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t o d ay ’ s t o p s t o r i e s f r o m t h e d e a l p i p e l i n e
MONDAY
JULY 11, 2011
VOLUME 22 ISSUE 132
FULL STORY >
The Apostolous, owners of the bankrupt Giordano’s pizza chain, regret enlisting the help of a dubious character
One slice short of a pie
By aviva Gat
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INDEX
TOP STORYThe Apostolous, owners of the bankrupt Giordano’s pizza chain, regret enlisting the help of a dubious character page 6
SENSE Of ThE maRkETSNot many companies go out for their initial public offering dragging along the ghost of a $3.65 billion Ponzi scheme. But Bluestem Brands is doing just that as it prepares to raise $150 million page 9
mOvERS & ShakERSPersonnel changes at Marks and Spencer, UBS, Barclays Capital and other firms page 10
bRIEflY NOTEDPhillips Plastics•Medisize•Ratos, SK Telecom• STX Group•Hynix Semiconductor, Paine & Partners•Scanbio• Verdane Capital page 11
m&aAfter the successful spinoffs of AMC Networks and Madison Square Garden, the Dolans may be ready to reprise an old act: Taking Cablevision private page 12
Forest Laboratories, with five recently approved products and one of Wall Street’s best-known activist investors pushing for change within the company, is being targeted as an attractive acquisition page 13
aRbITRagEA Florida municipal authority and some towns in the Carolinas are trying to squeeze a little juice out of Duke Energy, Progress Energy and the companies’ pending $13.7 billion merger page 14
ThE DaIlY DEalSFor a summary of current risk arbitrage situations, click here
PRIvaTE EquITYA slew of midmarket dividend recapitalizations launched over the past week are putting money in the hands of sponsors, while refinancing debt at favorable terms for companies purchased around the time of much tighter credit markets page 15
mIDDlE maRkETManagement of Steinway Musical Instruments is making an unsolicited offer to acquire the company’s band and online divisions, potentially unraveling an ambitious rollup page 15
REgulaTIONNearly 100 European banks will soon receive report cards on the state of their capital health when the European Banking Authority publishes the results of its long-awaited stress test page 16
Christine Varney’s announcement that she will leave the Department of Justice’s antitrust division and return to private law practice reveals a strong amount of goodwill toward her from public advocacy groups page 17
IPOsSilver Spring Networks, a venture-backed provider of smart-grid technologies, files plans to raise $150 million page 18
aucTION blOckExtended information on companies that are new on the block and just off the block, along with the latest updates on auctions that continue to run page 21
The beginning of search funds is the professional coming-of-age story of two Harvard Business School graduates as they launched careers as newly minted MBAs page 23
fEEDbackTell us what’s on your mind page 19
cOmPaNY INDEXpage 20
ThE DEal PIPElINELinks to current content page 3
ThE DEal magazINELinks to the current issue page 4
aSSISTaNT aTTORNEY gENERal vaRNEY
2 ThE DaIlY DEal m O N D aY J u lY 1 1 2 0 1 1
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THE DEAL PIPELINE
Top restaurant bankruptcy filings, past 12 months
Debtor: Sbarro Inc.Court: Southern District of N.Y.Filing date: April 4Assets: $471,006,000Liabilities: $486,557,000
Debtor: Perkins & Marie Callender’s Inc.Court: DelawareFiling date: June 13Assets: $289,998,000Liabilities: $440,824,000
Debtor: Priszm Income Fund (KFC, Taco Bell, Pizza Hut franchisee)Court: OntarioFiling date: March 31Assets: $115,377,000Liabilities: $141,419,000
Debtor: CB Holding Corp. (Charlie Brown’s steakhouses)Court: DelawareFiling date: Nov. 17, 2010Assets: $100,000,001Liabilities: $115,013,649
Debtor: Claim Jumper Restaurants LLCCourt: DelawareFiling date: Sept. 10, 2010Assets: $50,000,001Liabilities: $100,000,001
Source: The Deal Pipeline
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MOSt RECEnt AuCtIOnS• Pfizer Inc. - nutrition division -
07/07/2011• Pfizer Inc. - animal health
division - 07/07/2011• Delta Petroleum Corp. -
07/06/2011
MOSt RECEnt BAnkRuPtCy• Omega Navigation Enterprises
Inc. - Filing - 07/08/2011• All American Pet Co. - Warning -
07/07/2011• Real Racing Club de Santander
SAD - Filing - 07/07/2011
MOSt RECEnt M&A• Apac Customer Services Inc. -
07/07/2011• Core Performance LLC -
07/06/2011• HomeForm Group Ltd. - Sharps
Bedrooms division - 07/06/2011
MOSt RECEnt FInAnCIngS• FKF Madison Park Group Owner
LLC - Exit - 07/01/2011• Infineta Systems Inc. - VC -
07/01/2011• BlackLocus - VC - 07/01/2011
Exclusive VideoGroupon IPO to pave way for M&A ‘It sure feels that this is a sector that’s ripe for consolidation,’ says Mary Kath-leen Flynn, senior editor at The Deal, regarding the online coupon industry in the wake of Groupon’s $750 million IPO filing.View all videos
3 THE DAILy DEAL M o N D Ay J u Ly 1 1 2 0 1 1
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Contents
The Deal magazineIssue of June 27-July 24, 2011
Corporate dealmakingBioTech BillionaireR.J. Kirk has quietly built a sterling record investing in and run-ning some of the riskiest businesses around—and he’s done it from bucolic southwestern Virginia by David Holley
private equity deals of the year Mission accoMplisheD (MosTly)Four years after the financial crisis, private equity is beginning to rack up some impressive exits, whether from M&A or IPOs. There are, as always, exceptions by David Carey
DiscorDanT noTesTerra Firma’s Guy Hands hopes investors will overlook his disas-trous exit from historic British music company EMIby Jonathan Braude
The 3G wayBurger King’s story highlights a successful turnaround, a profitable exit and an unusual twist under new ownership by Taina Rosa
sunshine sTaTeA consortium assembled by John Kanas bought a failed Florida bank and scored a partly realized gain of 130% by Michael Rudnick
sweeT revenGeRich Kinder blew out of Enron to build Kinder Morgan 15 years ago. Now he and his partners reap the rewards in an IPOby Claire Poole GooD TiMes, BaD TiMesDespite the music industry’s travails, THL ekes out a respectable return from beleaguered Warner Music Group by David Carey
reThinkinG chinaCarlyle’s bet on China Pacific produced pretty major returnsby Lisa Ward
lovin’ The BiG MacAn investor group sinks its teeth into rich returns from a buyout of a Latin American McDonald’s franchisee by Taina Rosa
social GracesSequoia and the founder of LinkedIn were the biggest winners in the social networking site’s IPOby Olaf de Senerpont Domis
BaGel runSun Capital feasted on generous returns on its investment in Brueg-ger’s after an arduous turnaroundby Demitri Diakantonis
BlooD, sweaT anD TearsAfter a grueling yearlong ordeal, Cerberus finally won antitrust ap-proval for its sale of plasma products maker Talecris by Bill McConnell
faT pipesDecember witnessed Numerous deals involving fiber-optics net-works, but fibertech’s was unique in many aspects
when seconD BesT isn’T BaDA few notable exits that almost made the grade, and one big loser
dealmakersMovers & shakers MeMorializinG Joe floM and sanDler’s insurance Duo
Deal diary inG, pnc financial, enerGy Transfer equiTy
due diligenCeoh, BehaveIn her tenure as antitrust chief at the DOJ, Christine Varney has settled on monitoring a merged company’s actions after the deal is done. There are those who don’t believe that’s going to matter much by Bill McConnell
BlockBusTer BlockBusTerWith more plot twists than a Hollywood thriller, and a cast of no-tables, the auction of the big video rental company provided some gripping drama and a new owner. Now the hard part begins by Ben Fidler
MarchinG orDersThe EC demanded the asset sales, but ING chief Hommen made his own smart—and fast—moves, including a $9 billion sale of a U.S. online bankby Renee Cordes
voice of the deal economy. 9 . 11 27 — 24 2011
ANTITRUST Varney’s remedies page 14 AUCTIONS blockbuster blockbuster page 19
CORPORATE DEALMAKING Virginia’s biotech billionaire page 40
PRIvATE EqUITy DEALS Of ThE yEAR big exits, hot auctions, robust ipos and the ineVitable disaster page 46
All users of The Deal Pipeline can receive a complimentary annual subscription to The Deal magazine
Click here to request a copy today.
T o s e e f u l l s T o r y , c l i c k o n T h e h e a d l i n e
Continued >
4 the daily deal m o n d ay J u ly 1 1 2 0 1 1
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View from the City Not so fast
Corporate dealmaker traNsformers
silicon Valley specialthe gamblers
follow the money UNlimited diVideNds
risk arb Update
CommentarytraNsaCtioNs
media maneuvers tiNy bUbbles
backstory the eNd of mass media?
safe harbor Cross-poNd lessoNs
rules of the road CleaNiNg the pool
soapbox esops’ promise
industry insightCoNtraCt hit
Judgment call retUrN of the toaster?
the deal magazineIssue of June 27-July 24, 2011
voice of the deal economy. 9 . 11 27 — 24 2011
ANTITRUST Varney’s remedies page 14 AUCTIONS blockbuster blockbuster page 19
CORPORATE DEALMAKING Virginia’s biotech billionaire page 40
PRIvATE EqUITy DEALS Of ThE yEAR big exits, hot auctions, robust ipos and the ineVitable disaster page 46
All users of The Deal Pipeline can receive a complimentary annual subscription to The Deal magazine
Click here to request a copy today.
T o s e e f u l l s T o r y , c l i c k o n T h e h e a d l i n e
Contents
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TOP STORY
Home is where the Giordano’s mess liesThe Apostolous, owners of the bankrupt pizza chain, regret enlisting the help of a dubious character
When Efren and Joseph Boglio missed their mother’s deep-dish, double-crusted pizza, they started a retail chain, Giorda-no’s, and used her recipe. When the current owners of that chain missed having control of it, they made a more perilous decision—they joined forces with someone named Marshall E. Home.
Home on July 1 was arrested for bank-ruptcy fraud in Tucson, Ariz., by the FBI. Giordano’s Enterprises Inc. sits in bank-ruptcy under the control of a Chapter 11 trustee. And John and Eve Apostolou, who acquired Giordano’s in 1988, are hoping to find investors to buy the company out of bankruptcy who will reinstall them to run it.
But it won’t be easy for the Apostolous. While they concede that they received what their attorney said was some “very bad advice” from the octogenarian Home, they did fire debtor counsel and made trou-bling if odd accusations, such as alleging that Chapter 11 trustee Philip V. Martino was attempting a hostile takeover of the company.
Their relationship with Home will likely be spotlighted on July 21 when Judge Pa-mela S. Hollis of the U.S. Bankruptcy Court for the Northern District of Illinois in Chi-cago will hold a hearing on a motion that Martino filed on June 8 seeking to impose monetary sanctions on the 81-year-old Home.
