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Home , Apax Partners, Bain Capital, Club deal, CVC Capital Partners, Kohlberg Kravis Roberts, Permira

IFLR International Review

The 2006 Guide to and Venture 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 was the 2002 acquisition proprietary private equity deal bear for the benefit of the , of from O seems to have become a relic of portfolio company and potential return. Communications by 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 multibillion-dollar assets that are now otherwise been involved can team up and since acquired regularly for sale, has given birth to club offer a higher price. On the other hand, RJR 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 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, to remain in have funded the Capital Partners, 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 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 financing the confidentiality obligations owed by sized consortium is more likely to because selling high-yield bonds and the initial sponsor to the seller, on the success. syndicating 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 • Worldwide $12.0 billion (largest ever traditional marriages involve sponsors • Advisers LBO in ) taking an equal percentage of the deal • and therefore having equal rights and • Kohlberg Kravis Roberts obligations. This dynamic often leads to • 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) • 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 - • 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, • 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 led a group of • Lynch Global Private high-profile private equity investors - was Equity where Sony Corporation of America led a consortium made up of Toys ‘R’ Us • Kohlberg Kravis Roberts $6.6 billion Corporation, Providence Equity Partners, • Bain Capital Texas Pacific Group and DLJ Merchant • 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. Lastly, strategies, as well as the type and nature of governance and exit. In these situations, there is the arranged marriage, where the any equity commitment letter that will be the initial sponsor has an advantage by seller selects which sponsors will join delivered at the seller’s request. These being first into the fray. Sometimes, together to acquire the target. The timing issues can have -lasting implications however, being first can be a potential

100 A special IFLR supplement www.iflr.com Club deals

Author biography weakness if the initial sponsor is so entrenched in the deal and beyond the Eric Schwartzman point where it will practically walk away. Latham & Watkins In these situations, the other sponsor members who may be willing to walk Eric Schwartzman is a partner at Latham & Watkins and co-chair of from the deal but yet know their equity its Corporate Department in . He focuses his practice on participation is essential to the initial , private equity , venture sponsor could have an advantage vis-à-vis capital investments, and general securities and corporate matters. the initial sponsor and be able to level the He represents investment , LBO firms, private equity and playing field, at least for essential funds, as well as publicly traded and privately held governance and exit decisions. companies. Although most discussions about member relations focus on the post- of being invested in more than one of the answer multiple questions from multiple closing period and the shareholders members of any given consortium and sources. During the sale process, the task agreement, sometimes members also enter therefore overexposed to certain portfolio of supplying sponsors and their advisers into agreements that cover the period companies. A related topic is the with abundant and detailed information between signing and closing. These suggestion that, if the large private equity largely falls on the in-house counsel and agreements are intended to be -lived firms all go into the same deals through CFO, with the help of the investment but can be essential because they address forming consortiums, there will not be bank that is running the auction. control over which member or members much Although this adds can decide to walk away from a signed differentiation layers of deal if problems emerge at the target or between private Many traditional marriages complexity for the with the debt financing. In other words, equity firms or the executives, it also the interim agreements govern the control returns that they involve sponsors taking an equal creates of the closing conditions that are set out can offer limited percentage of the deal and opportunities for in the acquisition document with the partners. These individuals who are target. This topic may also be covered in concerns are therefore having equal rights and exposed to many the equity commitment letter, especially in misplaced. Most sponsors in the shotgun and late-life marriages, where limited partners, obligations multiple bidding the initial sponsor has already signed a made up of consortiums. If purchase agreement and other sponsors are pension funds, they perform well joining after the fact. In those instances, endowments and the like, are large and and are perceived to possess skill and the interim agreement might well involve well diversified. The amount of money integrity, these executives can stay on in a sponsor-to-sponsor equity commitment going into any one deal relative to the their positions post-closing or be where, although the initial sponsor is liable amount of money a limited partner presented with even more lucrative roles to the seller, it can seek recourse against allocates to private equity investments is in other portfolio companies or future the joining sponsors for failure to fund. unlikely to have even a negligible impact deals involving the sponsors. So far, club deals have enjoyed a rising on diversification, even if a limited of fund raising, economic and exit partner has investments in more than one Law firm considerations strategy success. Therefore, relationships of the consortium members. Additionally, The formation, management and among consortium members have not yet limited partners spend a great deal of representation of consortiums create been truly tested, which will probably time, resources and energy making opportunities and challenges for law firms happen when there is a highly-publicized investment decisions and are more than that represent the individual members of a problem with a jointly owned and sophisticated enough to determine which consortium and, potentially (and managed portfolio company or a private equity funds tend to lead or be hopefully for law firms) the consortium downturn in the markets that have been equal participants in club deals and which itself. Private equity firms in general, and fuelling private equity investments. If and tend to consistently engage in shotgun the larger ones who tend to lead or join when a deal that closes blows up, the and late-life marriages by following the consortiums with other large sponsors in staying power of sponsors’ ability to lead of other sponsors. particular, typically have long-standing continue to work together will be tested and entrenched relationships with outside and, at that time, similarity of outlook and Considerations for seller’s legal counsel. Predominantly with personalities - more than what the executive team: in-house traditional marriage consortiums, there is shareholders agreement might or might counsel and CFO issues a tendency for sponsors to want the law not say - will probably be of paramount Sponsors are known for doing extensive firms they usually rely on to represent the importance. financial, and legal consortium as lead deal counsel which, in before consummating transactions and for turn, leaves sponsors and law firms Limited partner/investor con- being involved in monitoring and/or jockeying to take the lead role. There is a siderations managing investments post-closing. With similar dynamic when it comes to The media has questioned whether consortiums, that means there are a lot of deciding which firm will get limited partners of private equity funds cooks in the kitchen and a seller’s the lead role for the consortium, and it are disadvantaged by club deals by virtue executive team must be prepared to often becomes a where one sponsor

