PE Week Wire: Tues., Aug. 28, 2007

I have issued exactly one piece of investment advice since the credit crunch began six weeks ago: Buy stock in publicly-traded companies that have already agreed to go private. One or two might sour, but the overall “index” will generatepositive returns. If you did so, I accept thanks in the form of anonymous story leads and/or Red Sox tickets…

There are 25 ending take-private buyouts, and Thomson Financial has analyzed their stock performance from August 1 through market close last Friday. Seventeen of the 25 have experienced gains over that time period, including 4.7% for Sequa Corp. and 4.44% for Hilton Hotels. The average gain got dragged down considerably by the -8.42% performance of Affiliated Computer Services, but still ended up at 1.09 percent. So maybe bleacher seats instead of boxes…

For comparison, the S&P 500 lost 2.83% over the same time period, while the DJIA was up less than two-tenths of one percent.

And there is still some wiggle room, as the average take-private was still trading around 4.44% below its buyout price. There could be a few re-pricings in the mold of HD Supply, but that situation was pretty unusual (good explanation here).

So keep buying the whole basket. It’s as sure a thing as can be found in an uncertain market. You can download the Thomson Research analysis here.

*** The revised $8.5 billion pricetag for HD Supply is lower than what second-place bidders Thomas H. Lee Partners and CCMP Capital had originally offered.

*** Email of the Day comes from Dale: “Dan, you’ve been reliably bearish over the past two years, insisting that the credit markets would eventually stop providing such cheap debt to private equity firms. Then once it finally happens, you begin talking ‘bull’ about how the market will survive, deals will get done, etc. I’ve concluded that you’re neither a bear nor a bull, but just a reflexive contrarian.”

Maybe so Dale – particularly given today’s column lead. But back to my past bearishness: The concerns expressed weren’t so much about how the credit market would eventually crunch and affect future dealflow, because we all knew that what goes up must eventually come back down. Instead, it was about how the leverage excesses would impair buyout fund returns for limited partners. Specifically, how buyout funds were overpaying because of an abundance of cheap debt. Even if you accept that most LBO-backed company fundamentals are strong, it will be very difficult to find decent exits for many of the large companies bought over the past 12 months. And this will be a double-whammy for LPs who ramped up PE commitments over the past year, as much of that money has gone not only to mega-funds, but also to mega-fund co-invests.

*** Yesterday I linked you to a Mercury News report that VenturePAC, the National Venture Capital Association’s political action committee, gave more to Democrats than Republicans in the first half of 2007. It was just a few lines in a larger story, so I’ve fleshed it out a bit here. Included is a downloadable spreadsheet of all first-half VenturePAC donations.

Top Three

Home Depot Inc. today confirmed that it will sell its HD Supply unit for $8.5 billion to a buyout consortium of Bain Capital, Carlyle Group and Clayton, Dubilier & Rice. The sale price as announced in June was $10.3 billion, but turbulent credit conditions and a tightening housing market forced the talks on new terms. As part of the amended agreement, Home Depot will purchase a 12.5% equity interest in HD Supply for $325 million, and will guarantee a $1 billion senior secured loan. The deal is expected to close Thursday.

Hi-Media Group has agreed to acquire Fotolog Inc. for approximately $90 million in cash and stock. Fotolog is a New York-based social network and photo-sharing site thatasks users to post a single photo every day. Itclaims to have more than 10 million members. Fotolog has raised about $11 million from BV Capital, 3i Group and other backers since 2004.

Halyard Capital has formed a new marketing and advertising company called Engauge, via the merging of existing portfolio company Direct Impact (Austin, Texas) with new acquisition Ten United (Dallas, Texas). No financial terms for either acquisition was disclosed. Engauge will be run by Ten United CEO Rick Milenthal, while industry veteran Stan Rapp will serve as chairman.

VC Deals

Jaxtr Inc., a Palo Alto, Calif.-based provider of VoIP services for social networks and blogs, has raised around $8 million in second-round funding. August Capital led the deal, which also included return backers like Draper Richards, Mayfield, Founders Fund and individual angels like Ron Conway and Reid Hoffman. The company has raised a total of $10 million.

Spiceworks, an Austin, Texas-based provider of IT management software for small and mid-sized businesses, has raised $8 million in Series B funding. Shasta Ventures led the deal, and was joined by return backer Austin Ventures. The company previously raised $5 million in Series A funding.

TraceSecurity, a Baton Rouge, La.–based provider of SaaS security compliance management solutions, has raised $8 million in Series C funding led by Maple Leaf Partners.

Solido Design Automation, a Saskatchewan-based provider of transistor-level statistical design and verification software, has raised Cdn$6.5 million in second-round funding. Golden Opportunities Fund ledthe deal, and was joined byBDC Venture Capital, Victoria Park Capital and individual angels.

inQ Inc., a Los Angeles-based provider of outsourced online live chat sales solutions, has raised $5 million in Series D funding. Emergence Capital led the deal, and was joined by return backers Partech International, Dolphin Equity Partners and Hudson Ventures. The company has raised over $20 million in total VC funding since 2004.

MocoSpace, a Boston-based mobile community network, has raised $3 million in Series A funding. General Catalyst Partners led the deal, and was joined by the Pilot Group and former eBay executive Michael Dearing.

Concordia Fibers LLC, a Coventry, R.I.-based maker of engineered yarns and fibers, has raised $1.5 million in venture capital funding. Backers include the Slater Technology Fund, which invested $250,000.

