PE Week Wire: Wed., Sept. 12, 2007

Saul Fox and Dexter Paine used to be tight. The name partners of buyout firm Fox Paine & Co. lived just minutes from one another in tony Woodside, Calif., and often got together on weekends to discuss everything from investments to office space. So it is more than a bit surprising that Fox is now suing Paine, alleging breach of fiduciary duty, breach of contract, unjust enrichment and a misappropriation of assets.

“I’m really stunned by the whole thing,” says a former Fox Paine staffer, who preferred to remain anonymous. “If you had told me on the day I left that [the lawsuit] would happen, I’d have called you a liar.”

Fox filed suit in Delaware Chancery Court on August 27 – after spurning Paine’s request for private mediation. “Fox believes he needs immediate interdiction,” says a source, claiming that a formal suit would be most expedient.

To understand the case, one must understand that Fox and Paine were no longer in the exact same business. The partnership had begun in 1997, when former KKR partner Fox recruited Paine, who at the time was working for Kohlberg & Co. They raised a $500 million first fund in 1998 and a $1 billion second fund in 2000 – with each owning a 50% piece of the firm’s management company. But when it came time to raise Fund III, Fox opted out. He was several years older than Paine, and said he’s prefer to instead stay on to continue managing the existing portfolio of nine public and private companies.

The pair reached an agreement whereby Fox would remain as CEO of the management company overseeing the first two funds, while Paine would be given conditional license to use the Fox Paine brand, track record and office resources for Fund III. The two “groups” would essentially share employees, but Fund III would hire its own CFO and accountant. For future clarity, the Fox-run management company will be called FPC, while Fund III with be called NewCo.

What happened next, according to Fox, borders on the bizarre. Fox alleges that Paine improperly recruited FPC chief financial officer Amy Ghisletta. Making matters worse, Ghisletta wrote an August 1 memo to all firm employees, saying, in part: “As you know, many changes have taken and will be taking place in connection with Fund III. One of the most major changes is the change in your employer… [Newco] will be your employer. ‘FPC’ will no longer be your employer.”

Fox claims to have been unaware of the memo until just a few weeks ago, as it was not shared with him or his employees. Further, he alleges that the “raiding” of employees severely diminished his ability to conduct FPC duties, and was done to essentially force him to quit. Perhaps more importantly, Fox claims that Paine and his “raided” employees began proceedings to sell off three Fund II portfolio companies, without Fox’s consent. Moreover, Paine allegedly told Fox that he would not approve further capital commitments if the sales did not proceed. Fox relented to allowing one of the companies to go and to search for a new CEO for the others. According to the complaint, however, Paine had Newco employees direct bankers to auction off all three companies. A similar incident occurred sometime later, with Fox cutting short an Australian vacation to stop an “unauthorized” board meeting to consider a third-party buyout proposal. Again, bizarre.

Paine has not yet filed court documents in response, but a spokesman strongly denied what he termed “untrue” allegations. He also said the following: “The idea that Mr. Paine would do anything to cause harm to Fox Paine & Co. or Funds I or II is ridiculous, especially given that a good deal of his net worth is invested in those entities.”

Well, yes and no. Paine’s response is perfectly logical with one big caveat: He was out raising a new fund (which has since closed, albeit unannounced). More than a few firms rush existing portfolio companies to the exit when securing new LP commitments, in an effort to show additional realizations. I’m not saying that’s necessarily what happened in this case – I honestly have no idea – but it’s not implausible. It’s also possible that Fox is suffering from a case of seller’s regret – having not sufficiently monetized the brand equity he had helped to build. Perhaps a cautionary tale to other founding GPs who are looking to exit come the next fund…

I’ve posted the entire complaint and supporting exhibits on peHUB. You can access them here (scroll to end).

Top Three

OpGen Inc., a Madison, Wis.-based provider of microbial genome analysis, has raised $23.6 million in third round funding. The deal represents a restart for OpGen, which last spring laid off two-thirds of its employees due to financial troubles. New backers include CHL Medical Partners, Highland Capital Partners and Versant Ventures, while return backer Mason Wells also participated. Other past investors had included Stonehenge Capital Co. and the State of Wisconsin Investment Board.

Melita Cable PLC, a Malta-based communications provider recently acquired by GMT Communications Partners, has agreed to acquire 3G Telecommunications Ltd., a portfolio company of M/C Venture Partners. The deal will enable Melita Cable to roll out Malta’s third wireless communications network, and gives M/C Venture Partners a minority ownership position in Melita.

Angelo Gordon & Co. is planning to raise $900 million for its fourth turnaround fund. The main vehicle will be targeted at $700 million, with a $200 million reserve fund raised for deals in excess of $75 million. In other Angelo Gordon news, the firm has hired Jeff Fienberg as a managing director and Harish Nataraj as a senior associate. Feinberg previously was a managing director with Alvarez & Marsal, while Nataraj was with Kohlberg & Co.

VC Deals

Tagsys, a provider of item-level RFID infrastructure, has called down the second $16 million tranche of its $35 million Series C round. Backers include JPMorgan Partners, DFJ Espirit (f.k.a. Cazenove Private Equity), Endeavour Advisors, Saffron Hill Ventures, Add Partners and Elliott Associates. The company has now raised around $80 million in total VC funding.

PowerReviews, a Millbrae, Calif.-based provider of customer reviews and social merchandising solutions for online retailers, has raised $15 million in new VC funding. Lehman Brothers Venture Partners led the deal, and was joined by return backers Menlo Ventures and Draper Richards.

