PE Week Wire: Tuesday, July 22, 2008

The Wall Street Journal reported yesterday that department store chain Mervyn’s may be the next PE-backed retail bust, just four years after it was carved out of Target Corp. for $1.2 billion. Certain vendors have stopped shipping, longtime lender CIT has cut ties and there is no rising economic tide to lift all boats (unless your vessel is made of petroleum).

By most objective standards, this should be a disaster for Mervyn’s current owners: Cerberus Capital Management, Sun Capital Partners, Lubert-Adler and Klaff Partners. But this is private equity we’re talking about, where operational failure can be rewarded with financial hedging.

According to WSJ, the original transaction was structured in two parts: One for the retailer and one for its real estate. While the former is an apparent failure, the latter made money off rising valuations (remember, this is compared to 2004) and leases to both Mervyn’s and other retailers.

Great structure, unless you happen to work for Mervyn’s or are an unpaid vendor. And that’s what really bothers me about this new private equity narrative, which is titled: Heads we win, tails you lose.

Buying a company is first and foremost about making money, but it should also be about helping the company prosper – because so many people’s livelihoods rely upon that prosperity. This isn’t to say that all deals are going to work out for everyone, but interests should be closely-enough aligned that big gains or big losses are experienced by both company owners and the company itself. In this case, it looks like the owners will breakibreak near even, while the actual company loses everything.

I’m not making any judgments here on whether or not Mervyn’s apparent failure is due to operational mismanagement or outside factors (probably a combination of both). But I do hold Cerberus and Sun accountable for helping to remove moral hazard from private equity. They should be losing more if Mervyn’s is indeed liquidated.

As it currently stands, what is preventing them – or other firms — from making the exact same deal again? Nothing, which is exactly what many Mervyn’s employees and vendors are about to be left with.

*** Last month I asked you to participate in a Dealmakers survey, which we regularly do in partnership with The Association for Corporate Growth. More than 500 private equity pros and bankers participated, and you can get some analysis and the raw results over at peHUB.

*** One additional note to yesterday’s column on SBA Communications’ agreement to buy Optasite: This is arguably a deal that wouldn’t have happened had the IPO market been stronger. Optasite was running a parallel process to go public, having already retained an advisor (although an actual S-1 was still a way off). But VC-backed IPOs aren’t really much of a viable option these days…

*** I’ll be in Silicon Valley for at least part of next week. More details once I figure them out.

*** The Chicago Cubs are for sale, and the inside track is held by John Canning, chairman and co-founder of Madison Dearborn Capital Partners. Not only is he a Chicago business icon, but he’s got a personal relationship with MLB commissioner Bud Selig. If you don’t think the last part matters, then you weren’t in Boston when John Henry got the team despite being outbid by Charles Dolan.

I’m officially rooting for Canning to win, because that would mean I could justifiably discuss baseball in this space (see: Boston Celtics). Therefore, I’ve begun digging into his group a bit, and have uncovered many of his limited partners (buy-in is at least $10m). They include Bruce Rauner and David Donnini from GTCR. More names here.

By the way, earlier today I spoke with someone who declined multiple invitations to participate in the auction (via different groups). He says that reports of ten bidding groups are probably legit, but that only four or five of the groups are serious. The rest are just happy to be nominated.

Top Three

LS Power Equity Partners and Global Infrastructure Partners have offered to buy TransAlta Corp., a Canadian wholesale power generator and marketer, for approximately C$7.75 billion. The offer would give TransAlta stockholders C$32.25 per share, which is a 21% premium to last Friday’s closing price.

EverBank Financial Corp., a Jacksonville, Fla.-based thrift holding company, has received approximately $100 million in private equity funding from Sageview Capital.

Jorge Espinel has joined Velocity Interactive Group as an investment partner. He previously was with AOL as head of corporate strategy and M&A.

VC Deals

CambridgeSoft Corp., a Cambridge, Mass.–based maker of life science enterprise solutions like e-notebooks, has raised $21 million in private equity funding from Goldman Sachs. The company had previously raised around $5.2 million from Edison Venture Funds.

Performance Plants Inc., an Ontario-based stress-resistant crop seed technologies, has raised C$13 million in new venture funding. Ceres Global Ag Corp. led the round, and was joined by Eastwood Capital Corp.

Agent Video Intelligence, an Israel-based maker of enterprise video analytics software, has raised $9 million in Series B funding from existing backer 21Ventures.

Amitive (f.k.a. Mitrix) has expanded its Series A round from $4 million to $10 million. Return backers include CMEA Ventures and Logispring. In other company news, Amitive has named former SAP and i2 exec Amar Singh as CEO.

Carbonetworks Corp., a Canadian provider of enterprise greenhouse gas emissions management software and services, has held a first close on a US$5 million Series A round. NGEN Partners is leading the round., a Washington, D.C.-based social discovery and cataloging network, has raised more than $5 million in Series A funding. Grotech Ventures led the round, and was joined by Steve and Jean Case.