Martino, who is under pressure to find a buyer for Giordano’s by Tuesday to comply with the terms of the company’s debtor-in-possession loan, said in court papers that Home’s actions have interfered with his ad-ministration of the estate and have forced him to spend time and money “clarifying the confusion created by Home” to the me-dia and parties interested in bidding on the debtor.
The Apostolous, he added, welcomed Home’s involvement in the case. Martino
said that when he was first appointed, John Apostolou approached him and said he was going to bring in his “partner,” Home, to help out in the bankruptcy case.
The company filed for Chapter 11 on Feb. 16, and the Apostolous were removed from management of Giordano’s on May 12. It was then they enlisted the help of Home, a serial filer of lawsuits in Arizona who promised them he could navigate the courts, have the trustee removed and re-solve the bankruptcy proceedings, said the couple’s lawyer, Zane D. Smith of Zane D. Smith & Associates Ltd.
“The Apostolous did not realize Home was—how should I put this?—a different thinker,” Smith said. “If you listen to him, he spins a good story.”
Who is Marshall Home? A self-pro-claimed billionaire who runs one business, Mortgage Rescue Service, which, for $500, will try to save someone who defaults on a mortgage from foreclosure—a curious line of work, considering his own Pima County, Ariz., residence was foreclosed on in 2009. The quirky Home announced his candi-dacy for mayor of Tucson in March only to withdraw in June because he’s not a resi-dent of the city. He and his wife, Mary, have started a political party, the International Rights Party, whose platform is based on individual freedoms and a mistrust of the government.
But Home’s real claim to fame has been his recent rampant use of the bankruptcy courts. He has filed 173 proofs of claim against the federal government and the state of Arizona worth $2.5 trillion, and involuntary bankruptcy has become his new passion. He led petitioners in an in-voluntary bankruptcy filed on March 16 in the U.S. Bankruptcy Court for the District of Arizona in Tucson against the federal government and the state of Arizona. The Apostolous were among the petitioners in that case, too.
It’s unclear when the Apostolous and
Home met. Smith thinks they met at the beginning of the year through a mutual ac-quaintance. In documents, Home said the Apostolous were “defenseless” when he met them, so he decided to help them out.
Home quickly unleashed his profligacy on the Chicago court, filing a $150 million proof of claim in the Giordano’s case, as well as several other motions alleging con-spiracies, treason and embezzlement by the bankruptcy court, the Chapter 11 trustee and Giordano’s’ previous lawyers. Home’s accusations culminated in a hearing on June 28 when Hollis barred him from filing any more documents in the case without previous authorization.
Undaunted, Home filed another docu-ment on June 30—a notice of appeal of the decision to the U.S. District Court for the Northern District of Illinois in Chicago.
But Hollis’ decision seemed to be a tip-ping point for the Apostolous, who started to disavow their involvement with Home. Smith said that the Apostolous listened to Home and his “wacky ideas” onlybecause they were desperate to remain in control of their company.
“They were grasping for straws,” he said, “and he made them promises.”
Damage had already been done, howev-er. On Home’s advice, on June 27 the Apos-tolous had filed documents with the Chica-go court accusing Martino, the Chapter 11 trustee from Quarles & Brady LLP, of al-lowing Giordano’s vice president, Allen Ay-nessazian, to “fake the company’s all secret recipe” and purchase poor quality ingredi-ents. They also said Martino has “stirred up animosity, hate, discontent, uncertainty, and [a] hostile environment” in Giordano’s, and said Martino is trying to “destroy not only the business but along with it thou-sands of families who are employed by the company.”
Home also filed an adversary complaint
CONTINUED >
by aviva gat
6 ThE DaIlY DEal M O N D aY J U lY 1 1 2 0 1 1
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TOP STORY
against Martino, but he attached it to his in-voluntary bankruptcy filing against the fed-eral government and Arizona that he filed in Tucson.
Martino notified Home in a May 16 let-ter filed with the court that he wasn’t au-thorized to sue a trustee without prior per-mission from the bankruptcy court. Then Judge Eileen W. Hollowell of the Tucson court threw out the involuntary case and the adversary complaint in a May 18 order that also barred the petitioners from filing any more pleadings in that court, labeling Home a “vexatious litigant.”
But Home still had the $150 million proof of claim he filed in the Chicago court, asserting perfected security interest in all of Giordano’s assets. He also notified Gior-dano’s prepetition and debtor-in-possession lender Fifth Third Bank about his lien and offered to settle the case with the bank, documents show.
Fed up, Martino filed the motion seek-ing to impose monetary sanctions on Home, hold him in contempt and allow him to purge the contempt by withdrawing his proof of claim, which Martino called “fraudulent.”
“Home’s actions should not be dismissed as the harmless antics of an impotent crank,” Martino wrote. “They are potentially much more dangerous to the Debtors’ estate than his scores of pointless filings in the Arizona Bankruptcy Court.”
Certainly, the Apostolous didn’t think of him as a crank when they followed his advice. Home said he had advised the Apos-tolous to fire Michael L. Gesas of Arnstein & Lehr LLP as debtor counsel—which they did—after “prudent review” because he believed Gesas and Giordano’s chief re-structuring officer, Fred Caruso of Devel-opment Specialists Inc., were attempting a “hostile takeover” of Giordano’s by “de-liberately failing to file the court ordered financial reports promptly” and failing to pay the U.S. trustee. (In a separate motion, Home accused Martino and Caruso of try-ing to engineer a hostile takeover, too.)
Now that Home has been arrested in Ar-izona on two counts of false claims in bank-ruptcy related to the involuntary petition filed against the federal government, the
Apostolous’ judgment will be scrutinized only more. Martino isn’t likely to be sym-pathetic; he is obligated to find a buyer for Giordano’s under the DIP agreement with Fifth Third Bank. The $35.98 million DIP included $2.5 million in new money, but in a May 20 motion filed by Martino, the new-money portion was increased to $3.5 mil-lion. Also under the amendment, which the court approved May 27, Martino must deliv-er at least one letter of intent from a poten-tial purchaser by July 12. An asset purchase agreement must then be finalized by July 26 and a sale motion must be filed by Aug. 5.
Smith said the couple didn’t participate in the Arizona and federal government in-voluntary filing, asserting that Home listed them among the petitioners without their consent. Indeed, he may find some support in the complaint that led to Home’s arrest. According to the complaint, Home added the Apostolous to the involuntary petition, saying that they had a $100 million claim against the federal government.
The couple, who purchased Giordano’s in 1988, are now looking for investors to help pull Giordano’s out of bankruptcy, and anticipate being reinstated as the com-pany’s management upon emergence from bankruptcy, Smith explained.
Martino, on the other hand, said he has received no concrete proof that the Apos-tolous have sufficient funds to pull the com-pany out of bankruptcy even though the couple has indicated several times that they
have the ability to fund an emergence from bankruptcy.
Martino stressed that the company will be sold to the highest bidder during the auc-tion process and that the bidder could very well be the Apostolous. The Apostolous, however, have not made a proposal. “I wel-come Mr. Apostolou to make an offer,” he quipped.
Judge John H. Squires—who, like Hol-lis, is sitting in on the case for Judge Eugene R. Wedoff until he returns from a sabbati-cal on Sept. 1—ordered John Apostolou and anyone acting as his agent to stay away from Giordano’s premises when he appointed Martino as trustee, but Smith said that was entirely to avoid confusion among Gior-dano’s employees and not reflective of the Apostolous’ management.
Smith said that the company has been operating at a profit even in bankruptcy. What doomed the 45-store chain to Chap-ter 11 was a poor decision to invest in real estate and open new locations in Florida, he noted.
“Giordano’s is a fantastic company with a great future,” Smith said about the chain the Boglios, both Italian immigrants, founded in 1974 in Chicago. “The Apostolous were just the victims of some bad advice."
That may be, but they still have a consid-erable amount of explaining to do and many bridges to mend thanks to a relationship with Marshall Home from which they may never recover. n
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SENSE OF THE MARKETS
Not too many companies go out for their initial public offering dragging along the ghost of a $3.65 billion Ponzi scheme. But Bluestem Brands Inc. is doing just that as it prepares to go public with plans to raise $150 million, according to the company’s amended S-1 filing on Thursday.
Minnesota-based Bluestem was formerly known as Fingerhut Direct Marketing Inc., an old-time mail-order catalog company that switched over to the Internet when the time was right.
As a Minnesota small-business success story, Fingerhut was a natural for home state boy made good, Tom Petters, who bought the company from Federated Department Stores Inc. in 2002 as he was amassing a corporate empire that eventually included
Sun Country Airlines and Polaroid.Bain Capital Venture Partners came
in as an investor in Fingerhut alongside Pet-ters two years later with a $62.5 million eq-uity investment.
But that was then and this is now. Pet-ters was convicted of fraud in 2009 and is now sitting in maximum-security federal prison in Leavenworth, Kan., serving a 50-year prison term for running a Ponzi scheme.
Bluestem had to warn prospective inves-tors that it may still be on the hook for liabil-ity arising from the activities of its former owner. The trustee overseeing the liquida-tion of Petters Co. is attempting to recover funds from current and former Bluestem officials, based on their connections to Pet-ters.
In addition to Bluestem’s CEO, Brian Smith, who was paid $158,440 to indemnify him against the trustee’s clawback effort, four former Bluestem directors face $12.7 million in claims. One of those directors put in an indemnification claim for $3.8 million, which Bluestem rejected. The others have not presented claims.
There have been no allegations that Bluestem or any of its employees or direc-tors acting for the company were engaged in wrongdoing.
Petters’ trustee, Douglas Kelley, of Min-nesota law firm Kelley, Walter & Scott PA, did not return calls seeking comment.
A spokeswoman for Bluestem declined to comment further, citing the offering’s quiet period.
One thing likely to hearten Bluestem and its investors—who, through the trustee, in-clude the victims of Petters’ Ponzi fraud—
Bluestem tries to shed Petters’ baggage
By Paula SchaaP
CONTINUED >
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Manvinder Banga will become a nonexecutive direc-tor on the board of Marks and Spencer Group plc in September. He is an operating partner of private equity firm Clayton, Dubilier & Rice LLC. Prior to this, he spent 33 years at Unilever plc, where he was the former president of the global foods, home and personal care businesses and a member of the executive board. Banga is a nonexecutive director of Thomson Reuters and Maruti Suzuki India Ltd.
In September, Michael Ruppert will join UBS as a managing di-rector in its global industrial group, focusing on defense. Earlier, he worked in the aerospace and defense group at Lazard. Previ-ously, he spent eight years at Lehman Brothers Holdings Inc.
Barclays Capital tapped Kenichi Onuma as head of equity capital markets, Japan. Onuma will join from J.P. Morgan Securities Japan, where he was an executive director in equity capital markets. He joined J.P. Morgan in 2002 after two years at Goldman, Sachs & Co. in Japan. He also worked in the equity syndicate department at Nomura Securities Co. Ltd.