Vantrix Corp., a New York-based provider of mobile multimedia adaptation and delivery solutions, has raised $12 million in Series B funding. JK&B Capital led the deal, and was joined by return backers SummerHill Venture Partners, Entrepia Ventures, BDC Venture Capital and Innovacom.

Mawell Ltd., a Helsinki, Finland-based health informatics company, has raised €8 million in VC funding from CapMan.

HubSpot, a Cambridge, Mass.-based online marketing platform for small and mid-sized businesses, said that it has raised $5 million in a funding round led by General Catalyst. A regulatory filing places the round at closer to $5.6 million.

Tapioca Mobile has raised an undisclosed amount of seed funding from Venrock. The San Diego-based company helps media companies and advertisers deliver video and rich media to consumers through their cell phones. As part of the deal, Venrock’s David Siminoff and Neeraj Choubey have joined the Tapioca board of directors.

Chlorogen Inc., a St. Louis-based developer of a protein-based therapy for gynecological cancer, has ceased operations, and is in the process of selling its technology assets. The company had raised over $15 million in VC funding from firms like Finistere Partners, Burrill & Co., Harris & Harris Group, Prolog Ventures and Redmont Venture Partners.

Buyout Deals

CVC Capital Partners has put its bid for Franco-Spanish tobacco group Altadis on hold until October due to credit concerns, according to La Gaceta de los Negocios. The report says that CVC is “very close” to abandoning the offer, which it originally made with PAI. The latter withdrew from the consortium after disagreement on the division of control if the deal went ahead. If CVC withdraws, it would leave the way clear for the UK’s Imperial Tobacco Group, which has offered €50 per share. Press reports over the last few months have said CVC may opt to buy Altadis’ logistics division as opposed to the whole company.

The Blackstone Group may enter the bidding for a 26% stake in Industrial Finance Corp. of India, according to The Economic Times. Blackstone declined to comment. Other suitors are reported to include Standard Chartered Bank, Citigroup, Reliance Capital, Barclays and UBS Securities.

Hancock Park Associates has agreed to buy Brown & Cole Stores LLC, a Washington state grocery store chain, out of bankruptcy. The Los Angeles-based firm will invest $40 million, as first reported by The Deal.

PNC Equity Partners has acquired Lone Star Overnight from Brazos Private Equity Partners, according to LBO Wire. No financial terms were disclosed. Lone Star Overnight is an Austin, Texas-based discount shipping company with less than $50 million in annual sales. It was acquired by Brazos in late 2002 from company founder Gary Gunter, who continues to serve as CEO. Houlihan Lokey Howard & Zukin advised Brazos on the sale.

PE Exits

BioMeriux (Paris: BIM), a French in vitro diagnostics company, has acquired BTF Pty. Ltd., a Sydney, Australia-based provider of quantitative reference standards for microbiological testing. No financial terms were disclosed. BTF had been owned by Kestral Capital and company employees.

VMWare Inc. (Nasdaq: VMW) has acquired Dunes Technologies, a Switzerland-based provider of IT process orchestration software for virtual environments. No financial terms were disclosed. Dunes had raised VC funding from Swiss firm Affentranger Associates.

PE-Backed M&A

GoAmerica Inc. (Nasdaq: GOAM) has agreed to acquire Hands On Video Relay Services Inc., a Rocklin, Calif.-based provider of audio and video communications for deaf and hard-of-hearing people. The deal is valued at approximately $69 million, including $35 million in cash and 6.7 million shares of GoAmerica common stock. Clearlake Capital will help finance the acquisition, via $5 million in equity financing and $40 million of committed senior debt financing.

ITSolutions, a Silver Springs, Md.-based provider of IT services to federal, state and local government agencies, has agreed to acquire Codin Solutions Inc., a Herndon, Va.-based provider of IT services to the U.S. federal government. No financial terms were disclosed. ITSolutions is backed by Edgewater Funds.

NRG Media, a Cedar Rapids, Iowa-based radio network, has purchased five radio stations in Lincoln, Nebraska. No additional information was disclosed. NRG was formed via a 2005 consolidation of radio stations owned by Waitt Media and NewRadio Group. Its shareholders include Alta Communications, Waitt Media and the McCarthy Group.

Firms & Funds

Thoma Cressey Bravo is talking to LPs about splitting into two independent operations, according to Private Equity Insider. The discussions are still in their early phase, but would result in name partners Orlando Bravo and Carl Thoma running one firm, with healthcare specialist Bryan Cressey running another.

Human Resources

Steve Goldby and Ken Song have joined Venrock as a partner and vice president, respectively. Both will be based in Menlo Park. Goldby spent the past nine years with Venrock-based materials science company Symyx Technologies, where he now serves as executive chairman. Before that, he was CEO of scientific information company MDL Information Systems. Song is a veteran biomedical researcher, with such organizations as MIT Whitehead Institute, UCSF and Fred Hutchinson Cancer

Reginald Mills has agreed to join Credit Suisse as a managing director and head of European equity private placements, effective next week. He previously spent six years with NM Rothschild, where he headed the private equity agency practice.

Dan Broderick has joined Prolog Ventures as its fourth partner. He previously was a managing director with Mason Wells.

Fred Niemeier has joined Baird Capital Partners as a Chicago-based vice president. He previously was with Danaher Corp., as global director of strategic sourcing and materials for the company’s Motion Business unit. BCP is the U.S.-based buyout fund of Baird Private Equity.

Steven Pidgeon and David Lewis have joined the Phoenix law office of DLA Piper as partners in the corporate and securities practice group. They previously were with Snell & Wilmer LLP.