peHUB Wire: Tuesday, August 18, 2009

Reader’s Digest yesterday announced that it will file for Chapter 11 bankruptcy protection, in order to facilitate a debt restructuring that would wipe out equity sponsor Ripplewood Holdings. It will be the year’s largest PE-backed bankruptcy that doesn’t have at least some relation to either the real estate (Masonite, Extended Stay, Station Casinos) or auto (Chrysler) industries, and apparently shows that not all 2007-era buyouts had loosey-goosey debt terms. Or perhaps Tim Collins just needs a lesson from Tony James in how to rewrite history…

The Ripplewood-led buyout was valued at $2.4 billion (including $800m of assumed debt), or $17 per share. This included a $275 million equity check from Ripplewood, and another $100 million from co-investors like C.V. Starr & Co., GSO Capital Partners, Merrill Lynch, Magnetar Capital, GoldenTree Asset Management and J. Rothschild Group.

And it was considered to be a bargain!

Ripplewood had originally offered to buy Reader’s Digest for $18.50 per share (twice), but was rebuffed by the company’s board of directors. It wasn’t until the stock price began plummeting that Reader’s Digest had a change of heart ($17.50 ended up representing a 25% premium to the prior 60-day trading average).

By early this year, however, three things were abundantly clear: (A) Ripplewood had massively overpaid, because it bought at the top of a market cycle; (B) Reader’s Digest could not handle the extra debt burden; (C) Ripplewood did not have an adequate plan to deal with A or B. In short, it was a lousy deal with lousy execution.

All of which brings us to the following comment by Reader’s Digest CEO Mary Brenner, as part of a statement announcing the debt-for-equity swap:

“We also thank our sponsor Ripplewood Holdings, who has provided inspired vision and stewardship over the last two and a half years, including during this process.”

Was she being ironic? Was she just thanking Ripplewood for her paychecks, given that they installed her in the first place? Did some well-meaning – but poor-thinking – PR flack write this, and Brenner just used her rubber stamp?

I understand the concept of not burning bridges (even if I have a tough time practicing it). But I don’t understand telling everyone that the bridge is sound, when all that’s left is ash.

*** Rosetta Stone yesterday pulled a secondary stock offering by two of its VC backers, just one week after filing for it in the first place. This came as part of a downwardly-revised Q3 earnings outlook, which sent the language software maker’s shares down as much as 29 percent.

There are obviously a lot of corporate governance and managerial questions raised by this sudden reversal, but I also wonder if it could have a chilling effect on the PE/VC-backed IPO market (Rosetta Stone kind of bridged the categorical divide). In other wo! rds, will investors worry that they’re being snookered by private equity sponsors? Just an idle thought…

*** Unrelated book promotion: Blew through Chuck Klosterman’s Fargo Rock City over the weekend, and only eight years after it was first published. Kind of like a self-affirmation tome for all of us with old Motley Crue albums stashed away somewhere… Great read, and has led to some loud notalgia to shake the home office’s foundation…

Top Three

Reader’s Digest yesterday announced that it will file for Chapter 11 bankruptcy protection, in order to facilitate a debt restructuring that would wipe out equity sponsor Ripplewood Holdings. Ripplewood led a $2.4 billion take-private buyout of Reader’s Digest in early 2007.

Rosetta Stone Inc. (NYSE: RST) yesterday cut its Q3 earnings outlook and scrapped a proposed secondary stock offering. Just last week, the company filed to offer 4.085 million shares, with sellers including ABS Capital Partners and Norwest Equity Partners. The company went public this past April.

KKR Private Equity Investors, the Amsterdam-listed affiliate of buyout firm KKR, has released second-quarter numbers, including mark-ups for portfolio companies D! ollar General and HCA.

VC Deals

Apptio, a Bellevue, Wash.-based provider of on-demand IT financial management software, has raised $14 million in Series B funding. Andreessen Horowitz Fund and Shasta Ventures were joined by return backers Greylock Partners and Madrona Venture Group. Apptio previously raised $7 million in late 2007.

Novomer Inc., an Ithaca, N.Y.-based developer of biodegradable plastics, polymers and other chemicals from renewable substances like carbon dioxide, has raised $14 million in Series C funding. OVP Venture Partners led the round, and was joined by return backers Physic Ventures and Flagship Ventures. Novomer previously raised $6.6 million.

Analogix Semiconductor Inc., a Santa Clara, Calif.-based chipmaker, has raised $10 million in Series! B-3 funding. Analogix has raised around $44 million since 2002. Keytone Ventures led the round, and was joined by return backers DCM, Globespan Capital Partners, JAIC and Woodside Fund. Analogix previously had raised around $34 million since 2002.

AdvanDx, a provider of molecular diagnostic products for bacterial infections,has raised $8 million in new Series C funding. Return backers include SLS Venture and LD Pensions.

