pakistan Buyout Fund, which held a first close in June.

PE-Backed IPOs

US BioEnergy Corp., an Inner Grove Heights, Minn.-based ethanol production company, set its proposed IPO terms to 9.375 million common shares being offered at between $15 and $17 per share. It plans to trade on the Nasdaq under ticker symbol USBE, with UBS and Piper Jaffray serving as co-lead underwriters (Credit Suisse has been dropped). Shareholders include Capitaline Advisors.

Artes Medical Inc., a San Diego-based developer of injectable aesthetic products for the dermatology and plastic surgery markets, set its proposed IPO terms to 4.6 million common shares being offered at between $12 and $14 per share. It plans to trade on the Nasdaq under ticker symbol ARTE, with Cowan & Co. and Lazard Capital Markets serving as co-lead underwriters. The company has raised around $61 million in total VC funding from backers like National Securities Corp., Empire Asset Management, Baltimore Business Leaders, NGN Capital, Peter and Georgia Angelos and Lon Otembra.

Asthmatx Inc., a Mountain View, Calif.-based medical device developer that treats asthma, formally withdrew its IPO filing. It had announced last month that it would instead pursue “alternative strategic option,” while the withdrawal filing blames “current market conditions” for its decision. The company has raised venture funding from Boston Scientific Corp., HBM Partners, MedVenture Associates, Menlo Ventures, Montreux Equity Partners, Polaris Venture Partners and Vanguard Ventures.

PE Exits

FuturaGene PLC (AIM: FGN) has agreed to buy CBD Technologies Ltd., a Rehovot, Israel–based company focused on the commercialization of plants that are modified to grow faster, stronger and with greater biomass than native plants. The deal includes an initial payment of Gbp3.02 million in cash and 4.95 million shares of FuturaGene ordinary stock, plus up to 6.67 million shares in milestone payments. CBD has raised VC funding from firms like Biomedical Inv*stments, Challenge Fund, Comverse Inv*stments, Inventech and Nessuah Zannex Venture Capital Management.

Informatica Corp. (Nasdaq: INFA) has agreed to acquire Itemfield Inc., a San Mateo, Calif.-based provider of XML-based data transformation software, for approximately $55 million in cash. Itemfield has raised around $17.5 million in total VC funding since its 2000 inception, from firms like Accel Partners, Evergreen Capital Partners, Foundation Capital and Gemini Israel.

VeriSign Inc. (Nasdaq: VRSN) has agreed to acquire inCode Wireless Inc., a San Diego-based business and technology consulting firm focused on mobility solutions. The deal is valued at approximately $52 million. InCode has raised over $20 million in VC funding from firms like Sequoia Capital, Focus Ventures and inOvate Communications Group.

PE-Backed M&A

Haggin Marketing Inc., a Sausalito, Calif.–based direct marketing agency, has acquired The Chicago Catalog Group, a designer and producer of catalogs, direct mail pieces, and other marketing-related collateral for B2B and B2C applications. No financial terms were disclosed. Haggin is a portfolio company of Lake Capital.

Focus Brands, a restaurant franchise acquisition platform backed by Roark Capital Partners, has acquired Schlotzsky’s Ltd., an Austin, Texas-based sandwich shop chain. No financial terms were disclosed, except that Schlotzsky’s generates $210 million in annual revenue.

CBS Personnel Holdings Inc., a Cincinnati-based provider of temporary staffing services, has acquired select assets of PMC Staffing Solutions Inc. of Owings Mills, Maryland. No financial terms were disclosed, except that PMC’s annual revenue is in excess of $34 million. CBS Personnel is a portfolio company of Compass Diversified Trust (Nasdaq: CODI).

Firm & Fund News

Apax Partners has launched operations in India.

Human Resources

Modassir Choudhry and Robert Schrimpff have joined TVM Capital as a senior associate and associate, respectively. Choudhry will focus on life sciences, and is a board-certified cardiothoracic surgeon. Schrimpff will focus on technology, and previously was CEO of UK Internet consultancy NetXtra.

Robert Seery has joined GSC Group as a New York-based senior vice president in the firm’s Structured Finance group. He previously was with International Asset Transactions as chief operating officer.

Clifton Strain has joined CIT Group Inc. (NYSE: CIT) as a managing director in the firm’s Sponsor Finance unit. He previously was with Wachovia Securities.

Andrew Torgove has joined Goldsmith Agio Helms as head of its distressed advisory and restructuring practice. He previously was co-head of the distressed M&A practice at Houlihan Lokey Howard & Zukin.

CapMan has added four new “Industrial Advisors.” They are: Erik Prydz Mathisen, an independent consultant who most recently held positions within Nike Europe; Jari Pasanen, vice president of strategy and technology at Nokia Multimedia; Terje Thon, an independent consultant whose past jobs include president of Telenor AS and CEO of TBK AS; Barbara Thoralfsen, who previously served as president of TeliaSonera Norway and; Rune Thoralfsen, director and founder of Fleming Invest AS.