PEHUB Wire: Wednesday, February 4, 2009

Last month, Senator John Ensign (R-NV) introduced legislation that would have provided a temporary suspension of income taxes for companies buying back their own distressed debt. The plan did not make it into the Senate’s economic stimulus package, but Ensign nonetheless managed to get a compromise that would amount to a massive bailout for private equity-backed companies.

For the uninitiated, companies are required to pay income tax on any “gains” made by buying back their own debt at reduced prices. For example, imagine that Wire Corp. negotiates with its lenders to buy back $1 billion worth of notes for $700 million. Wire Corp. would then be required to pay income tax on the $300 million difference. The original Ensign bill would have eliminated those taxes for 2009 and 2010, but the compromise would defer 2009 and 2010 payments until 2011 (at the earliest), and then allow them to be paid out over an eight-year period.

The U.S. Chamber of Commerce has been a chief proponent of both the original Ensign language and the compromise plan. As Chamber lobbyist Bruce Josten explains: “Giving temporary relief from income tax related to the cancellation of debt will fulfill the exact same purpose originally envisioned for the TARP program… It’s identical to what’s being provided for home mortgage holders, except that it only uses private sector money.”

Dean Zerbe, a former counsel to the Senate Finance Committee, also was supportive, but a bit more circumspect: “I think Ensign should be commended for finding a good middle ground that certainly will get through the Senate… But clearly this is something that will be more helpful to private equity-backed and big companies, than to the small and mid-sized companies I work with. They’re having a hard time getting banks to even return their calls, let alone negotiate debt buybacks.”

Finally, there was this line from the source who first alerted me to the language: “This is a lifeline for private equity firms that are over-levered… If these are good companies making good products, why shouldn’t they just go through the bankruptcy process? It may wipe out the private equity firm’s investment, but isn’t that part of the risk you take when you pile debt onto a company?”

For my part, I somehow agree with each of the above comments – perhaps reflecting my larger ambivalence toward bailouts. After much thought, however, I see this language as doing more good than harm. Yes, it’s a giant giveaway to the private equity firms, particularly given that they don’t plan to own these companies once the final tax bill comes due. But there is inherent value to corporate solvency, particularly until DIP financing returns en masse. People keep jobs, companies can make more capital expenditures, etc. If certain PE pros happen to get a mulligan for dumb deals, well then it’s a bitter pill worth swallowing.

That said, this bill also needs an addendum: Companies taking advantage of the tax deferrals should be required to pay interest on the deferred payments. It’s one thing for the government to lend a helping hand to companies in need, but quite another to subsidize their initiate mistakes. Hopefully the Senate heeds that call, although opposition from the Chamber of Commerce likely means it won’t.

*** I’ve heard some rumblings that venture capitalist Tony Sun is leaving Venrock, where he’s been working since 1979. The information is true, but also a bit premature.

Sun will leave the firm in the middle of next year, which also is around the same time that Venrock expects to be raising a new fund (last one raised in 2007). In other words, sounds like an orderly retirement…

*** A bunch of you participated in yesterday’s live-blog of the organized labor call. The full transcript is here, and I’ll have some thoughts in this space tomorrow.

Top Three

The Carlyle Group and KKR have made a joined bid for the roughly $3 billion in wireless assets that Verizon Wireless must divest as part of its acquisition of Alltel Corp., according to The Wall Street Journal. Other bidders reportedly include AT&T and Providence Equity Partners.

Siguler Guff has secured around $2.3 billion in commitments for its third distressed fund-of-funds, which had been targeting just $1.5 billion. A final close is expected within the next month. The New York-based firm also has secured more than $900 million for its second BRIC fund-of-funds, which is targeting $1 billion.

Josh Hannah has joined Matrix Partners as a general partner. He previously was co-founder and CEO of (now Betfair), a London-based developer of the world’s first online marketplace for sports betting.

VC Deals

Borrego Solar Systems Inc., an El Cajon, Calif.-based designer and installer of grid-tied solar electric power systems, has raised $14 million in new VC funding. No investor information was disclosed by the company, which was founded in 1980.

Wavesat, a Montreal-based provider of WiMax chipsets and software, has raised C$11.7 million in new VC funding. Return backers include BDR Capital, BDC Capital and Multiple Capital.

Delphix Inc., a Palo Alto, Calif.–based developer of database management solutions, has raised $8.5 million in Series A funding, according to an amended regulatory filing. Backers include Greylock Partners and Lightspeed Venture Partners.

Cambridge Broadband Networks, a UK-based provider of point-to-multipoint transmission equipment to telecom operators, has raised $7.5 million in new VC funding. Return backers include Accel Partners, Adara, Amadeus Capital Partners and TVM. It had previously raised around $66 million.

Eiger Biopharmaceuticals Inc., a Palo Alto, Calif.-based drug startup, has raised $7.1 million in Series A funding, according to a regulatory filing. Backers include InterWest Partners and Vivo Ventures. The company does not have a public website.

iWidgets, a San Francisco-based company that automates the process of embedding native applications into social networking sites, has raised $4.1 million in Series A funding. Opus Capital led the round, and was joined by University Venture Fund.

Mixpo, a Seattle-based provider of online video advertising solutions, has raised $4 million in Series B funding, as first reported by VentureBeat. Madrona Venture Group led the deal, and was joined by return backers Yaletown Venture Partners and Growthworks Capital. Mixpo previously raised $6.5 million.

National Payment Card Association, a San Francisco-based developer of a large-scale, low-cost debit settlement system, has raised $2 million from KPG Ventures.