Madison Williams and Co. hired Leland Gershell as a manag-ing director and biotech and specialty pharmaceutical analyst. He worked at Favus Research LLC, an independent equity research firm. Earlier, Gershell was a senior analyst at Apothecary Capi-tal LLC and spent four years at Cowen and Co. LLC, where he covered biopharmaceutical companies.
Southlake, Texas-based private equity firm Insight Equity Holdings LLC added James Jackson as a vice president and Daniel Davidson as an analyst.
Jackson was an associate with PE firm Audax Group, execut-ing investment opportunities in the distribution, media, business services and healthcare industries. Prior to Audax, he was a busi-ness analyst with McKinsey & Co.
Davidson joins from FTI Consulting Inc., where he was a senior consultant in the corporate finance, turnaround and restructuring group.
David Rubinsky recently joined Simpson Thacher & Bartlett LLP as a partner in the executive compensa-tion and employee benefits group, based in New York. Rubinsky advises executives and employers on execu-tive compensation and other employee benefit matters in connection with mergers and acquisitions, and indi-vidual and group employment and severance negotia-tions. He was with Willkie Farr & Gallagher LLP.
Quarles & Brady LLP announced that Scott Bremer joined the firm’s Chicago office as a partner in the public finance group. He was a partner at Pugh, Jones, Johnson & Quandt PC.
Morgan, Lewis & Bockius LLP will bring in Martin Stewart-Smith as partner in its energy transactions practice, resident in London. He was previously with Simmons & Simmons.
Perkins Coie LLP said patent lawyer Joseph Reid joined the firm as a partner in the firm’s patent litigation practice. He was most recently a principal at Fish & Richardson PC in San Diego.
Loeb & Loeb LLP tapped Brian Arnold for its Los Angeles office as a partner in the patent litigation practice. He comes in from Thomas Whitelaw, where he was a partner. Prior to that, Arnold was a partner at Kirkland & Ellis LLP.
Jack Griem recently joined the firm’s patent litigation prac-tice in New York from Milbank, Tweed, Hadley & McCloy LLP.
Debevoise & Plimpton LLP said corporate lawyer Natalia Drebezgina and litigators Michael Schaper and Shannon Selden became partners of the firm. Drebezgina is resident in the Moscow office, while Schaper and Selden are in New York.
Huron Consulting Group announced that Judith Bachman joined the firm as a managing director in its education practice, focused on academic medical centers.
Bachman joins from Thomas Jefferson University and Thomas Jefferson University Hospital, where she was senior vice presi-dent for strategic initiatives. n
MOVERS & SHAKERScompiled by baz Hiralal
is that Kelley has gotten court approval to waive any future claims, other than those outstanding against the four directors.
When it unraveled, Petters’ scam, like most frauds, appeared simple in concept. The scheme involved persuading inves-tors, including hedge funds, to make loans on commercial paper backed by big-box store appliances, such as refrigera-
tors and wide-screen TVs.For the hedge funds, that kind of invest-
ing was known as asset-backed lending. It was a strategy, in a world of fast trading and hedging, regarded as stodgy and relatively safe because, unlike complicated finan-cial instruments, there was really a “there there.”
Petters marketed his ABL funds so well that they became known in the hedge fund world as as the “Petters trade.”
There was only one problem: the TVs, the refrigerators, the other big appliances simply did not exist.
One suspicious investor was even taken out to a warehouse by a Petters confederate to view the goods that supposedly backed up the loan. Which would have been all well and good, except that Petters’ company didn’t own any of it.
That sort of history is not helpful to a re-tailer about to tap the capital markets. n
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BRIEFLY NOTEDEDITED by ThE DaIly DEal sTaff
Ratos unloads Medisize foR Modest gainListed Swedish private equity firm Ratos AB has agreed to sell portfolio company Medis-ize Corp., a medical device maker, to Phillips Plastics Corp. for about ¤99.8 million ($142.3 million), the parties said Friday. Ratos said it will rake in a gain of 40 million Swedish kronor ($6.3 million) and an average annual inter-nal rate of return of about 4%. Ratos has owned Medisize, a Vantaa, Finland-based con-tract manufacturer specializ-ing in medical devices for drug delivery, since 2008. Phillips Plastics, backed by Kohlberg & Co. LLC, is a global contract
maker of high-tech products, with revenue of about $250 million. A Ropes & Gray LLP team that included William Shields, Thomas Draper, Eric Elfman, Peter Alpert, David Djaha, Charles Larsen, Gregory Levine and Loretta Richard advised Kohlberg. —Vyvyan Tenorio
Hynix seMiconductoR dRaws coMpeting bidsSK Telecom Co. Ltd. and STX Group said Friday that they submitted bids to buy a 15%, W2.4 trillion ($2.3 bil-lion) stake in Hynix Semi-conductor Inc., the world’s second-leading memory chip producer. The two South
Korean companies said they sent letters of intent to the semiconductor company’s creditors-turned-sharehold-ers to purchase the stake before the bid deadline. Ko-rea Exchange Bank, which is leading the group of nine creditors, said no other bid-ders emerged. Creditors have affirmed that they want to select a buyer in August and complete the sale by year’s end. —Evan Klonsky
paine & paRtneRs nets scanbio MaRineChicago-based Paine & Part-ners LLC said Friday it will acquire Trondheim, Norway-based Scanbio Marine Group
from Scanbio AS for an un-disclosed amount, expanding its exposure to the seafood sector. The sellers are Oslo’s Verdane Capital Advisors and management. According to Verdane, the target, which makes fish protein, fish meal and fish oil, posted Ebitda growth of about 30% under its ownership over the past seven years. Upon closing in the third quarter, CEO Per Arne Eide will retire and Carl Eide, Scanbio’s deputy CEO, will take his place. Reykjavik, Iceland-based Markó Part-ners was Paine & Partners’ financial adviser and Oslo’s ABG Sundal Collier advised Scanbio AS. n —Taina Rosa
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Who hasn’t enjoyed the Dolans? The reign-ing family of Cablevision Systems Corp. put the fun in—well, you know—before that phrase even entered the lexicon.
Take, for example, the intrafamily skir-mish swirling for much of the past decade over patriarch Charles Dolan’s obsession with satellite broadcasting, despite Cable-vision’s standing as a premier cable com-pany. Consider, too, the widely held view that Charles’ son Jim so covets his night-time role as front man and rhythm guitar-ist for JD & the Straight Shot that, if he had his druthers, he’d sleep through his day job as Cablevision president and CEO. (Some suspect he does anyway.) And let’s not for-get the many times the Dolans have tried to take their public company private, even though they’ve always run the thing as if that were already the case.
However, for Cablevision investors, there’s even more joy. Over the past six years, the Dolans’ leadership of Cablevision and artful spinning of two of its units have added more than $10 billion to sharehold-er value. That’s right, from October 2005 to last week, the market capitalization of Cablevision and spun companies Madison Square Garden Inc. and AMC Networks Inc. grew from $5.3 billion to $12.9 billion. Throw in the extra $3 billion from a tax-free special dividend that Cablevision paid out in April 2006, and the $10.6 billion in added value represents a 200% gain.
Such is the magnitude of Cablevision’s pure-play payday. And to think it all began with a letter, dated Oct. 24, 2005, in which a defeated Dolan family withdrew an unchar-acteristically complicated take-private bid. As a consolation prize, it would seem, the withdrawal letter also recommended board consideration of what Cablevision would later call “a $3 billion one-time, special divi-dend payable pro rata to all shareholders.”
Although it took a half-year to push
through their dividend request, the Dolans still weren’t content. They ten-dered another take-private proposal, this one for $27 per share, in October 2006. And after much discussion they revised their offer, to $30 per share, in January 2007. When that didn’t work, they came back with what Cable-vision declared in May 2007 to be a “definitive merger agreement” to take out its public interest for $36.26 per share. But this much discussed and often derided proposal lost out on a vote taken at a special shareholders’ meeting in October 2007.
Less than a year later, the Dolans were up to their old tricks—only this time on be-half of all shareholders. A Cablevision re-lease in August 2008 confirmed as much by noting the company would “explore several strategies for bringing the market value of the company’s common stock more closely in line with the underlying operating per-formance of the company. … Separately, as part of this strategic review, the board au-thorized the company to explore the spin-off of one or more businesses.”
Cablevision’s MSG business wound up being the first to receive such treatment. The board authorized management to con-sider a spinoff in May 2009 and severed its ties to MSG on its becoming a standalone in February 2010. Cablevision achieved the spin by giving its shareholders one MSG share for every four parent-company shares in their possession. It also had MSG main-tain the distinction between Class A stock (with one vote per share) and Class B stock (with 10 votes) that sustains Dolan control over substantive corporate matters.
Along the way, on explaining the ratio-nale for spinning MSG, Jim Dolan noted that both the parent company and the spin
company were “leaders in their industry with their own defined business focus and clear investment char-acteristics.” Specifically, after acquiring a majority stake in MSG properties in 1997, Cablevision recon-figured them into three business segments: MSG Sports, which includes the New York Knicks; MSG En-tertainment, which man-
ages and creates events at Madison Square Garden, Radio City Music Hall and other venues; and MSG Media, which comprises all MSG television networks as well as mu-sic-TV network Fuse.
The three segments were “strategically aligned to work together to drive its over-all business,” Cablevision explained, “and built on a foundation of iconic venues and compelling content that MSG creates, pro-duces, presents and/or distributes through its programming networks and other media assets.” And, sure enough, the foundation proved sturdy enough for MSG to emerge with a market cap of $1.4 billion, which has since grown to $2.1 billion.
Next up was Cablevision’s portfolio of programming assets—known officially as Rainbow Media Holdings LLC—dominated by such cable channels as AMC, IFC, Sun-dance Channel and WE tv. Cablevision’s board authorized an exploration of spinning these assets in November 2010 and complet-ed the job with the emergence of AMC Net-works Inc. (a rebranding of Rainbow) as a standalone on July 1. Making the task easier this time was Cablevision’s replicating the template for the MSG spin, including a one-for-four stock distribution and maintenance of the Class A-Class B distinction.
AMC, which has just completed its first
by richard morgan
From the Dolans, a familiar actAfter two successful spinoffs, the time may be right for another attempt to take Cablevision private
cAblevision’s cHARles DolAn
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M&A
Carl Icahn must be smiling.Forest Laboratories Inc., with five recently approved products
and four others in late-stage development and one of Wall Street’s best-known activist investors pushing for change within the com-pany, is being targeted as an attractive acquisition for Big Pharma.
The speculation may have been exactly what Icahn is looking for. In mid-June, the controversial activist investor revealed he has obtained a 6.95% stake in New York-based Forest, and, in typical fashion, promptly nominated four people to Forest’s board of direc-tors. About two weeks later, on June 28, Credit Suisse Group ana-lyst Catherine Arnold published a 34-page report discussing Forest as an acquisition target.
Arnold pointed to Eli Lilly and Co. and Merck & Co. as the two Big Pharma players with the most potential interest, though many other companies could pay “very high prices” for Forest. In the note, Arnold said a takeout price could reach about $56 per share, 41% above Forest’s current trading price, or about $16 billion.