InnoCentive Inc., a Waltham, Mass.-based operator of an online collaboration forum for scientists and scientific companies, has raised $7.3 million in Series B-2 funding. Return backer Spencer Trask Ventures led the round. The company previouly raised $15.5 million from Spencer Trask, Omidyar Networ! k and former parent company Eli Lilly & Co., a Salt Lake City-based provider of online crime-mapping solutions, has raised $7.2 million in Series B funding. Austin Ventures led the round, and was joined by return backer vSpring Capital.

Jambool, a virtual currency startup, has raised $5 million in second-round funding. Madrona Venture Group led the round, and was joined by return backer Bay Partners.

Scoreloop, a Munich, Germany-based provider of mobile social gaming infrastructure, has raised €2 million in first-round funding co-led by Earlybird and seed backer Target Partners.

Sequoia Capital India has acquired a 6.6% stake in listed knowledge process outsourcing company eClerx, for approximately Rs 43 crore. The seller was Burwood Ventures, based in the Virgin Islands.

Workface Inc., a Minneapolis-based provider of online identity management solutions, has raised an undisclosed amount of first-round funding led by Arthur Ventures.

Buyouts Deals

Hampson Industries PLC (LSE: HAMP) has sold its aerospace machining unit to Darwin Private Equity for 23.7 million. The unit employs 300 people in three UK facilities, and focuses on precision machining of metallic components for gas turbine engines and similar applications.

Tenaska Capital Management and Energy Spectrum Partners have formed Frontier Gas Services LLC, a joint venture that will acquire and operate midstream natural gas infrastructure assets. The firms are committingupwards of $250 million, combined.

Wynnchurch Capitalhas completedits acquisition of bankrupt auto parts supplier Proliance International Inc., for $21.5 million. Leveraged financing was provided by The Private Bank.

PE Exits

MySpace is nearing a deal to acquire, a Seattle-based social music directory service, according to TechCrunch. The deal reportedly is valued at “around $20 million.” In 2006, iLikeraised $13.3 million in strategic funding from Ticketmaster, in exchange for a 25% ownership position. Other shareholders include Khosla Ventures and Bob Pittman.

PE-Backed M&A

Global Learning, a Cary, N.C.-based provider of IT and business training, has agreed to acquire Nexient Learning, a Canadian corporate training and talent development company. Global Learning is a portfolio company of Welsh, Carson, Anderson & Stowe.

Hertz Global Holdings Inc. (NYSE: HTZ) has acquired the assets of Automoti Group Inc., an online marketplace for consumers to directly purchase used cars. No financial terms were disclosed. Hertz was acquired in a 2005 buyout by The Carlyle Group, Clayton Dubilier & Rice and Merrill Lynch Global Private Equity. The firms still hold a majority stake.

Major League Gaming, a New York-based professional video game league, has acquired Agora Games Inc., a Troy , N.Y.-based developer of video game community applications. No financial terms were disclosed. MLG has raised over $32 million in VC funding fromOak Investment Partners.

Primesight Ltd., a UK outdoor advertising company owned by GMT Communications Partners, has acquired the roadside assets of Titan Outdoor Advertising Ltd. No financial terms were disclosed for the deal, which includes 8,600 panels, consisting of 7,900 48-sheet panels and 700 96-sheet panels.

Towne Holdings Inc., a provider of air cargo ground logistics, has acquired Texas Land and Air. No financial terms were disclosed. Towne Holdings is a portfolio company of Charterhouse G! roup.

Firms & Funds

NGP Energy Technology Partners has closed its second fund with $348 million in capital commitments. The fund will make growth equity investments in companies offering tech-related products and services to the oil & gas, power, alternative energy and energy efficiency sectors.

Rockland Capital, an energy-focused PE firm with offices in New York and Houston, recently held a $94.5 million first close on its debut institutional fund, according to LBO Wire. The fund is being marketed with a $350 million target and a $500 million cap.

Human Resources

Jeremy Busch has joined Huron Capital Partners as a principal in the firm’s new Toronto office. He previously was with TorQuest Partners and, before that, Wind Point Partners.

Ben Choi has joined Seattle-based venture capital firm Maveron as a principal. He previously was a principal with Storm Ventures, working with portfolio companies like Ad Infuse, Adgregate Markets, DeviceVM, Marketo and YieldBuild. Prior to Storm, Choi was VP of strategy with Greystripe, and also spent time with In-Q-Tel and RRE Ventures.

Berkshire Partners has hired five new associates: Neel Bhargava, previously a senior associate consultant with Bain and Co.; Joshua P! lavner, previously an analyst with Goldman Sachs; Justin Hupp, previously a senior associate consultant with Bain and Co.; Eric Weiner, previously a senior associate consultant with Bain and Co.; and Kevin Koslosky, previously an analyst with Goldman Sachs.

Tom Tuft has agreed to join Lazard as chairman of the firm’s global capital markets advisory, and vice chairman of U.S. investment banking. He begins work at Lazard in November, and previously was chairman of Goldman Sachs’ equity capital markets group.

Temasek has not set a deadline to replace CEO Ho Ching, who unexpectedly resigned last month.