PE Week Wire: Wed., April 25, 2007

Yesterday, the Service Employees’ International Union issued a 44-page report that essentially asks buyout firms to share their prosperity with portfolio company workers (read/download it here). Let’s proceed in notes form, as I’m running far too late to come up paragraph segues:

*** Are you thinking something along the lines of: “Who cares what SEIU says? They don’t understand private equity.”

If so, pull yourself out of the LBO cocoon for a moment, and trust me when I tell you that what SEIU says matters – whether you agree with its underlying facts or not. Not only is it the nation’s largest labor union with 1.8 million members, it is expected to keep growing as America transitions more and more into a service economy. In other words, SEIU has clout (particularly with Democrats in charge of Congress).

*** I am sympathetic to SEIU’s basic premise: Portfolio company workers should share in a company’s success. After all, a buyout firm or CEO might come up with strategies for success, but only the workers can implement them. We’re talking basic fairness here. A handful of buyout deals have resulted in employee stock options, for example, but this is still the exception rather than the rule. It shouldn’t be.

We already know that the opposite is true: Workers suffer from a company’s failure – usually by losing their jobs or benefits.

*** It’s worth noting that SEIU also included portfolio company management in the above conversation, but I’m not so sure it’s as pressing an issue. More and more buyout firms already are granting options to senior management, or asking them to contribute equity to the initial buyout. For example, there was that story about SunGard’s CEO Cris Conde asking a dozen or so managers to write down what would be a “meaningful” personal equity contribution on a piece of paper, and then put the paper in an envelope. Conde accepted each contribution. But, in cases where management doesn’t have a stake, it should.

*** SEIU is proposing far greater transparency prior to transaction closes. This would include GP income, company-specific restructuring plans, specifics about debt plans and risks associated with that debt. This is a total wishlist, because it basically asks private equity firms to share what they legitimately consider to be trade secret (save, perhaps, for GP income).

For example, imagine that Blackstone is bidding $25 per share for a company, while KKR is bidding $27 per share. The discrepancy is caused by KKR having spotted an operational inefficiency that Blackstone did not. If forced to disclose that item, Blackstone might raise its bid — thus negating KKR’s competitive advantage.

I raised this scenario with the SEIU guys, who responded that if correcting the “operational inefficiency” would result in the loss of thousands of jobs, then they don’t have much sympathy for the sanctity of trade secret. In other words, we might have a stalemate.

One possible compromise would be for buyout firms to keep most biz plan issues confidential, but to reveal any expected large-scale layoffs or benefit changes. KKR, for example, just publicly promised to job cuts or close stores at Alliance Boots, were it to buy the company. Of course, it would be a much different case were Boots a turnaround situation.

*** A bigger issue is enforcement. Assume for a moment that LBO firms agreed to disclose employee plans prior to a buyout close. What then? What if they lied? Or what if the situation changes? Very few LBO firms know exactly what they’re getting when they buy into a company – no matter how good the due diligence. In almost every case, new owners unearth some employment-related plusses and minuses. How would firms be held to their promises, or even should they be? Extra regulation? I just don’t see any viable means of enforcement here.

*** Private Equity Council chief Doug Lowenstein issued a brief statement in response to the SEIU report, in which he criticized the union for not also noting that “the largest investors in private equity are public employee pension funds, foundations, and universities who have flocked to the sector because top PE firms have generated returns more than triple the S&P 500.” SEIU itself does not serve as a limited partner in PE funds, but acknowledged Lowenstein’s basic point during yesterday’s conference call. It declined, however, to concede that such pensioners have done better with PE than they could have with other investments. Instead,they said they hadn’t done the math, because each pensioner contribution is different, and would have to be matched against what else he/she would have invested in. Methinks S&P 500 is still a good control index.

*** Feel encouraged to chime in here.

*** Unrelated: Venrock Associates today announced that it has closed a new $600 million fund, and hired former Spark Networks (a.k.a. JDate) CEO David Siminoff as a partner in charge of media investments. It’s also dropped “Associates” from its masthead, and quietly transitioned from four managing general partners to three. So I had 5 Questions for Ray Rothrock.