An acquisition would likely attract Lilly and Merck for the same reason: a deep, complementary pipeline that would also help broad-en revenue streams.
Forest received Food and Drug Administration approval in Feb-ruary for Daliresp, a treatment for chronic obstructive pulmonary disease that analysts think could be worth more than $1 billion in sales within the end of the decade. That same month, Forest landed Viibryd in its acquisition of Newton, Mass.-based Clinical Data, a drug approved for major depressive disorder expected to eventu-ally reel in more than $700 million annually. Forest hopes Viibryd will help replace revenue it will lose in 2012 when its blockbuster drug for major depressive disorder, Lexapro—which at $2.3 billion accounted for 55% of the company’s total sales—goes off patent and faces generic competition.
“Given the dramatic near-term improvement in visibility on pre-scription trends for Daliresp and Viibryd and further news on the pipeline, we would expect interested parties to pay more careful mind to the Forest story,” Arnold wrote.
Given Forest’s attractiveness, Icahn must be delicate in his criti-cisms of the company. In letters sent to other Forest stockholders, which were filed with the Securities and Exchange Commission as recently as Thursday, Icahn rationalizes his four nominees to the board by criticizing both the current board of directors, the com-
pany’s chief executive, and certain specifics of the company's op-erations.
Icahn is concerned about an erosion in the company’s stock once Lexapro faces generic competition next year. An historic dwindling of the company’s stock price is also problematic for Icahn, and is a signal that change is necessary on a board that Icahn implies is too entrenched—he noted four of its nine members have been on it for more than 30 years.
Icahn also targets Howard Solomon, the chief executive and chairman, because of the company’s recent fines by the Depart-ment of Justice and U.S. Attorney General related to charges of ob-struction of justice and alleged illegal promotion of antidepressant drug Celexa. In April, the U.S. Department of Health and Human Services notified the 83-year-old Solomon it intended to blacklist him, which could potentially prevent Forest from selling to govern-ment programs including Medicare.
Forest has said it would fight any such action, something that Solomon reiterated in a late June response to Icahn’s nomination, written as a letter to Forest’s employees.
“These criticisms are typical of someone who is looking to get media attention and investor support for director nominations, and I urge you not to be distracted by them,” Solomon wrote.
Arnold noted that Icahn’s actions don’t necessarily mean he wants to force an acquisition. But she believes he also is aware of the company’s potential.
“We do think [the nomination of board members] says that he agrees with our view that the company has valuable assets with upside potential versus Street estimates and that he has a desire to have more control on Forest’s future and specifically at influencing CEO succession,” Arnold wrote.
The move to replace board members is nothing new for Icahn, who successfully installed two of four nominees on Biogen Idec Inc.’s board in 2009 and made a deal with Genzyme Corp. in 2010 to give two of his representatives seats on its board. Genzyme, of Cambridge, Mass., sold to Paris-based Sanofi-Aventis SA for $20.1 billion in a deal announced in February, while Weston, Mass.-based Biogen has been listed as a top buyout target.
Icahn’s nominees to Forest’s board are: the two Biogen board members whom Icahn nominated in 2009, Alexander Denner and Richard Mulligan; Eric J. Ende, one of the two people Icahn had added to Genzyme’s board in 2010; and Lucian Bebchuk. n
Icahn helps stir Forest Labs takeover speculationby david holley
week of trading, not only boasts a market cap of $2.9 billion but has managed to leave its parent company with one of $7.9 billion. These two figures, coupled with MSG’s market cap of $2.1 billion and the special dividend of $3 billion, set up the impres-
sive payday attributable to Cablevision’s transformation into a pure play. Yet there are those who believe the maneuvers be-hind these numbers set up something else as well: another take-private proposal, this one successful, for the cable assets that re-main.
That is, thanks to the transparency
gained from the spins of MSG and AMC, a fair Cablevision valuation has become a whole lot easier to ascertain. So what better time for the Dolans to make one last play for the equity they’ve long wished they never let get away? And what better time for patri-arch Charles, now in his mid-80s, to realize his nonsatellite dream? n
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A Florida municipal authority and some towns in the Carolinas are trying to squeeze a little juice out of Duke Energy Corp., Progress Energy Inc. and the companies’ pending $13.7 billion merger.
The Florida Municipal Power Agency as well as the towns of New Bern and Rocky Mount, N.C., and Orangeburg, S.C., have filed objections to the merger with the Fed-eral Energy Regulatory Commission, not so much because they aim to block the deal but because they hope making life tough for the companies at FERC will give them leverage to win concessions or regulatory rulings they have sought for a long time.
Although the companies are in discus-sions with some state utility commissions regarding rate caps that states are demand-ing in return for their approval, Duke and Progress officials have complained to FERC that the issues raised by the municipal au-thorities have nothing to do with the merger and should not have any bearing on FERC’s review.
For instance, the Florida Municipal Power Agency has opposed the transac-tion on grounds that the merger might be anticompetitive and urged FERC to require the utilities to provide an analysis of pos-sible anticompetitive effects the merger could have on electricity markets in Florida. FMPA noted in its filing that the deal would create the second-largest utility company in the U.S. (And the largest if the pending merger of Exelon Corp. and Constellation Energy Group Inc. doesn’t go through.)
“There is already very high generation concentration in Florida and limited import capability,” FMPA said.
The companies have countered that FM-PA’s protest is a feint aimed at forcing the utilities to agree to expand the capacity of the Florida transmission inter-tie and grant FMPA ownership rights in new baseload capacity projects. FPMA has no grounds to make such demands on the merger because Duke has no presence in Florida and the
combination with Progress would have no competitive effect in that state.
In North Carolina, the cities of New Bern and Rocky Mount have asked the com-mission to relieve them of the power supply agreement with the North Carolina Eastern Municipal Power Agency, a consortium of 32 cities and towns that owns a portion of plants operated by Progress. New Bern and Rocky Mount have unsuccessfully pushed NCEMPA to raise utility rates in order to generate more money for their municipal budgets, an idea both NCEMPA and Prog-ress have opposed.
Duke spokesman Tom Williams said the two towns are pressing the dispute because they would rather raise utility rates than local property taxes. “How cities manage their internal budgets has nothing to do with the merger,” he said.
Orangeburg has requested that FERC declare the town exempt from the jurisdic-tion of the North Carolina Utilities Com-mission, which struck down a wholesale supply agreement the town reached with Duke. North Carolina activists argued that the deal with Orangeburg was part of a larg-er Duke strategy to build new power plants to serve energy customers outside their state, but to have North Carolinians pay the construction costs through higher rates. As a result of the NCUC ruling, Orangeburg complained that it must continue meeting its supply needs through higher-priced con-tracts from South Carolina Electric & Gas Co.
Whatever the merits of Orangeburg’s dispute with the NCUC, the companies not-ed in a counter-filing to FERC that Orange-burg’s petition has nothing to do with the merger and is being addressed in a separate agency proceeding.
Williams emphasized that the compa-nies have been more than willing to make concessions to win needed regulatory ap-proval, as long as they addressed issues af-fected by the merger.
He noted that CEOs from both compa-
nies were testifying Friday before Kentucky regulators as part of evidentiary hearings on a rate settlement reached with the state attorney general. The North Carolina Utili-ties Commission has scheduled hearings on the merger beginning Sept. 20. South Caro-lina regulators have yet to schedule their hearings. At the federal level, approval is still required from the Nuclear Regulatory Commission as well as FERC. Clearance from federal antitrust regulators was re-ceived April 27 with expiration of the Hart-Scott-Rodino Act waiting period.
Companies’ shareholder meetings to ap-prove the deal were announced Thursday. Duke Energy’s meeting will be 10 a.m. Aug. 23 in Charlotte, N.C. Progress will hold its meeting at 11 a.m. Aug. 23 in Raleigh, N.C.
Under terms of the deal, Progress stock-holders for each of their shares will receive 2.612 Duke shares. As of midday trading Friday, that would value Progress shares at $49.81. With Progress shares trading at $48.11, the spread was 3.4%. n
by bill Mcconnell
Local authorities demand plums from Duke-Progress deal
How to usetHe daily deal
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This version of The Daily Deal is based on eMprint, a digital publishing format developed at the University of Missouri. Readers can move around the publica-tion using the navigation bar at the bot-tom of the screen. In addition, the story descriptions on the front page and on the page 2 index are all links. Simply click on a subject heading or story abstract to get to that section or story. The index lists every article and feature in the current edition and serves as a map for the entire publication. You can return to the index by clicking on that button in the naviga-tion bar. n
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A slew of midmarket dividend recapitalizations launched over the past week are putting money in the hands of sponsors, while refi-nancing debt at favorable terms for companies purchased around the time of much tighter credit markets.
The largest of these involved Abry Partners LLC-backed Q9 Networks Inc., a Toronto technology outsourcing company that likely gave a large dividend to its Boston sponsor.
On July 7, TD Securities launched a C$446 million ($465 mil-lion) senior secured debt package for Q9, which included a C$40 million revolver and a C$276 million term loan, both from TD Secu-rities, and a C$130 million second-lien loan led by Barclays Private Credit Partners, according to a source familiar with the financ-ing. Though the exact amount of the dividend is unclear, the recap leaves a difference of C$178 million between the current and previ-ous debt package.
The recent recaps, which also include health services provid-ers AdvoServ Inc. and MCCI Medical Group, take advantage of lenders familiar with credit securities that have performed well over the course of their sponsors’ ownership, sources said. Many sponsors are actively considering dividend recaps, even structuring deals so as to make dividends easier going forward.
Abry bought a controlling stake of Q9 in 2008 for C$361 million, with a debt package also provided by TD.
The last time Q9 tapped the debt market was in April 2010, re-financing into a five-year, C$25 million revolver, a C$160 million A term loan, with an option for C$25 million more, according to Stan-dard & Poor’s Leveraged Commentary & Data. It had C$58 million in mezzanine debt at the time.
In another instance, Menlo Park, Calif.-based GI Partners is getting a dividend “in the ballpark” of $50 million from a recap of Bear, Del.-based AdvoServ, which it bought in 2009, a second source told The Daily Deal. AdvoServ provides health services to individuals with developmental disabilities and behavioral disor-ders in Delaware, New Jersey and Florida.
GE Capital Corp. is the lead agent for AdvoServ’s $135 mil-lion senior secured loan, with Bank of Montreal and Barclays participating for undisclosed sums. The loan increases leverage to 4 times, while lowering the cost of capital, according to the source.
LCD puts the pricing of AdvoServ’s loans at LIBOR plus 475 to 500 basis points with a 1.25% LIBOR floor, with other terms un-changed, comprising a $10 million, five-year revolver and a $125 million, six-year term loan.
“This is what you get when you have a tight-knit bank group, stable cash flow [and a] strong sponsor,” LCD’s Kelly Thompson commented on her Twitter feed.
In a third case, New York-based New MainStream Capital, a former investment arm of Goldman, Sachs & Co., is taking out $77 million from Miami-based MCCI Medical.
