Private Equity and Venture Capital Club Deals
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IFLR International Financial Law Review The 2006 Guide to Private Equity and Venture Capital Club deals activities and enforcing confidentiality What it takes to make a agreement provisions are difficult tasks, and sellers are unlikely to turn away an attractive offer from a consortium simply consortium work because it might have been formed without formal permission or in breach of the nondisclosure provisions in a confidentiality agreement. Club deals have many facets and partners in a consortium must share Recent club deals similar values and appreciate each other’s differences to make the union For the reasons discussed above, club deals successful, says Eric Schwartzman of Latham & Watkins LLP tend to form in large, multibillion-dollar transactions. An early example of a high- ver the last few years, the expertise, bringing the best resources to profile club deal was the 2002 acquisition proprietary private equity deal bear for the benefit of the investment, of Dex Media from Qwest O seems to have become a relic of portfolio company and potential return. Communications by The Carlyle Group the past and auctions controlled by sellers From a seller’s perspective, consortiums and Welsh Carson Anderson & Stowe for and their investment bankers are the deal arguably provide a livelier auction, where more than $7 billion. At the time, the de jour. This, combined with the participants who might not have Dex Media deal was the largest buyout multibillion-dollar assets that are now otherwise been involved can team up and since Kohlberg Kravis Roberts acquired regularly for sale, has given birth to club offer a higher price. On the other hand, RJR Nabisco in 1989. deals consummated by various types of some sellers worry that the formation of More recent high-profile deals that private equity consortiums. consortiums dampens competition in have been announced or closed are auctions because sponsors who would shown in Table 1. Why clubs form: pros and cons otherwise be bidding against each other Of about 60 club deals involving US For the private equity firms (or sponsors) team up to jointly bid and drive down targets valued at $1 billion or more since bidding in an auction, as well as for the the sale prices. This worry has caused 2001 (according to a recent article by seller, sponsors forming private equity sellers and their investment bankers to David Marcus writing for TheDeal.com), consortiums can be attractive for many often explicitly prohibit the formation of many targets were standalone companies, reasons. consortiums without the seller’s prior many were large divisions of even larger From the sponsor perspective, club consent. Such a provision typically resides conglomerates and a good number were deals allow private equity firms to in the confidentiality agreement that household names. Notwithstanding any competitively participate in auctions by sponsors must first sign to gain access to of those characteristics, however, all of being able to increase aggregate bid price information memorandums, them fit the main criterion that makes and share the burden and risk of writing management presentations and due deals ripe for potential buyers to form a large equity cheque. Although several diligence materials. It provides a consortiums: they were all multibillion- funds approaching or even exceeding $10 mechanism for dollar deals where billion have been raised in 2005 by The sellers and no one private Carlyle Group, Apollo Management, The investment bankers The timing and circumstances in equity firm could Blackstone Group, Goldman Sachs to remain in have funded the Capital Partners, Warburg Pincus and control of the which a consortium forms affect entire equity piece CVC Capital Partners, the multibillion- auction process the dynamics among the or would have dollar price tags attached to the assets and encourages the been willing to being offered to and sought by private formation of consortium’s members and the take the risk of equity investors make it unlikely that any consortiums issues they will face doing so even if it one sponsor would be permitted (most comprised of could have funded fund documents provide for sponsors, at least the equity. diversification of holdings by restricting partially, who Additionally, most sponsors from investing too large a might not have otherwise been involved of these clubs had only four or fewer percentage of a fund in any one in the auction. Additionally, in a shotgun members. Although there seems to be transaction) or willing to fund the entire marriage consortium (discussed below) safety in numbers and a desire to share equity portion of the purchase price. there might be tension between the desire risk and operating expertise, consortiums Aside from the pure size of the equity or need of the initial sponsor to share also must face the task of allocating and financing required to consummate any information regarding the target with the sharing control over the investment. given multibillion-dollar acquisition, club joining sponsors, on the