*** Keep those internship opportunities coming, and thanks to those who have already contacted me. Just a few more days until I post…

Top Three

GS Capital Partners has agreed to acquire Myers Industries Inc. (NYSE: MYE), an Akron, Ohio-based manufacturer of polymer products for industrial, agricultural, automotive, commercial and consumer markets. The deal is valued at approximately $1.07 billion, including assumption or repayment of approximately $276 million in debt. Myers stockholders would receive $22.50 per share.

Alien Technology Corp., a Morgan Hill, Calif.–based RFID tagging company, has raised $33 million in Series I funding. Advanced Equities and Sunbridge Partners co-led the deal, and were joined by return backers Rho Ventures and New Enterprise Associates. A regulatory filing from last fall indicated that the company planned to raise up to $50 million, plus another $93.75 million in convertible securities. Alien has raised over $270 million in total VC funding, and last year withdrew registration for a $138 million IPO.

Venrock Associates has closed its fifth fund with $600 million in capital commitments. It also that it has hired former Spark Networks (a.k.a. JDate) CEO David Siminoff as a partner in charge of media investments, while managing general partner Tony Evnin is transitioning into a “general partner” role. For more info, go here.

VC Deals

Heartscape Technologies Inc., a Columbia, Md.-based developer of a medical device that diagnoses heart attacks and ischemia in emergency cases, has raised $17 million in Series B funding. Scottish Equity Partners led the deal, and was joined by Investor Growth Capital and return backers Radius Ventures and Delta Partners.

The Natural Dentist, a Medford, Mass.-based oral care company, has closed its Series B funding round with a total of $13 million. It had held an $8.4 million first close last November, from Burrill & Co., Prolog Ventures, Brooke Private Equity and Great Spirit Ventures. Aisling Capital participated on the latter tranche.

Gordon Murray Design Ltd., a UK-based auto design, prototyping and development company, has raised first-round funding from Mohr, Davidow Ventures and Caparo Group. No financial terms were disclosed, but a source puts the round amount north of $10 million.

Solidcore Systems Inc., a Palo Alto, Calif.-based provider of IT control solutions, has raised $10 million in Series D funding. Jafco Ventures led the deal, and was joined by return backers Matrix Partners, Menlo Ventures and Sevin Rosen Funds. The company has raised around $46 million in total VC funding since 2003.

EQO Communications, a Vancouver-based provider of mobile internet phone services, has raised $9 million in Series B funding. Ventures West led the deal, and was joined by return backers GrowthWorks and BDC Capital.

Limbo 41414, a Burlingame, Calif.–based mobile and online entertainment company, has raised $8 million in Series C funding. New Enterprise Associates led the deal, and was joined by return backers Azure Capital Partners and Draper Fisher Jurvetson.

Lamina, a Westhampton, N.J.-based LED developer, has raised $7 million in Series D funding. Easton Capital led the deal, and was joined by return backers Morgenthaler Ventures, Granite Global Ventures, RedShift Ventures and CID Equity Capital also participated. Lamina has raised around $47.5 million in total VC funding since 2001.

Ryla Teleservices Inc., a Kennesaw, Ga.-based provider of customer contact solutions and business process outsourcing, has raised $6.5 million in Series B funding from Frontier Capital.

Netlog, a Belgium-based operator of a network of social portals, has raised €5 million in Series A funding. Index Ventures led the deal, and was joined by Atomico and Skype co-founder Janus Friis.

Apacheta Corp., a San Diego-based provider of mobile computing and communications solutions, has raised around $2.6 million in follow-on Series B funding led by return backer Palisades Ventures.

iYogi, an India-based computer support startup, has raised $3.1 million in venture funding from Canaan Partners and SVB Financial Group.

TargetSpot Inc., a New York-based provider of ad serving within streaming media, has raised an undisclosed amount of first-round funding from Union Square Ventures, CBS Radio and Oddcast Inc. The company is run by co-founder and CEO Doug Perlson, former COO of Seavast (f.k.a. Kanoodle).