GE Capital and SunTrust Robinson Humphrey are arranging the $195 million loan, according to LCD, comprising a $15 million revolver, a $140 million term loan and a $40 million second-lien term loan. Proceeds will be used to refinance debt and pay a $77 million dividend to the sponsor, LCD said.
New MainStream Capital, along with Pharos Capital Group LLC and GE Healthcare Financial Services, purchased the com-pany in January 2007. n
by max frumes
Management of Steinway Musical In-struments Inc. made an unsolicited offer to acquire the company’s band and online divisions, the company announced. No fi-nancial details have been revealed.
The attempt, if successful, would break apart the very rollup the two principal man-agers crafted beginning almost two decades ago.
In the three months ended March 31,
band division revenue amounted to $29.3 million, about 40% of total company rev-enue of $72.9 million. Revenue for the band division is flat, while piano sales have seen a modest uptick. Online revenue was negli-gible for the quarter.
Band instrument sales have been flat or declining for several years, a victim of the economy and schools that have squeezed instrumental music programs.
Steinway’s current market cap stands at
around $330 million.Those involved in the buyout attempt in-
clude the company’s chairman, Kyle Kirk-land, and its CEO, Dana Messina. The com-pany announced July 5 that Kirkland would step down as chairman and be replaced by Michael Sweeney, an independent director. A special committee will now consider the offer and alternatives.
Former junk bond bankers, Kirkland and Messina bought musical instruments com-pany Selmer Co. in 1993 for $95 million and took it public a year later. In 1995, Selmer
Steinway brass composes buyout bid
by matt miller
Sponsors revive dividend recapsAt least three groups take cash payments, capitalizing on healthy credit markets
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REGULATION
Nearly 100 European banks will soon re-ceive report cards on the state of their capital health when the European Banking Author-ity publishes the long-awaited results of its stress test.
The London-based regulator announced Friday that the test results will be released after the close of European markets on July 15. The stress test, applied to 91 lenders rep-resenting just under two-thirds of European bank assets, aims to assess lenders’ resilience to a hypothetical adverse scenario designed by the Frankfurt-based European Central Bank. This will be the first test carried out by the EBA since it took over as Europe’s banking regulator at the start of the year as part of a broad, EU-wide financial supervision reform.
Individual banks will publish their data including credit and sovereign-debt exposure using the EBA template at 5 p.m. London time. National bank supervisory authorities will then have a maxi-mum of 29 minutes to republish the results. Finally, the EBA will put out its aggregate summary report by 5:30 p.m. London time.
“We had received strong recommendations from market au-thorities to issue the results after European markets close,” EBA spokeswoman Franca Rosa Congiu said.
For purposes of the current test, adverse scenarios include a 15% average decline in euro-zone stock prices with possible trading losses on sovereign debt, a leveling off of housing prices in most Eu-ropean countries, and a 0.4% decline in European Union real gross domestic product in 2011 and zero growth in 2012.
Officials have pledged stricter scrutiny of the Continent’s lenders amid widespread criticism that the previous test round, conducted last July, was inadequate. It produced significant differences from country to country and failed to detect the imminent implosion of Ireland’s financial system.
All banks previously tested will be part of the current exercise,
along with some additions. Banks due to receive report cards on July 15 include Bel-gium’s KBC Bank NV and French-German lender Dexia SA; France’s BNP Paribas SA and Société Générale; Germany’s Deutsche Bank AG and Commerzbank AG; and ING Bank NV and ABN Amro Bank NV of the Netherlands.
The banks will be judged according to several criteria, including whether they meet a core Tier 1 threshold of risk-weighted as-sets, though this is not a minimum require-
ment in the 27-nation European Union. That compares with a 6% threshold for last year’s tests.
The EBA said it delayed publication of the test results by a couple of weeks to gather more information and resolve inconsistencies in the data. On Friday, Congiu said the regulator is now confident it has addressed those issues and is ready to wrap up the exercise.
As the deadline approaches, supporters of the test argue that more transparency is needed in the sector in the wake of the fi-nancial crisis, while critics question whether naming and shaming problem banks will do any good.
Guido Ravoet, the executive director of the European Banking Federation lobby, argued that assuming a 0.4% decline in GDP is an “unlikely and completely unrealistic scenario.” The stress tests should not be repeated, he said. “It is not something we should do on a regular basis.” Nicolas Véron, a senior fellow with Brussels’ Bruegel think tank, said it remains to be seen whether the results for different banks will be directly comparable. “The scope of the stress tests covering all important banks is right,” he said, “but we don’t yet know about this comparability element.”
Banks that fail the tests will be required to hammer out plans for making up their capital shortfall with national supervisors. Of course, receiving the fail mark will in itself make it harder for the banks to raise capital. n
European banking regulator details stress test procedureEarlier examinations were criticized as inadequate and inconsistent
by renee cordes in brussels
bought Steinway for $104 million, the pub-lic company assuming the storied Steinway name.
In 2000, Steinway paid $85 million in cash and assumed debt for United Musical Instruments Inc., itself an amalgam of sev-eral instrument manufacturers including C.G. Conn brass and Ludwig drums. Selmer manufactures woodwinds.
Steinway bought online classical music retailer ArkivMusic LLC in 2008 for $4.5 million. However, a year earlier, it lost out in a much more ambitious attempt to buy out of bankruptcy the country’s biggest band instruments retailer, Woodwind and Brass-wind, officially known as Dennis Bamber Inc. Rock instruments retailer Guitar Cen-ter Inc. outmaneuvered Steinway to gain Woodwind and Brasswind. Steinway with-drew a $42.6 million bid after running afoul
of retail customers who were shouting con-flict of interest.
In Steinway’s most recent 10-Q, released in May, the company announced that Kirk-land and Messina would be divesting all Class A shares, which gave the two an 80% voting stake in the company. The shares would convert into common after regula-tory approval. That announcement turned out to be a prelude to a much more dramatic move. n
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REGULATION
Christine Varney’s announcement that she will leave the Department of Justice’s an-titrust division and return to private law practice has revealed a strong amount of goodwill toward her from public advocacy groups.
Varney announced Wednesday that she will join Cravath, Swaine & Moore LLP to advise executives and boards on strate-gic issues, a practice she built at her previ-ous employer, the former Hogan & Hartson law firm (now Hogan Lovells). She plans to leave the DOJ Aug. 5 and will begin at Cra-vath in September.
Although Varney received some criti-cism from public interest groups for allow-ing some industry-shaking mergers to pro-ceed, such as Ticketmaster Entertainment Inc.’s acquisition of Live Nation and Com-cast Corp.’s purchase of NBC Universal, several public advocates also said she de-serves credit for, if nothing else, re-engag-ing them in broad discussion over antitrust policy following eight years of neglect from the Bush administration. They also give her
credit for asserting the DOJ’s authority in the healthcare and agriculture arenas and for developing novel approaches to tackling vertical mergers, which historically have been more difficult for antitrust regulators to challenge than horizontal mergers be-tween direct competitors.
Varney is likely to find a friendly audi-ence when she speaks to the liberal Center for American Progress, or CAP, the morn-ing of July 12, where she’s slated to give a speech titled “Reinvigorating Antitrust En-forcement.” The event is a sendoff of sorts for Varney. In announcing the event, the center said her tenure has been character-ized by “reinvigorated enforcement against anticompetitive conduct and potentially problematic mergers.”
CAP senior fellow David Balto praised one of Varney’s first actions, which was to hire former Consumer Union federal rela-tions director Gene Kimmelman as one of her senior advisers. “He is the dean of con-sumer movement, and Gene did tremen-dous outreach and has made sure we’ve had an opportunity to voice our opinions,” Balto
said.Regarding healthcare, Balto said Varney
brought the first action against a health in-surer for anticompetitive conduct since the Clinton administration when the DOJ sued Blue Cross Blue Shield of Michigan in 2010 over provisions it required in hospital contracts guaranteeing it would receive the lowest reimbursement rates. He also credit-ed her for moving Blue Cross Blue Shield of Michigan to cancel plans to acquire Physi-cians Health Plan of Mid-Michigan earli-er that year by threatening to challenge the proposed transaction. Finally, he praised a settlement reached with United Regional Health Care System in Wichita Falls, Texas, that prohibited anticompetitive con-tracts with health insurers. “DOJ had never sanctioned a dominant healthcare provider for anticompetitive actions before,” Balto said.
CAP and others also credited Varney for presiding over a string of investigations and cases brought in the dairy and other agricultural markets. “Christine Varney
by bill Mcconnell in Washington
Varney gets high marks from liberalsCommentators cite her inclusiveness of consumer groups and scrutiny of healthcare deals
AssIsTANT ATTORNEy GENERAL CHRIsTINE VARNEy
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IPOs
Silver Spring Networks Inc., a venture-backed provider of smart-grid technologies, late Thursday filed to raise $150 million in an ini-tial public offering.
The Redwood City, Calif.-based company said it plans to trade its shares on the New York Stock Exchange under the ticker symbol SSNI. Founded in 2002, the company, which provides meters, soft-ware and wireless networking to utilities seeking to update their aging power grids, has been growing impressively over the past several years, with net revenue climbing from $58,000 in 2008 to $70.2 million last year.
But Silver Spring has consistently posted losses, including an operating loss of $33.7 million in 2010. In its filing with the Securi-ties and Exchange Commission, the company said it expects these losses to continue as it keeps investing in research and development and other areas.
The offering would open the exit door to the handful of venture capital firms and strategics that have invested in Silver Spring. Ear-ly investor Foundation Capital holds the biggest stake, with 41.5% of the company, with Kleiner Perkins Caufield & Byers holding 9.7%. WR Group Holdings LP owns 8.8%, and NCD Investors LLC owns 7%, the filing said. Al Gore’s Generation Investment Management LLP and Google Inc. also own small stakes in the company.
In its filing, Silver Spring pointed to a raft of negative publicity smart-grid technology has received in the last year or two as a risk
factor to its business. In some locales, smart meters have been criti-cized as being inefficient and inaccurate, artificially inflating con-sumers’ power bills.
“Negative publicity and consumer opposition in California, Maine and elsewhere have caused other utilities or their regula-tors to respond by delaying or modifying planned smart grid ini-tiatives, mandating that utilities allow their customers to opt out of smart metering programs, or calling for investigations and/or implementation of unfavorable regulations and legislation,” Silver Spring said.
The company also cited the intense competition in the smart-grid market as a risk to its success. It listed a large group of rivals, including Itron Inc., Landis+Gyr AG, Coulomb Technologies Inc. and Tendril Networks Inc. Large technology companies in-cluding Cisco Systems Inc., IBM Corp. and Siemens AG also pose a threat, as they have announced plans to offer smart-grid products, Silver Spring said.
Morgan Stanley, Goldman Sachs Group Inc. and Credit Su-isse Group acted as lead underwriters on the offering, with Jeffer-ies & Co., Piper Jaffray & Co., Stifel Nicolaus Weisel, Robert W. Baird & Co., Canaccord Genuity, Evercore Partners Inc. and Pacific Crest Securities co-managing.
