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NOVEMBER 21, 2005 PERELLA, MEGUID SEEN STARTING UP M&A SHOP VOL. XXXI, NO. 46 Joseph Perella, a former vice chairman at Morgan Stanley and In the News veteran M&A banker, and Terry Meguid, former head of Some LBOs Squeeze Through 2 investment banking at the firm, are in the process of setting M&A Volumes Soar 2 up an advisory firm that will launch soon after their non- SPACs Get Sweetened 4 compete agreements expire at the end of the year. The Citi MD Alleges Retaliation 4 two, along with several other bankers, left the AMEX Relents On SPAC Listings 5 investment bank in April amidst a big shakeup that CapitalSource Exec Wary culminated with the ouster of Phil Purcell. Of Housing Sector 5 Soon after resigning from the firm Perella independently advised credit card company MBNA in its Private Equity/LBO News $35 billion takeover by Bank of America in July. Several calls to Gryphon Recoups Through Recap 6 (continued on page 15) Pension Makes Room For Buyout Hedgies 6 E*TRADE FINANCING GIVES OUTRIGHTS A LIFT Indiana Retirement Looks To VC 6 Outright investors, those whose strategy involves holding convertibles, gobbled up a M&A News sizable chunk of a $450 million of mandatory convertible preferred offering from E*Trade Medical Co. Scouts For Targets 7 last week. The deal, part of a $1.65 billion financing to pay for the acquisition of online Friendster To Fetch Under $50M 7 broker BrownCo, was priced at the cheap end of price talk and enjoyed an aftermarket lift on Thursday. Financing Strategies “There was a ton of outright demand,” said one capital markets executive of the KKR Exits Willis Group 11 convertible tranche, which was oversubscribed by more than two times. “They like the story Eagle Bulk Shipping Trims and right now they’re the ones that have the money,” he added, comparing the fundamental Equity Sale 11 investors to arbitrage hedge funds, which have been struggling with redemptions this year. Myriad Raises R&D Equity 11 Ravi Malik, senior portfolio manager at Froley Levy Investment Co., which oversees $3.5 Flavor-Maker Sells Shares 11 billion in convertibles, was among the fundamental investors that put in for the deal. “It was Columbus McKinnon Chips Away (continued on page 16) At Debt 13 Departments NEW TURNAROUNDS PREP FOR DISTRESSED WAVE M&A Record 9 A batch of turnaround buyout shops have recently opened their doors and begun marketing Nuggets 13 new funds under the assumption the current boom in buyout Financing Record 14 activity and the expansion of credit markets will bring them plenty of distressed companies in the next few COPYRIGHT NOTICE: No part of this publication may years. be copied, photocopied or duplicated in any form or by any means without Institutional Investor’s prior written “Historically, this is a relatively underserved space,” consent. Copying of this publication is in violation of the said Kevin Prokop, a director in the private equity Federal Copyright Law (17 USC 101 et seq.). Violators may be subject to criminal penalties as well as liability group at Questor Management Company, which runs for substantial monetary damages, including statutory a group of funds in Southfield, Mich. “And [some damages up to $100,000 per infringement, costs and attorney’s fees. Copyright 2005 Institutional Investor, firms] are aware of the opportunity there in the next few Inc. All rights reserved. ISSN# 1064-1912 years as the leveraged loan market comes home to roost,” he For information regarding subscription rates and electronic licenses, please contact Dan Lalor at (continued on page 15) (212) 224-3045.
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Corporate Financing Week www.corporatefinancingweek.com November 21, 2005
In The News
Pretty Please? EDITORIAL PUBLISHING TOM LAMONT ELAYNE GLICK Editor Publisher LBO Issuers Adjust Junk Terms (212) 224-3069 STEVE MURRAY Deputy Editor AMANDA CATERINA LBO issuers had to make hefty adjustments to their deal terms last week to get Associate Marketing Manager their money in the high-yield market. “A lot of them had covenant changes. Some PETER THOMPSON (212) 224-3096 Executive Editor [Chicago] VINCENT YESENOSKY were aided by the strength of the loan market, which absorbed whatever couldn’t (773) 439-1090 Senior Fulfillment Manager get done in high-yield,” said one syndicate banker. DANIEL SHIRAI Managing Editor SUBSCRIPTIONS/ Kohlberg Kravis Roberts’ Accellent downsized its $325 million deal to $305, (212) 224-3254 ELECTRONIC LICENSES [email protected] One year - $2,595 (in Canada add $30 the rest of which was taken out in a loan. The 10 1/2% 10-year notes (B-/Caa1) postage, others outside U.S. add $75). MATTHEW CRAFT were priced at 98.67. Senior Reporter DAN LALOR (212) 224-3278 Director of Sales (212) 224-3045 [email protected] Team Health, backed by Apollo Advisors and Banc of America Equity CHARLES PANOFF Partners, also moved some of its funding into the loan market and raised $215 PRIYA MALHOTRA Account Executive Reporter 212-224-3030 million in 11 1/4% notes at par. (212) 224-3516 [email protected] TOM GANNAGÉ-STEWART Account Executive [London] Other offerings such as Network Communications, backed by Citigroup JONATHAN STEIMAN (44 -20) 7779-8998 Intern Venture Capital, and Avago, a Singapore-based television network which also SABEENA NAYYAR (212) 224-3933 Account Executive [Hong Kong] [email protected] counts KKR as its backer, weren’t as lucky and will be trying again this week. (852) 2842-6929 “They’ll have until Wednesday morning at the very latest to get these done,” said