Vocera Communicartions Inc., a Cupertino, Calif.-based based provider of wireless communication systems among workers, has raised an undisclosed amount of strategic funding from Motorola Ventures. The company had previously raised around $48 million in total VC funding, including a $7 million Series F round last fall at a post-money valuation of approximately $117 million. Shareholders include Granite Global Ventures, RRE Ventures, Venrock and Thomas Weisel Venture Partners.

Altor Bioscience Corp., a Miramar, Fla.-based drug company focused on cancer, autoimmune diseases and viral infections, is raising $15 million in Series C funding, according to VentureWire. The company previously raised around $10 million from Sanderling Ventures, Radius Ventures and TVM Capital.

Buyout Deals

Blair Corp. (AMEX: BL) stockholders approved a $42.50 per share buyout by Appleseed’s Topco Inc., a portfolio company of Golden Gate Capital. The total transaction is valued at approximately $173.6 million. Blair Corp. is a Warren, Pa.-based catalog and multi-channel direct marketer of women’s and men’s apparel and home products.

The Harbour Group has acquired Tritex Corp. (A.k.a. Haydon) from G.L. Ohrstrom for an undisclosed amount. Tritex is a Waterbury, Conn.-based maker of linear actuators, leadscrew assemblies and electromechanical switches.

The Blackstone Group is in talks to acquire Klöckner Pentaplast from Cinven and CCMP Capital, according to Financial Times Deutschland. The deal would be valued at between €1.3 billion and €1.5 billion. Klöckner Pentaplast is a German manufacturer of rigid plastic films for food packaging and medical devices. It was acquired by Cinven and CCMP in 2001 for approximately €900 million.

J.F. Lehman & Co. has agreed to acquire the Inertial Products business of BAE Systems (Nasdaq: BEAS), for $140 million. Inertial Products supplies military and commercial customers with inertial sensors and measurement units for the control, navigation and guidance of aircraft, precision weapon systems, missiles, unmanned aerial vehicles, aerial targets and drones, tanks and fighting vehicles. The sale also includes BAE Systems’ share of Silicon Sensing Systems, a joint venture between BAE and Sumitomo Precision Products.

Blue Wolf Capital Management and Atlas Holdings have agreed to acquire Glenn Falls, N.Y.-based papermaker Finch, Pruyn & Co. No financial terms were disclosed.

Cortec Group has acquired The Hygenic Corp. from Baird Capital Partners, Beecken Petty O’Keefe & Co. and American Capital Strategies. No financial terms were disclosed. Hygenic is an Akron, Ohio-basedmanufacturer and marketer of branded healthcare and fitness products for the rehabilitation, therapy and wellness markets.

Great Atlantic & Pacific Tea Co. (NYSE: GAP) confirmed that it is seeking to sell 66 Farmer Jack grocery stores in and around Detroit. A&P acquired the Farmer Jack chain in 1999.

PE-Backed IPOs

Cinemark Holdings Inc., a Plano, Texas-based movie theater chain, priced 28 million common shares at $19 per share ($17-$19 range), for an IPO take of approximately $532 million. Lehman Brothers served as lead underwrite, while the company has begun trading on the NYSE under ticker symbol CNK. Madison Dearborn Partners held a 66.3% pre-IPO take, while Quadrangle Group held 7.1 percent.

Ocean Power Technologies Inc., a Pennington, N.J.-based developer of renewable energy from ocean waves, priced five million common shares at $20 per share ($20-$22 range), for an IPO take of approximately $100 million. It will trade on the Nasdaq under ticker symbol OPTT, while UBS served as lead underwriter. Shareholders include Henderson Group.

Concho Resources Inc., a Midland, Texas-based oil and gas company focused on the Permian Basin of Southeast New Mexico, has filed for a $535 million IPO. It plans to trade on the NYSE under ticker symbol CXO, with JPMorgan and Banc of America Securities serving as co-lead underwriters. Shareholders include Yorktown Energy Partners.

PE-Backed M&A

RoadLink USA, a portfolio company of Fenway Partners, has acquired World Super Services Inc., a Phoenix–based third-party logistics provider specializing in outsourced warehousing support services to clients in the grocery and retail sectors. No financial terms were disclosed. WSS was advised on the transaction by Harris Williams & Co.