Fenwick & West LLP’s Gordon Davidson, Robert Freedman, Sayre Stevick and Michael Brown advised Silver Spring on the offer-ing. Alan Denenberg and Sarah Solum of Davis Polk & Wardwell LLP advised the underwriters. n
Silver Spring outlines plans to raise $150MSmart-grid technology provider unveils strong growth but warns of continuing losses
by olaf de senerpont domis
promised to renew strong enforcement of our antitrust laws, and she fulfilled that promise during her tenure at the Depart-ment of Justice,” Herb Kohl, a Wisconsin Democrat and chairman of the Senate An-titrust Subcommittee, said in a statement. “We appreciated her interest in preventing consolidation in the dairy industry, which she investigated on the ground in my home state of Wisconsin.”
Gigi B. Sohn, president and co-founder of Public Knowledge, a public advocacy group focusing on digital technology policy, praised her “exemplary service” promoting competition in the technology and telecom-munications markets.
Public Knowledge spokesman Art Brod-sky cautioned, however, that Varney’s true
legacy in those markets won’t be known until the effectiveness of remedies she im-posed on the Ticketmaster and Comcast deals can be determined.
In both of those deals, the DOJ im-posed behavioral remedies that prevent the merged companies from using any market power gained from acquiring complemen-tary businesses. “We will have to see how those are enforced,” he said.
Even the outcome of the pending review of AT&T Inc.’s plan to acquire T-Mobile USA Inc. will color her legacy, he said, de-spite the fact that the DOJ’s decision will come long after she’s gone. “Like a start-ing pitcher getting relieved, if DOJ follows through on a course she set, that would go on her record.”
President Obama nominated Varney to be the assistant attorney general for anti-
trust, and she was confirmed to the post in 2009. Her other endeavors included several significant procedural changes that will likely be in place for the foreseeable future. She and Federal Trade Commission Chair-man John Leibowitz last summer oversaw the update of the federal government’s hori-zontal merger guidelines that give antitrust regulators more tools to challenge mergers. Last month she also updated the DOJ poli-cies to provide agency staff better guidance on how to craft behavioral remedies.
John Ingrassia, special counsel in the Washington office of Proskauer Rose LLP, said the procedural changes Varney helped oversee are likely to be carried over by her successor. “She put the antitrust division on a trajectory that will likely continue through the next election and maybe lon-ger,” he said. n
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19 THE DAILY DEAL M O N D AY j U LY 1 1 2 0 1 1
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COMPANY INDEX
A-G
ABG Sundal Collier . . . . . . . . . . . . . . . . . . . . . .11ABN Amro Bank NV . . . . . . . . . . . . . . . . . . . 16Abry Partners LLC . . . . . . . . . . . . . . . . . . . . . 15AdvoServ Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . 15AMC Networks Inc . . . . . . . . . . . . . . . . . . . . . 12Apothecary Capital LLC . . . . . . . . . . . . . . . . 10Arnstein & Lehr LLP . . . . . . . . . . . . . . . . . . . . 7AT&T Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Audax Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Bain Capital Venture Partners . . . . . . . . . . . 9Bank of Montreal . . . . . . . . . . . . . . . . . . . . . . . 15Barclays Capital . . . . . . . . . . . . . . . . . . . . . . . . 10Barclays Private Credit Partners . . . . . . . . 15Biogen Idec Inc . . . . . . . . . . . . . . . . . . . . . . . . . 13Blue Cross Blue Shield of Michigan . . . . . .17Bluestem Brands Inc . . . . . . . . . . . . . . . . . . . . . 9BNP Paribas SA . . . . . . . . . . . . . . . . . . . . . . . . 16Cablevision Systems Corp . . . . . . . . . . . . . . . 12Canaccord Genuity . . . . . . . . . . . . . . . . . . . . . 18Cisco Systems Inc . . . . . . . . . . . . . . . . . . . . . . 18Clayton Dubilier & Rice LLP . . . . . . . . . . . . 10Comcast Corp . . . . . . . . . . . . . . . . . . . . . . . . . . .17Commerzbank AG . . . . . . . . . . . . . . . . . . . . . . 16Constellation Energy Group Inc . . . . . . . . . 14Coulomb Technologies Inc . . . . . . . . . . . . . . 18Cowen and Co . LLC . . . . . . . . . . . . . . . . . . . . 10Cravath, Swaine & Moore LLP . . . . . . . . . . .17Credit Suisse Group . . . . . . . . . . . . . . . . . 13, 18Davis Polk & Wardwell LLP . . . . . . . . . . . . 18Debevoise & Plimpton LLP . . . . . . . . . . . . . 10Deutsche Bank AG . . . . . . . . . . . . . . . . . . . . . 16Development Specialists Inc . . . . . . . . . . . . . 7Dexia SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Duke Energy Corp . . . . . . . . . . . . . . . . . . . . . . 14Eli Lilly and Co . . . . . . . . . . . . . . . . . . . . . . . . . 13Evercore Partners Inc . . . . . . . . . . . . . . . . . . 18Exelon Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Favus Research LLC . . . . . . . . . . . . . . . . . . . 10Federated Department Stores Inc . . . . . . . . 9Fenwick & West LLP . . . . . . . . . . . . . . . . . . . 18Fifth Third Bank . . . . . . . . . . . . . . . . . . . . . . . . 7Fish & Richardson PC . . . . . . . . . . . . . . . . . . 10Forest Laboratories Inc . . . . . . . . . . . . . . . . . 13
Foundation Capital . . . . . . . . . . . . . . . . . . . . . 18FTI Consulting Inc . . . . . . . . . . . . . . . . . . . . . 10GE Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Generation Investment Management LLP . . . . . . . . . . . . . . . . . . . . 18GI Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Giordano’s Enterprises Inc . . . . . . . . . . . . . . . 6Goldman, Sachs & Co . . . . . . . . . . . . . 10, 15, 18Google Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Guitar Center Inc . . . . . . . . . . . . . . . . . . . . . . . 16
H-Z
Hogan Lovells . . . . . . . . . . . . . . . . . . . . . . . . . . .17Huron Consulting Group . . . . . . . . . . . . . . . 10Hynix Semiconductor Inc . . . . . . . . . . . . . . . .11IBM Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18ING Bank NV . . . . . . . . . . . . . . . . . . . . . . . . . . 16Insight Equity Holdings LLC . . . . . . . . . . . 10Itron Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18J .P . Morgan Securities Japan . . . . . . . . . . . 10Jefferies & Co . . . . . . . . . . . . . . . . . . . . . . . . . . . 18KBC Bank NV . . . . . . . . . . . . . . . . . . . . . . . . . . 16Kelley, Walter & Scott PA . . . . . . . . . . . . . . . . 9Kirkland & Ellis LLP . . . . . . . . . . . . . . . . . . . 10Kleiner Perkins Caufield & Byers . . . . . . . 18Kohlberg & Co . LLC . . . . . . . . . . . . . . . . . . . . .11Korea Exchange Bank . . . . . . . . . . . . . . . . . . .11Landis+Gyr AG . . . . . . . . . . . . . . . . . . . . . . . . . 18Lazard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Loeb & Loeb LLP . . . . . . . . . . . . . . . . . . . . . . 10Madison Square Garden Inc . . . . . . . . . . . . 12Madison Williams and Co . . . . . . . . . . . . . . . 10Markó Partners . . . . . . . . . . . . . . . . . . . . . . . . .11Marks and Spencer Group plc . . . . . . . . . . . 10Maruti Suzuki India Ltd . . . . . . . . . . . . . . . . 10MCCI Medical Group . . . . . . . . . . . . . . . . . . 15McKinsey & Co . . . . . . . . . . . . . . . . . . . . . . . . . 10Medisize Corp . . . . . . . . . . . . . . . . . . . . . . . . . . .11Merck & Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Milbank, Tweed, Hadley & McCloy LLP . . . . . . . . . . . . . . . . . . . . . . . . 10Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . 18Morgan, Lewis & Bockius LLP . . . . . . . . . 10NCD Investors LLC . . . . . . . . . . . . . . . . . . . . 18
New MainStream Capital . . . . . . . . . . . . . . . 15
Nomura Securities Co . Ltd . . . . . . . . . . . . . . 10
Pacific Crest Securities . . . . . . . . . . . . . . . . . 18
Paine & Partners LLC . . . . . . . . . . . . . . . . . . .11
Perkins Coie LLP . . . . . . . . . . . . . . . . . . . . . . . 10
Petters Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Pharos Capital Group LLC . . . . . . . . . . . . . . 15
Phillips Plastics Corp . . . . . . . . . . . . . . . . . . . .11
Physicians Health Plan
of Mid-Michigan . . . . . . . . . . . . . . . . . . . . . .17
Piper Jaffray & Co . . . . . . . . . . . . . . . . . . . . . . 18
Progress Energy Inc . . . . . . . . . . . . . . . . . . . . 14
Proskauer Rose LLP . . . . . . . . . . . . . . . . . . . . 18
Pugh, Jones, Johnson & Quandt PC . . . . . 10
Q9 Networks Inc . . . . . . . . . . . . . . . . . . . . . . . 15
Quarles & Brady LLP . . . . . . . . . . . . . . . . . 6, 10
Ratos AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Robert W . Baird & Co . . . . . . . . . . . . . . . . . . . 18
Ropes & Gray LLP . . . . . . . . . . . . . . . . . . . . . . .11
Sanofi-Aventis SA . . . . . . . . . . . . . . . . . . . . . . 13
Scanbio AS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Siemens AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Silver Spring Networks Inc . . . . . . . . . . . . . . 18
Simmons & Simmons . . . . . . . . . . . . . . . . . . . 10
Simpson Thacher & Bartlett LLP . . . . . . . 10
SK Telecom Co . Ltd . . . . . . . . . . . . . . . . . . . . . .11
Société Générale SA . . . . . . . . . . . . . . . . . . . 16
Standard & Poor’s . . . . . . . . . . . . . . . . . . . . . . 15
Steinway Musical Instruments Inc . . . . . . 15
Stifel Nicolaus Weisel . . . . . . . . . . . . . . . . . . 18
STX Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
SunTrust Robinson Humphrey . . . . . . . . . 15
T-Mobile USA Inc . . . . . . . . . . . . . . . . . . . . . . 18
TD Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tendril Networks Inc . . . . . . . . . . . . . . . . . . . 18
Thomas Whitelaw . . . . . . . . . . . . . . . . . . . . . . 10
Thomson Reuters . . . . . . . . . . . . . . . . . . . . . . 10
UBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Unilever plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
United Regional Health Care System . . . .17
Verdane Capital Advisors . . . . . . . . . . . . . . . .11
Willkie Farr & Gallagher LLP . . . . . . . . . . 10
WR Group Holdings LP . . . . . . . . . . . . . . . . 18
20 thE DAIlY DEAl M O N D AY J u lY 1 1 2 0 1 1
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Auction Blocktm
AUCTION BLOCK™ IS PUBLISHED EacH MonDay aS a fEatUrE In tHE DaILy DEaL, a SErvIcE of tHE DEaL PIPELInE. for DEMonStratIon anD SUBScrIPtIon InforMatIon, PLEaSE caLL 888-257-6082.
jULy 11 - jULy 17, 2011 VOLUME 6 NUMBER 21
ThE fULL dEAL: vISIt PIPELInE.tHEDEaL.coM for coMPLEtE UP-to-DatE Info on BUSInESSES UP for aUctIon
OFF the blOck
Oilsands Quest Inc. on July 6 announced that it has concluded a pro-cess to explore strategic alternatives and intends to pursue a rights offering to shareholders. The Calgary, Alberta-based company said it will use proceeds from the offering to advance its oil sands technol-ogy toward commercial development. In the meantime, the company will remain open to offers of joint venture opportunities, asset sales or other alternatives.