one hand, and When facing those issues, a manageable- deals can also bolster debt financing the confidentiality obligations owed by sized consortium is more likely to yield because selling high-yield bonds and the initial sponsor to the seller, on the success. syndicating bank loans is often facilitated other hand, because the typical when several large, well-known sponsors confidentiality agreement does not How clubs form: timing and attach their names to a deal. Additionally, permit information to be shared with types forming a consortium allows sponsors to joining sponsors without prior consent of Timing is always critical and members of combine, enhance and supplement the seller. Nonetheless, policing these private equity consortiums come together www.iflr.com A special IFLR supplement 99 Club deals Table 1: Recent deals that sponsors must often work out quickly and adeptly. Target Consortium Purchase price Although not always the case, many TDC • Apax Partners Worldwide $12.0 billion (largest ever traditional marriages involve sponsors • Permira Advisers LBO in Europe) taking an equal percentage of the deal • The Blackstone Group and therefore having equal rights and • Kohlberg Kravis Roberts obligations. This dynamic often leads to • Providence Equity straightforward and even-handed arrangements for how the consortium SunGard • Silver Lake Partners (lead) $11.3 billion will approach the bidding process • Kohlberg Kravis Roberts (including the equity commitment letter) • Bain Capital and then negotiate the ultimate • Texas Pacific Group shareholders agreement covering post- • The Blackstone Group closing governance of the target - which • Providence Equity many consortiums wait to do until after • Goldman Sachs Capital they have won the auction, signed the Partners deal and are approaching the closing. The key here is how the personalities of the AMC Entertainment/ Loews • JPMorgan Partners Deal value not publicly players at each sponsor member mesh Cineplex Entertainment • Apollo Management disclosed; combines second and whether the firms have a similar • Bain Capital Partners and third largest theatre approach and outlook. If this is the case • The Carlyle Group chains; will have interests in and the sponsors view each other - • Spectrum Equity Investors 450 theatres in 30 states and economically and otherwise - as partners 13 countries who can each add to the mix in the effort to share a smaller piece of a larger pie, Intelsat • Apollo Management $5 billion the negotiations, governance and ultimate • Madison Dearborn exit will go smoothly. The importance of Partners having a similar approach and outlook • Apax Partners might partially explain why most club • Permira deals are made up of private equity sponsors and few (probably 10% or so) Hertz (from Ford) • Clayton Dubilier & Rice $15 billion involve strategic buyers (although one (lead) noteworthy club deal - because the • The Carlyle Group primary strategic investor led a group of • Merrill Lynch Global Private high-profile private equity investors - was Equity where Sony Corporation of America led a consortium made up of Comcast Toys ‘R’ Us • Kohlberg Kravis Roberts $6.6 billion Corporation, Providence Equity Partners, • Bain Capital Texas Pacific Group and DLJ Merchant • Vornado Realty Trust Banking Partners to acquire Metro- Goldwyn-Mayer for $4.8 billion in April in different circumstances. The formation and circumstances in which a consortium of 2005). of a private equity consortium is often forms affect the dynamics among the In the shotgun marriage, where an akin to courting and marriage. There is consortium’s members and the issues they initial sponsor has made significant the traditional marriage, where sponsors will face. progress and is then joined by other join together from the beginning to sponsors (which, for example, was the conduct diligence, submit the bid and Internal issues: governance and case in the SunGard transaction where negotiate the acquisition of the target. equity commitments Silver Lake was actively negotiating with There is also the shotgun marriage, where After the marriage has been set - or at SunGard before being joined by the the initial sponsor has made significant least once the members are engaged and members that ultimately made up the progress in the auction process and the bidding in the auction - there are several consortium), the smoothness of joining sponsors enter before submitting internal issues that the members of the establishing the parameters of the the actual bid or after the bid is submitted consortium must face as largely dictated consortium can vary. Almost regardless of but, in either case, before executing by the type of marriage that formed the whether the economic stakes are equal, definitive documentation. Then there is consortium. Such issues include the initial sponsor might often be viewed the late-life marriage, where the signing shareholder arrangements governing as the lead investor who will most sponsor seeks to syndicate a portion of its control of the board of the target and exit influence - if not dictate - strategy, equity commitment post-signing.