GreenRoad Technologies Inc., a provider of driver safety solutions with offices in London and Silicon Valley, has expanded its Series C round from $14.5 million to $17.5 million. Amadeus Capital Partners provided the new tranche, while prior investors included Virgin Green Fund, Benchmark Capital and Balderton Capital.

10gen, a cloud computing startup founded earlier this year by DoubleClick veterans, has raised $1.5 million in Series A funding from Union Square Ventures., a Los Angeles-based operator of an online animation community, has raised an undisclosed amount of Series B funding co-led by Syncom Venture Partners and Barshop Ventures.

Buyout Deals

The Blackstone Group is among a number of private equity firms believed to have made a buyout approach for UK mortgage lender Paragon. Word of the approaches sent Paragon stock up nearly 20%, valuing the company at around $577 million.

3i Group has acquired a 45% stake in Soya Concept, a Denmark-based women’s clothing company. No financial terms were disclosed.

CapStreet Group has sponsored a recapitalization of Trinity Steel Fabricators Inc., a Trinity, Texas-based provider of structural steel fabrication services. No financial terms were disclosed. GulfStar Group advised Trinity Steel on the deal, and also received a minority equity position.

Fidelity Equity Partners has sponsored a Gbp33 million management buyout of Picsolve International, a London-based provider of photographic systems and services for leisure operators. The deal includes a Gbp13 million senior debt package from RBS.

Fortress Investment Group has offered to take over more than 100 restaurants from bankrupt Buffets Holdings Inc. Buffets had been acquired by Caxton-Iseman Capital in late 2006, but filed for Chapter 11 protection this past January.

Marwit Capital has completed its acquisition of cinema operator Trans-Lux Corp.’s entertainment division. The total deal was valued at $24.5 million, and includes 10 movie theaters in the West and Southwest.

Segulah has offered to acquire Sweden-based Gunnebo Industrier (Stockholm: GIAB) for approximately $272 million, which represents a 54% premium to yesterday’s closing price. Gunnebo makes such equipment as fastening systems for the construction industry and telescopic ladders.

TA Associates has completed a minority recapitalization of Keeley Asset Management Corp., a Chicago-based boutique manager that focuses on small to mid-cap companies undergoing internal corporate restructuring. No financial terms were disclosed. UBS served as financial advisor to Keeley, which has over $10 billion in assets under management.

PE-Backed IPOs

Ellora Energy Inc., a Boulder, Colo.-based oil and gas company, has lowered the number of shares offered in its IPO from 11.37 million to around 10.21 million. It had previously raised its offering price range from $12-$14 per share to $17-$19 per share, and is keeping the higher target. Ellora plans to trade on the Nasdaq under ticker symbol LORA, with AG Edwards and Friedman Billings Ramsey serving as co-lead underwriters. It is a portfolio company of Yorktown Energy Partners.

PE Exits

Aspect Abundant Shale LP has agreed to sell its interest in a North Texas natural gas field to Williams (NYSE: WMB), for approximately $166 million in cash. Aspect Abundant was formed two years ago as a joined venture between First Reserve and Aspect Energy LLC.

Churchill Equity has sold Deer Park, Texas-based industrial services group Tepsco to German construction company Bilfinger Berger. No financial terms were disclosed.

Fluid Logic LLC, a Portland, Ore.-based maker of colloidal silica, has sold its grinding and fabrication fluids business for brittle materials to Ferro Corp. (NYSE: FOE). No financial terms were disclosed. Fluid Logic is a portfolio company of Riverlake Partners.

PE-Backed M&A

Modern Luxury Media, a publisher of city magazines like the upcoming Manhattan, has acquired online luxury and lifestyle brand Juli B. No financial terms were disclosed. Modern Luxury Media is backed by Clarity Partners, while AdMedia Partners advised Juli B. on the sale.

TouchPoint Print Solutions Corp., a printing company acquisition platform sponsored by Huron Capital Partners, has acquired Commercial Communications Inc., a Hartland, Wis.-based provider of digital document management, commercial off-set printing and fulfillment services. No financial terms were disclosed.

Ultra*Pro, a portfolio company of Marlin Equity Partners, has acquired Around the Block LLC, a Layton, Utah–based provider of scrapbooking tools. No financial terms were disclosed.

Firms and Funds

Kinderhook Industries, a New York-based buyout shop focused on the middle-markets, is raising up to $400 million for its third fund, according to a regulatory filing. The firm had raised just under $150 million for its second fund in 2006.

Human Resources

William Sonneborn has joined Kohlberg Kravis Roberts & Co. to help further develop the firm’s asset management platform. He previously was president and COO of The TCW Group.

Jane Keller has joined private equity firm Purepay as a vice president focused on the electronic payments sector. She previously was an executive with Electronic Clearing House.

Julian Cheong has joined Lehman Brothers as co-head of Asia-Pacific financial institutions, according to Dow Jones. He was previously a managing director with Goldman Sachs.

Sean Breen has joined CCMP Capital as an associate. He previously was with Lehman Brothers as an analyst in the firm’s global leveraged finance group.

John Leach has joined UK venture philanthropy group Impetus Trust as an investment director, on a pro bono basis. He is the former head of Barclays Capital’s European sponsor coverage business.