Pelion Systems Inc., a Lafayette, Colo.-based provider of manufacturing process optimization solutions, has agreed to merge with JCIT International, a technology transfer company focused on educational and engagement programs within the manufacturing industry. The combined company will be known as DemandPoint. No financial terms were disclosed. Pelion has raised VC funding from Inverness Capital Partners, Cordova Ventures and UPS Strategic Enterprise Fund.

SDL International,, has agreed to acquire Tridion Inc., an Amsterdam–based provider of enterprise-class web content management solutions. The deal is valued at $94 million, including $22 million in Tridion cash-on-hand. Tridion has raised over $21 million in VC funding since 1999, from firms like Prime Technology Ventures, Gilde Investment Management, Doughty Hanson and Barnard & Co.

PE Exits

Industri Kapital has sold French animal lab Ceva Santé Animale to a consortium that includes Euromezzanine, Natexis Industrie and Natexis Investissement. No financial terms were disclosed. Industri Capital originally bought the company in mid-2003 from PAI Partners, in an auction process that also included competition from Apax Partners, ABN Amro Capital and Astorg Partners. Ceva’s 2007 sales are estimated to be €340 million.

Macquarie reportedly is planning to sell its Thames Water Services subsidiary, which treats raw sewage, for between Gbp150m and Gbp200m.

DG Fastchannel Inc. (Nasdaq: DGIT) has agreed to acquire Pathfire Inc., a Roswell, Ga.-based provider of a digital media distribution pathway and network operations center (NOC) for the television and entertainment industries. The transaction is valued at $30 million in DG Fastchannel stock. Pathfire has raised around $124 million in total VC funding since 1996, from firms like Alliance Technology Ventures, AT&T Ventures, Banc of America Capital Investors, CNN, Halpern Denny & Co., Institutional Venture Partners, Kinetic Ventures, Monarch Capital Partners, Noro-Moseley Partners, PanAmSat, Quadrangle Group, Reuters Greenhouse Fund, Riggs Capital Partners and U.S. Venture Partners. It generated around $16.2 million in 2006 revenue.

Oracle Corp. (Nasdaq: ORCL) has agreed to acquire Lodestar Corp., a Peabody, Mass.–based provider of data management software for the utilities industry. No financial terms were disclosed. Lodestar raised $29 million in Series A funding in 2001 from Oaktree Capital Management and GFI Energy Ventures.

HP has agreed to acquire Arteis (a.k.a. Logoworks), a Lindon, Utah–based provider of distributed web-based graphic design services. No financial terms were disclosed. Arteis has raised $14.5 million in VC funding since 2005, from firms like Benchmark Capital, Highway 12 Ventures, Shasta Ventures and Village Ventures.

Red Hat Inc. (NYSE: RHT) has acquired MetaMatrix Inc., a Waltham, Mass.-based provider of data management and integration software. No financial terms were disclosed from the deal, which will result in MetaMatrix being folded into Red Hat’s JBoss division. MetaMatrix has raised around $40.5 million in total VC funding since 1998, from firms like Allen & Co., Angel Investors, EDBV Management, Gateway Associates, Integral Capital Partners, Kleiner Perkins and Schroder Finance Partners.

Firms & Funds

Activa Capital of France has closed its second buyout fund with €315 million in capital commitments. The firm has a generalist strategy, with a particular interest in businesses within the following sectors: Food and consumer goods, healthcare/pharma and business/support services.

Christian & Timbers, an executive search firm, has renamed itself CTPartners.

Human Resources

The Aurora Funds has promoted Jan Bouten to principal. He joined the firm in 2003, and was promoted to senior associate in 2005.

Kent McNellie and Steven Muns have joined Hunt Special Situations Group as senior associates. McNellie previously was an associate with Booz Allen Hamilton and, before that, was an analyst with First Reserve. Muns previously managed investment activities for Cox Oil LLC and, before that, was a portfolio manager on the distressed team at hedge fund Highland Capital Management.