After a four-day auction, liquidating Nortel Networks Inc. on July 6 named a group led by Apple Inc. and a consortium named Rockstar Bidco LP, which consisted of EMC Corp., LM Ericsson, Microsoft Corp., Research In Motion Ltd. and Sony Corp., as the winning bidder of its patent portfolio with a $4.5 billion bid.
Terex Corp. on July 1 said that it has secured about 68% of the
shares of Germany’s Demag Cranes AG after shareholders accepted its sweetened ¤936 million ($1.35 billion) bid. Demag had been on the block since May. Lazard, Deutsche Bank AG and Rothschild man-aged the auction.
Providence Equity Partners LLC struck a deal on July 1 to acquire Washington-based Blackboard Inc. for $1.77 billion in cash and as-sumed debt, continuing the private equity firm’s push into the educa-tion sector.
Polish billionaire Zygmunt Solorz-Zak has secured a ¤4.5 billion ($6.5 billion) deal to buy Polkomtel SA, beating competition for Poland’s No. 2 mobile phone operator from Norway’s Telenor ASA and buyout shop Apax Partners LP. Solorz-Zak’s bid vehicle, Spartan Capital Holding SP. z.o.o., will pay about 6.4 times Ebitda for Polkomtel.
New ON the blOck
Pfizer Inc. on July 7 announced it will pursue strategic alternatives—including a spinoff, sale or other transaction—for its animal health unit and its nutrition unit. The New York healthcare giant engaged J.P. Morgan to manage the review for its animal health business, which had revenue of $3.6 billion last year; Morgan Stanley and Centerview Part-ners LLC are managing the process for the nutrition business, which generated $1.9 billion in revenue last year.
Delta Petroleum Corp. said on July 6 it will explore strategic alterna-tives, including a potential sale, ahead of a debt maturity scheduled for January 2012. The Denver-based oil and gas company also said it had closed the sale of noncore properties in Texas and the DJ Basin for $43.2 million. Delta’s board has engaged investment banks Macquarie Capital (USA) Inc. and Evercore Partners Inc. to advise on alterna-tives.
German utility RWE AG may be considering selling its NPower unit in the U.K. and has hired Goldman Sachs International to assess op-tions for the unit. The Sunday Times reported July 3 that RWE may sell NPower, one of the U.K.’s six largest energy suppliers, for ¤5 billion ($8.1 billion). News reports have named Iberdrola SA, of Spain, and Scottish Power plc as likely bidders, although they note that a sale may not result from Goldman’s review of NPower.
Ennstone Inc., a privately held provider of ready-mix concrete through-out the mid-Atlantic region, announced on June 30, that it hired Phoe-nix Capital Resources to explore strategic alternatives including a sale. First-round bids are due in mid-July and the process is expected to be completed by early October, according to Phoenix Capital manag-ing director Adam Cook. He declined to provide financial details on the Fredericksburg, Va.-based target, mentioning only that he expects a robust sales process.
The entries below feature extended information on companies that are new on the block and just off the block, along with the latest updates on auctions that continue to run. For more details, go to pipeline.thedeal.com.
Prodded by a Professor, two Harvard Mbas created tHe searcH fund investMent Model in tHe Mid-80s, a scHool of tHougHt tHat Has been Practiced witH varying degrees of success since.
FEATURE INSIDESEE PAGE 23 Head of
the CLaSS
21 the daily deal M o n d ay J u ly 1 1 2 0 1 1
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Editor-In-Chief: Robert Teitelman Compiled by: Matthew V. Haas Editor, Newsletters and Databases: Anthony Baldo
UPDATES FROM ThE blOck bANkRUPTcY blOck
Brazil’s QGEP Participações SA said it has acquired a 10% stake in the BM-S-8 oil block from Royal Dutch Shell plc. The Bra-zilian oil and gas company, a division of domestic construction firm Queiroz Galvao SA, did not disclose financial terms. Shell will retain a 10% stake in the block, one of four in Brazil that it has been assessing un-der its strategic review.
LiveDeal Inc. continues to pursue strategic alternatives that could result in a sale, a company spokeswoman affirmed on July 5, adding there was no time frame in place for the Mesa, Ariz.-based telephone directory publisher to complete its review.
Constellation Energy Partners LLC’s initiative to explore strategic alternatives will become “pretty active” once the sale of its previous parent’s share of the company closes, a rep-resentative for the company said on July 5. The Houston-based company continues to work with advisers from Tudor, Pickering, Holt & Co. on its options. PostRock Energy Corp. on June 21 announced that it will ac-quire full control of Constellation Energy Group Inc.’s 28% stake in Constellation En-ergy Partners LLC for $22.5 million in cash and stock, plus warrants to acquire an addi-tional 1.5 million shares of PostRock. Closing of the transaction is still pending sharehold-er approval from both the buyer and seller.
Spanish infrastructure firm Actividades de Construccion y Servicios SA may sell a sec-ond set of renewable assets before the end of August, according to a July 5 report in Spanish daily Cinco Dias. The report cited unidentified industry sources and could not be immediately confirmed.
New York Times Co. announced on July 1 that it sold more than half its stake in Fenway Sports Group, the owner of the Boston Red Sox and the Liverpool soccer team, to three unidentified buyers for about $117 million. The Times owns about 17% of Fenway Sports —formerly New England Sports Ventures LLC—and the sale comprises about 390 of its 700 shares in the target. The Times will
record a pretax gain of $64 million in the third quarter from the transaction.
SilverBirch Energy Corp. needs a strategic buyer or partner to help finance the C$7.25 billion ($7.42 billion) required to develop the Frontier and Equinox oil sands project, ac-cording to SilverBirch CEO Howard Lutley. The company stated on June 29 it will not proceed with construction on the project until it can achieve a proper financing so-lution. SilverBirch and Teck Resources Ltd. currently co-own the oil sands project, which Lutley said is still three years away from at-taining government approvals.
Trump Entertainment Resorts Inc. hired CB Richard Ellis to sell its Steel Pier entertain-ment complex. CBRE said in a June 29 press release that bids will start at $2.5 million at an open-cry auction at the Trump Taj Mahal in Atlantic City on August 25.
London private equity firm Lion Capital LLP is a likely contender and would make a logi-cal fit for Icelandic retailer Aurum Holdings Ltd., according to a retail investment banker active in cross-border M&A and advising luxury retailers. The banker explained that Aurum Holdings is more of a “U.K.-centric” retailer, so its attractiveness is more likely to draw the attention of a PE firm rather than a strategic buyer.
Bluegreen Corp. announced in a SEC filing on July 1 that it has officially put its homebuild-ing subsidiary, Bluegreen Communities, up for sale. The Boca Raton, Fla.-based time-share operator initiated a strategic review of the homebuilding unit on March 24. Blue-green disclosed in an earnings release that it has engaged an investment adviser to assist in the strategic review, but has not revealed the name.
Atlanta-based real estate investment trust Roberts Realty Investors Inc. on July 1 an-nounced that it has retained Sandler O’Neill + Partners LP to explore potential strategic alternatives, which could result in a sale of the REIT.
Bankruptcy administrator Deloitte LLP con-tinued to market the Möben Kitchens, Dol-phin Bathrooms and Kitchens Direct brands for sale, although the operations have been closed down. The three brands were scuttled as part of the bankruptcy proceedings for Sun European Partners LLP portfolio com-pany HomeForm Group Ltd. Sun European Partners was able to salvage the Sharps bedroom furnishings unit from HomeForm, purchasing the unit through a new company, Sharps Bedrooms Ltd. Möben Kitchens, Dol-phin Bathrooms and Kitchens Direct entered prepack administration at the same time as Sharps. But the Deloitte team had been un-able to arrange a buyer in the 10 working days since the company had entered a period of preadministration and issued its “notice of intention to appoint” administrators.
Napa Home & Garden Inc. on July 5 filed for bankruptcy protection with plans to sell its assets to a competitor for $1.1 million. The Duluth, Ga., wholesaler of home and garden gifts filed in the U.S. Bankruptcy Court for the Northern District of Georgia in Atlanta, and concurrently sought approval of bidding procedures for an auction centered on a $1.1 million cash bid from Teters Floral Products Inc. The proposed stalking-horse bidder, a Bolivar, Mo., wholesaler and retailer of home and garden gifts, also would assume certain liabilities.
Bankrupt California megachurch Crystal Ca-thedral Ministries hopes to sell nearly all of its assets via auction. Under bidding procedures filed on July 5 in the U.S. Bankruptcy Court for the Central District of California in Santa Ana, the debtor will look to sell substantially all of its assets, including its church campus and an offsite condominium, to two separate stalking-horse bidders. Crystal Cathedral had already entered into a letter of intent with stalking-horse bidder Greenlaw Part-ners LLC for the sale of the church and land for $46 million. The ministry also received a $1 million offer from an individual, Christo-pher Kilpatrick—stalking-horse bidder—for an oceanfront condominium unit in Laguna Beach, Calif. n
22 the daily deal M o n d ay J u ly 1 1 2 0 1 1
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The beginning of search funds is the professional coming-of-age story of two Harvard Business School graduates, Jamie Turner and Kirk Riedinger, as they launched careers as newly minted M.B.A.’s.
Two Harvard M.B.a.’s wiTH an appeTiTe for risk and guidance froM a professor wHo preacHedself-enTrepreneursHip founded THe searcH fund invesTMenT Model
by Thomas Zadvydas
Turner and Riedinger share the credit for raising the first search fund at Harvard in 1984. The two men forged a new invest-ing model that provided a track for busi-ness school graduates with strong entre-preneurial instincts to blaze their way into executive leadership. A long climb up the corporate ladder was not required. Aspir-ing entrepreneurs needed only youthful
tenacity and willingness to embrace risk and walk down an unconventional road. Indeed, even today the model the pair cre-ated, the funded search, doesn’t have a wide presence beyond its Harvard and Stanford University roots.
“I had six job offers at the time, and I turned them all down because I wanted to do this,” says Turner, vice chairman of
Denver’s Alta College Inc., a trade school network he and Riedinger bought in 1987 for about $4 million. The company, ac-quired with capital from Turner and Ried-inger’s $140,000 fund, currently runs about 19 schools with some 16,000 students, and rakes in about $340 million in revenue an-
CoNTINUEd >
Head ofThE CLaSS
RIEdINGER aNd TURNERRIEdINGER aNd TURNER
aUCTIoN bLoCK fEaTURE
23 ThE daILy dEaL m o N d ay J U Ly 1 1 2 0 1 1
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AUCTION BLOCK FEATURE
nually. “Our strategy has been to be in fairly large metropolitan markets. We’re in like six or seven of them now,” he says.