Rubicor Medical Inc., a Redwood City, Calif.-based developer of minimally-invasive technologies for breast biopsy and tissue removal, has raised $10 million in venture debt from Comerica Bank and Oxford Finance Corp. Company shareholders include Safeguard Scientifics and ITX International Equity Corp.

Buyout Deals

Aetos Capital has agreed to invest up to $50 million in Tian Rui Hotel Corp., franchisor of Wyndham Hotel’s Super 8 brand in China. Tian Rui has opened 49 Super 8 hotels in China, and has signed agreements to develop an additional 67 hotels.

The Blackstone Group is one of several firms in talks to acquire a 20% stake in Italian telecom operator Wind SpA, according to Dow Jones. The stake is being offered up by Egyptian businessman Naguib Sawiris.

Boston Ventures has agreed to acquire SJI LLC, a telecom and broadband services provider for residential and commercial customers in southern Louisiana. No financial terms were disclosed. The seller is the Brady family, which has owned SJI since 1945. RBC Daniels advised SJI on the transaction.

Clinical Research Network, a Vernon Hills, Ill.–based provider of clinical trial services, has raised an undisclosed amount of private equity funding from WHI Capital Partners. CRN was formed in 2003, and works with pharma companies, biotech companies and contract research organizations.

Hilco Consumer Capital and Crystal Capital have agreed to acquire a variety of golf equipment brands from Huffy Corp. No financial terms were disclosed for the deal, which includes brands Tommy Armour, Ram, TearDrop and Zebra.

London Stock Exchange shares soared 5%, on reports that a variety of parties were interested in buying the 31% stake that has been earmarked for sale by Nasdaq. Temasek, the state investment vehicle of Singapore, has been cited as a likely buyer, while other reports cite both Deutsche Boerse and Borse Dubai as having interest. The latter group is currently in a hostile fight with Nasdaq over OMX, the Nordic exchange. A report has suggested that Borse Dubai could submit a joint bid for OMX with Nasdaq, if it becomes a major shareholder in the LSE.

McDonald’s Corp. (NYSE: MCD) has completed the sale of its Boston Market restaurant chain to Sun Capital Partners for an undisclosed amount. Boston Market, originally called Boston Chicken, was acquired in 2000 for $173.5 million as part of a McDonald’s initiative to diversify its business. Now the chain has 630 restaurants in 28 states. Sun Capital has a portfolio that also includes bakery chain Bruegger’s Enterprises, Garden Fresh salad restaurants and cheese-and-meat retailer Hickory Farms.

Skyservice Airlines Inc. of Canada has agreed to sell a majority interest in its charter airlines business to Gilbralt Capital. No financial terms were disclosed for the deal, which is expected to close in early fall.

PE Exits

BabyCenter, a baby information website owned by Johnson & Johnson, has acquired Maya’s Mom, a Palo Alto, Calif.-based social networking site for mothers. May’s Mom last year raised a small amount VC funding from True Ventures and individual angels like Jeff Clavier and Caterina Fake. News of the acquisition was first reported by PaidContent.

NBC Universal is in talks to buy Sparrowhawk Media for $350 million from 3i Group and Providence Equity Partners, according to Reuters. Sparrowhawk owns the international operations of the Hallmark Channel, and was acquired by 3i and Providence in 2005 for around $242 million.

PE-Backed M&A

EnerWorks Inc., an Ontario–based maker of solar thermal systems, has acquired the Blue Peter Project Group, a developer of large-scale applications of alternative energy solutions for the commercial, industrial and residential markets. No financial terms were disclosed for the deal, through which BPPG founder Graham Smith becomes EnerWorks’ VP and GM of commercial and industrial projects. EnerWorks has raised VC funding from Chrysalix Energy Management, Investeco Capital, Covington Venture Fund and VentureLink Brighter Futures Fund.

Lenovo Group Ltd. might consider a rival offer for fellow PC maker Gateway, according to a speculative piece on Gateway yesterday agreed to be acquired for $710 million, of $1.90 per share, by Acer – but the deal has a superior offer clause. Lenovo is the world’s third-largest PC maker, following its 2005 acquisition of IBM’s ThinkPad unit. That deal was partially financed by a $350 million private equity infusion from TPG and General Atlantic.

Firms & Funds

The Carlyle Group has agreed to an additional $100 million to Carlyle Capital Corp. Ltd., an affiliated vehicle that went public in Amsterdam two months ago. It’s the second $100 million bailout for the fund in as many weeks, with the vehicle announcing that it has sold around $900 million in assets at an estimated loss of between $30 million and $40 million.

The Carlyle Group paid Ogilvy Government Relations $260,000 to lobby the federal government in the first half of 2007, according to a disclosure form. The firm lobbied against proposed legislation that would raise taxes for private equity firms and their managers, and on foreign investment issues.

EnerTech Capital has held a $75 million close on its $250 million-targeted third fund, according to VentureWire. The Wayne, Pa.–based firm focuses on expansion-stage companies in the energy sector.

Human Resources

Key Principal Partners has hired Nick Stone as a San Francisco-based director in charge of West Coast business development. He previously was a vice president of Chicago-based Northlight Capital and, before that, was a director with U.S. Capital.

Joe Marengi has joined Austin Ventures as a venture partner. He has spent the past decade with Dell Inc., where he was a senior vice president and general manager of Dell Americas. Before that, he was president and COO of Novell Inc. As part of his role with AV, Maregni will work with portfolio companies LifeSize Communications, Sipera Systems and Copan Systems. He also will help evaluate new opportunities.

R. Jay Fortin has joined Patton Boggs LLP as a New York-based partner focused on transportation and project finance. He previously was with Curtis Mallet-Prevost Colt & Mosle LLP.