www.iflr.com A special IFLR supplement 101 Club deals

will pick the law firm and another sponsor job interview to premier sponsors with come in all different shapes and sizes. The will pick the accounting firm. Another whom the law firm might not have key to any successful marriage is common formulation has one law firm traditionally worked, which can lead to commonality of values and perspectives winning the lead M&A representation future business representing members of while at the same time recognizing, and another taking the lead financing role, the consortium on an individual basis. appreciating and working to make the although sponsors and consortiums often On the other hand, failing to show a most of differences. The institution of - and rightfully so - subscribe to the zealous representation of the consortium marriages has lasted for centuries. theory that the strongest formula for or exhibiting even a hint of favouritism Likewise, club deals, if they can survive success is to engage one firm that excels in towards one member of the consortium the first real economic downturn or major both M&A and finance, to seamlessly can be deadly for law firms. financial failure at a portfolio company integrate the many points on the deal In addition to the role as lead counsel that is highly publicized, are likely to be where the disciplines intersect. to consortiums, law firms play an active here to stay. Sometimes each sponsor will involve its role in negotiating the various marriage own law firm in the process during the contracts that bind members of early stages of the auction but a lead consortiums. As such, typically a handful counsel usually emerges, whether for cost of law firms are in the mix when it comes efficiency, the particular expertise of a law to the equity commitment letters, interim firm on the issues (industry, regulatory) period agreements, shareholders in any given deal, or a host of other agreements and other documents that reasons. If and when a lead counsel to the deal with the relationship among consortium emerges or is picked, that law consortiums’ members and their firm has to be professionally and ethically governance of the target. This too focused on representing the consortium presents opportunities for law firms to as a group and careful not to favour, get in front of sponsors with whom they Latham & Watkins LLP whether in reality or by perception, the typically do not work and make a lasting 885 Third Avenue, Suite 1000 sponsor who brought the law firm into impression that could generate future New York, NY 10022-4834 the deal. Successfully navigating that . course presents wonderful business development opportunities for law firms. Keep them coming to the altar Tel: +1 212 906 1200 It is a built-in way of showcasing a law There are numerous ways to get hitched Fax: +1 212 751 4864 firm’s capabilities in an extended, on-the- and consortiums, like married couples, Web: www.lw.com

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