Success stories such as Alta are rare. But a number of companies founded by the search fund model have achieved notable success, chief among them Asurion, one of the world’s largest providers of cellphone insurance, which was sold to a pair of pri-vate equity firms for $4.2 billion 12 years after being purchased by a search fund for $8 million.
Search funds, or small pools of capital that seek to acquire and manage lower-middle-market companies, allow a would-be executive with ownership aspirations to buy his or her way into the CEO chair.
The first known search fund was found-ed in 1984, according to a 2009 survey by the Center for Entrepreneurial Studies at the Stanford Graduate School of Business released in 2010. The idea for these little-known investing vehicles was hatched in a pair of serendipitous meetings, and by the collective vision of these two Harvard busi-ness school graduates, who were guided by an inspirational mentor, a teacher who believed strongly in the vocation of entre-preneurship.
Riedinger and Turner, after finishing their undergraduate work at Stanford in 1980 and 1981, respectively, tried their hand in the traditional corporate race. Turner spent two years as an analyst at Lehman Brothers Inc., while Riedinger held two jobs, one as a computer salesman for now-defunct Burroughs Corp. (which merged with Sperry Corp. in 1986 to become Uni-sys Corp.) and another as a consultant with a small firm called Cresap, McCormick and Paget (which would be acquired by New York consulting house Towers Perrin in 1982). Riedinger spent a year in Australia on an assignment with Qantas Airlines Ltd. while at Cresap McCormick.
The two never discussed working to-gether as undergrads in the same fraternity, but their paths crossed again in the fall of 1983 when they each decided to attend Harvard Business School. In their second year, fate came calling in the form of an in-spiring professor who would take the pair under his wing.
The two men credit H. Irving Grousbeck, then a professor at Harvard and currently a
director of Stanford’s entrepreneurial stud-ies center, for setting them down the search fund path.
“We were at the time taking Irv Grous-beck’s class, which was entrepreneurial management,” Riedinger recalls, “and I would describe his class as a little bit of teaching the religion of entrepreneurship. Each class was a case study on somebody who had gone out and started a business, or bought a business.”
Turner remembers that the busi-nesses they studied in Grousbeck’s class—ice cream stores and muffin shops, for instance—stood in stark
contrast to the large corporate conglomer-ates such as Coca-Cola Co. and Procter & Gamble Co. that Harvard M.B.A. students typically prodded. The professor would often bring in self-made entrepreneurs to speak to his class.
Riedinger and Turner say that Grous-beck had two main motives behind his unique teaching method. One was to keep his students engaged during long class ses-sions by introducing living examples, while the second was to show with impression-able force the validity of the entrepreneur-ial path.
“[It] sent the message that these guys weren’t necessarily any smarter or richer, or whatever, than we were. They had just decided to go out and do something, and had accomplished it,” Turner says. “It was a subtle message, but it was an effective message.”
Like many aspiring M.B.A. students at the time, Riedinger and Turner were satu-rated by the finance stories covered heavily by the press in the mid-’80s, like the devel-oping of the high-yield-bond market and the leverage buyout boom. They were in-trigued by the technique of using both debt and equity to buy a company. “We wouldn’t have thought of that. Being in the middle of that era, Michael Milken and others were doing that. It was on the front page of The Wall Street Journal,” Riedinger says.
Inspired to forge their own path, Ried-inger and Turner turned to Grousbeck for advice. “They came into my office one day, and they said, ‘We have an idea we’d like to hear your opinion on. We want to try to find a business to buy, and a classmate of ours has agreed to give us $20,000, and we think we can raise another $10,000 from
our families. What do you think of the idea of us taking $30,000 and going to look for a small company to buy?’ ”
Grousbeck explains that he was in-trigued by the concept but that he advised his young protégés to raise more cash. “I said, ‘That’s insufficient. You’ll need more time than that to get enough dealflow and enough choices and alternatives to make a good selection.’ ”
By aggressively tapping professional and personal networks, the men managed to rustle up about $60,000 by the summer of 1985. “We put down a list of everyone we thought would be likely [investors]. That could be our coach, our teachers, family members, uncles, whomever,” Riedinger says.
A dogged sense of determination and fearlessness served the two men well. “They were unafraid even then to pursue a path that was unpopular among their peers, [a path] frankly about which their peers were skeptical,” says Grousbeck, who continued to guide his students as they set out for a target.
Grousbeck says he invested in the first company the pair acquired. That company was Alta, originally known as the Denver Institute of Technology. Neither Turner nor Riedinger ever intended to work in the for-profit education space, and they cast a wide net before targeting Alta’s predeces-sor during the end of a tortuous journey from Boston to Los Angeles to Denver.
In 1986 the two men came close to ac-quiring a cosmetology school in Los Ange-les but were unable to close a deal because of price disagreements. Riedinger and Turner eventually came across a cosme-tology school in Denver that they almost bought. “We moved out, we had a big party in Boston, we said, ‘We’re off to Denver,’ and before we closed we kind of got some cold feet,” Turner recalls, adding that he and his partner ended up moving back to Boston and returning all the money raised for the acquisition and had to start with a fresh $80,000 search batch.
During their time in Denver, the pair met R. Wade Murphree, a principal owner of Denver Institute of Technology. Rieding-er and Turner purchased the company for between $4 million and $5 million. They raised about $1 million and funded the re-
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mainder of the purchase price with a small senior loan from a commercial bank and a seller’s note that was paid back over time.
“When we really looked at it from a sort of M.B.A. analysis, it was very attrac-tive. It had recurring revenue, high bar-riers to entry, it was import resistant and recession resistant,” Riedinger explains.
Despite the businesses’ potential up-side, the two men had to learn both basic managerial skills applicable to any compa-ny and the unique particulars of running a trade school. Two of the main challenges were developing effective communica-tion skills in a people-intensive business and learning how to work in tandem with industry regulators, they say.
Riedinger remembers the challenge of two young managers dealing with packs of government watchdogs from agencies such as the Colorado Commission on Higher Education hounding them. “You really had to approach [them] as a partnership to be effective,” he says. “It wasn’t just simply, ‘We’ll just comply and then we’ll be OK.’ It was that you needed to work with the regulatory folks, keep them well informed of what you were doing, how you were do-ing it, why you were doing it, and be open to their guidance and input also.”
Today investigations of the for-profit space come from a myriad of federal agen-cies such as the Federal Trade Commis-sion, Government Accountability Office, the Securities and Exchange Commission, and the Department of Education, as well as state accreditation bodies like the Ac-crediting Commission of Career Schools and Colleges.
The two partners worked over the ensu-ing years to build up their company, mostly through organic growth. “The core of our strategy was opening new schools from scratch,” Riedinger says. The investor base also shifted over time. BCI Partners Inc. bought a stake in Alta in 1999, and Housa-tonic Partners bought one in 2002. “We brought in some new money. We also re-tained some of our core investors,” Ried-inger states.
An early Alta board member, Rob John-son, says the partnership between these men was somewhat akin to a healthy mar-riage, a symbiotic bond whereby each person contributed something mutually
beneficial. “It was clear they were a good match for each other. They complemented each other’s skills. Jamie took on the finan-cial role and managed the finances, and managed them quite well. Kirk did more of the marketing-oriented and operational activities,” says Johnson, who was a former instructor at London Business School and who currently lectures on entrepreneur-ship and search funds at IESE Business School in Barcelona.
Some credit Boston investor Jim Southern with forming the first search pool. Southern, a well-known search fund investor,
bought a printing company called Uni-form Printing and Supply Inc. via a funded search in 1984. At the time, however, South-ern only had one investor. Turner and Ried-inger were the first to launch a search fund similar to the models used today.
Their story continues to be instruc-tive for the search fund community within Stanford and Harvard; the two now find themselves in front of a classroom extolling the virtues of self-entrepreneurship. “Irv wrote a case on us, and we would go back to Stanford and also to Harvard and be the guys that came into class and try to encour-age the current generation to go out and do something [like this] if they had the desire,” Turner says.
In fact, it was another pair of Grous-beck’s students that expanded Asurion from an $8 million search fund acquisition in 1995 to one of the world’s largest pro-viders of cellphone insurance, with more than 5,000 employees. Jim Ellis and Kevin Taweel bought the company when it was a 45-employee business called Road Res-cue Inc. providing assistance insurance through local wireless carriers to their us-ers. In 1999, they expanded into insurance for loss or damage to cellphones. Bolstered by three notable acquisitions in 2005 and 2006, Asurion grew to a company with $2.5 billion in revenue. In 2007, Ellis and Taweel sold the company to Providence Equity Partners LLC and Madison Dearborn Partners LLC for $4.2 billion.
Riedinger and Turner, meanwhile, act as elder statesmen for the search fund com-munity and both personally hold positions in such vehicles, believing strongly in the model after having personal success with it. “[We give] a lot of encouragement because
we know that when they’re out there doing this, it’s a roller coaster, high points and low points, and we want to make sure that they understand that that’s just part of it, that they’ll be successful as long as they’re per-sistent,” says Riedinger.
Their actions have guided search-ers from as far away as Europe, explains Johnson, who says that within his first two years at IESE Business School, a branch of Spain’s University of Navarra, he had a London student named Simon Webster fol-low in Turner and Riedinger’s footsteps. “[He] was going on exchange to Columbia [University] and was interested in running his own business. I gave him the Kirk and Jamie case.”
Upon returning to London, Webster was captivated by the story and went on to en-gage in the first funded search in Europe in 1991, raising £80,000 ($127,000). John-son says the student subsequently bought a family-owned prosthetics manufacturer in Leeds, U.K., called RSL (now known as RSLSteeper) for £3 million in 1992. He ran that for about seven years, according to Johnson. Webster acquired the company when it had about £3 million in revenue. When he sold the business in 2005, rev-enue stood at £30 million. Ebitda rose from £400,000 to £3.4 million over the period. Webster remained CEO until 2007.
Roughly 50 search funds were launched in the past three years, with each consecu-tive year marking a new high, according to a study released last July by Stanford. Grous-beck, Riedinger and others, however, ex-pect search funds to remain a little-known realm of finance. Turner, for his part, holds reservations about the future of search funds if they ever become ubiquitous.
“You wonder if things get too popular, is it cresting?” he asks.
No matter the model’s future, Turner and Riedinger stand at the head of the class of the cloistered search fund community. The group is so minuscule and tight-knit that it has become an almost secret society dubbed “the search fund mafia,” a nickname that also speaks to the collective power these in-vestors possess to curse or bless fundraising prospects. It is fitting that their journey with Alta College would serve to school other young finance professionals in an alternate path toward business leadership.
“They deserve accolades,” says Johnson. “They were pioneers.” n
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