South49 Solutions, a Sterling, Va.-based provider of solutions for managing distributed workforces, has raised $1.2 million in Series A funding led by Originate Ventures. As part of the deal, convertible debt holders like CIT GAP Funds were converted to equity holders.

Napo Pharmaceuticals Inc. of South San Francisco has raised an undisclosed amount of VC funding from Asset Management Company. The capital will be used to fund a wholly-owned subsidiary of Napo, which is in late-stage clinical development of an anti-diarrheal compound.

Buyout Deals

Apax Partners and market research firm GfK reportedly are circling Synovate, the market research arm of UK-based Aegis.

GMAC LLC, the finance company backed by Cerberus Capital Management (and the U.S. Treasury), reported a $7.46 billion fourth-quarter profit. This follows five straight losing quarters, and was based on gains from a debt swap.

JLL Partners has agreed to acquire PharmaNet Development Group Inc. (Nasdaq: PDGI), a provider of clinical development services, for $5 per share. The deal values PharmaNet at approximately $98 million, and will be financed by a $250 million equity commitment from JLL (used for the purchase and to retire $144 million in outstanding principal notes).

Small Bone Innovations has completed its acquisition of Link America Inc., developer of an ankle replacement system, from Waldemar Link Gmbh & Co. No financial terms were disclosed for the deal, which was first announced in early 2008. SBI was formed in May 2004 by the principals of Viscogliosi Brothers LLC, to developer and acquire technologies in the small bone and joined sector.

Spectrum Brands Inc. (OTC BB: SPCB) has filed for Chapter 11 bankruptcy protection. THL Partners holds a 23% stake in the battery maker, based on its 2005 sale of Rayovac Corp. to Spectrum for $1.2 billion. Spectrum was delisted from the NYSE last month.

PE-Backed IPOs

Tensar Corp., an Atlanta-based construction services company, has withdrawn registration for a $201.25 million IPO. It had planned to trade on the NYSE, with Lehman Brothers, Credit Suisse and Merrill Lynch serving as co-lead underwriters. Tensar shareholders include Arcapita (86.3%), Electra Private Equity (6.3%) and KRG Capital Partners. Tensar offers products and technologies for projects like high-performance roadways, earth retention structures, building foundations and erosion control.

TherOx Inc., an Irvine, Calif.-based developer of devices for cardiac ischemia patients, has withdrawn registration for a $100 million IPO. It had planned to trade on the Nasdaq, with Citi and UBS serving as co-lead underwriters. The company has raised over $120 million in total VC funding since 1995, including a $30 million Series J round earlier this year. Backers include Kleiner Perkins Caufield& Byers (27.8% pre-IPO stake), Integral Capital Partners (14.5%), New Science Ventures (14.8%) and Aperture Venture Partners (10.5%).

PE Exits

Finsbury Solutions, a London-based provider of spreadsheet management and control software, has acquired the assets of Compassoft Inc., a Scotts Valley, Calif.-based provider of SOX regulatory compliance and enterprise risk management software. No financial terms were disclosed. Compassoft had raised around $16 million in VC funding, from firms like Advanced Technology Ventures, Leapfrog Ventures and Wavepoint Ventures.

PE-Backed M&A

Enara Group, a UK-based portfolio company of August Equity, has acquired three companies: Beech Care and Nursing Agency, Companions Care and Freshford Homecare. No financial terms were disclosed. August Equity originally acquired Enara Group last November.

Peak Technologies, a Columbia, Md.-based systems integrator of supply chain automation and inventory management solutions, has acquired Integrated Labeling Systems, a Nashua, N.H.-based provider of automatic ID solutions to manufacturing, distribution, warehousing and healthcare facilities. No financial terms were disclosed. Peak Technologies is a portfolio company of Platinum Equity.

Univita Health, a platform portfolio company of Genstar Capital, has acquired Enurgi, a provider of Web services for connecting families and patients with clinical caregivers. No financial terms were disclosed. Genstar recently formed Unitiva via the acquisition of Long Term Care Group, an Eden Prairie, Minn.-based provider of outsourced services to the long term care insurance industry and the geriatric care market.

Firms & Funds

China International Capital Corp. (CICC) and Shanghai International Group (SIG) are forming a private equity venture that would manage up to 20 billion yuan ($2.9b). Named Golden Partners Capital, the effort is expected to invest in financial institutions like fund management firms, brokerages and banks.

Seidler Equity Partners, a Marina Del Rey, Calif.-based private equity firm, is targeting $400 million for its fourth fund, according to LBO Wire.

TPG Capital has ended talks about selling an ownership stake in itself to third-party investors, according to The Financial Times. The discussions had spanned two years, but broke down over valuation.

Human Resources

Lincoln Bloomfield Jr. has joined Pegasus Capital Advisors as an operating advisor. He has held several senior governmental positions, and most recently was a Presidential Special Envoy charged with reducing the threat to global aviation from shoulder-fired missiles.

Bejul Somaia has joined the India affiliate of Lightspeed Venture Partners as a managing director. He previously was co-managing director Twiga Fiberglass, an Indian building materials company.

Carmel Ventures has promoted both Itzik Avidor and Ronen Nir to the position of partner. Ronen previously served as a principal, while Itzik served continues to serve as CFO.

Shawn Collins, Thomas McCaffrey and Hank Weiss have joined Susquehanna Financial Group, as part of the special situations sales team. They previously were part of Citi’s Event Driven team.