ELINOR COMLAY (44-20) 7303-1738, REPRINTS VENILIA BATISTA the banker. DEWEY PALMIERI (44-20) 7303-1718 Reprint & Permission Manager London Bureau Chiefs (212) 224-3675 A Cornucopia JANA BRENNING, KIERON BLACK [email protected] Sketch Artists CORPORATE M&A Soars As Year-End Approaches PRODUCTION CHRISTOPHER BROWN Chief Executive Officer Last week was the fourth busiest in M&A so far this year as several mega deals were DANY PEÑA Director DAVID E. ANTIN Chief Operating Officer announced or confirmed. From Nov. 13-18, the combined value of 115 U.S. LYNETTE STOCK, DEBORAH ZAKEN Managers ROBERT TONCHUK transactions totaled $47 billion, according to Thomson Financial. That’s compared Director/Central Operations & Fulfillment MICHELLE TOM, ILIJA MILADINOV, Customer Service: PO Box 5016, with $70 billion during the week of Jan. 23, the busiest of the year. Last week MELISSA ENSMINGER, Brentwood, TN 37024-5016. BRIAN STONE, JAMES BAMBARA recorded fewer deals than any of the top 16 M&A weeks this year, suggesting deal Tel: 1-800-715-9195. Fax: 1-615-377-0525 Associates UK: 44 20 7779 8704 sizes were particularly large. JENNY LO Hong Kong: 852 2842 6950 E-mail: [email protected] Leading the pack was Johnson & Johnson’s agreement to purchase Guidant Web Production & Design Manager Editorial Offices: 225 Park Avenue MARIA JODICE for $21.5 billion, $4 billion below last year’s original offer. In another high- South, New York, NY 10003. Advertising Production Manager Tel: (212) 224-3254 profile transaction, Koch Industries, a tightly controlled family conglomerate, (212) 224-3267 Email: [email protected] ADVERTISING Corporate Financing Week is a announced its acquisition of papermaker Georgia Pacific for $13.2 billion. At general circulation newsweekly. No the end of the week, Cisco Systems unveiled plans to acquire cable TV JONATHAN WRIGHT statement in this issue is to be construed Advertising Director as a recommendation to buy or sell technology firm Scientific-Atlanta for $6.6 billion in one of the largest (212) 224 3566 securities or to provide investment advice. [email protected] Corporate Financing Week ©2005 technology deals of the year. PAT BERTUCCI, ADRIENNE BILLS, Institutional Investor, Inc. ISSN# 1064-1912 PHILIP COX, MAGGIE DIAZ Warren Gouk, head of M&A at Cascadia Capital in Seattle, said there is a Associate Publishers Copying prohibited without the generally a big push to get things done before Thanksgiving. “It’s a sign of things to permission of the Publisher. come,” said Gouk, adding that the markets have been hotter during the past three weeks compared with any other period this year.
Tell Us What You Think! Questions? Comments? Criticisms? Do you have something to say about a story that appeared in CFW? Or is there information you’d like to see published? Whether you would like to discuss a new business strategy or crow about a big hire, give us a call. Managing Editor Dan Shirai can be reached at 212 224 3254 or [email protected].
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Citi’s Menon Says Firing Securities, an underwriter, is said to have come up with a structure in which one class of shares represents 2 warrants, Was Retaliatory which is typical, while a second class represents 10 warrants but Ramesh Menon, the former head of Citigroup’s structured with no claim on the escrowed funds. Ira Greenspan at Brenner products group who was fired over a week ago, told CFW his didn’t return calls. dismissal was directly linked to the fact he filed a $138 million A third maneuver is to have management put its own money lawsuit against the firm. Last month, in the suit, he alleged into the trust which they would only get back if the deal was individuals at the firm discriminated against him on the basis of consummated. That strategy differs from officers buying warrants racial and cultural origin (CFW 11/07). in the deal, which has been common practice over the past year “I believe that my firing was transparently retaliatory and pretextual [sic], and I strongly dispute the basis for my U.S. Debt Underwriting Leaders termination,” he said. Ranked by Number of Issues A Citi spokeswoman would not comment directly, but Thurs. Nov. 10-Thurs. Nov. 17 stressed the part of a company statement on the matter which Proceeds Amount + suggests the two incidents were not connected, and that Menon Book Runner Number of Issues Overallotment Sold (US$ Mil) was fired for failing to meet standards of professional conduct, JP Morgan 16 4,897.2 Merrill Lynch & Co Inc 14 1,019.1 including failing to show up to work on a regular basis, and that Citigroup 11 3,887.9 he’d been given a warning some weeks prior. Goldman Sachs & Co 8 1,742.5 Morgan Stanley 8 908.3 “We are aware that Mr. Menon recently filed a lawsuit against Deutsche Bank AG 7 2,211.2 the company. We respect that right, but he also, like all Banc of America Securities LLC 6 858.4 Credit Suisse First Boston 5 606.8 employees, needs to come to work regularly and do his job. As ABN AMRO 4 623.0 we have stated previously, we believe the lawsuit is without merit, UBS 4 678.1 Wachovia Corp 3 282.4 its allegations are false, and we will contest it vigorously,” said the Lehman Brothers 3 632.4 statement, which also included a more detailed explanation for Barclays Capital 2 583.0 HSBC Holdings PLC 2 225.0 the reasons behind the firing. Bear Stearns & Co Inc 2 54.7 Menon said the move only adds ammunition to his suit. “This Williams Capital Group LP 1 166.4 Blaylock & Partners LP 1 166.4 very much strengthens the case I have regarding retaliation,” he BNP Paribas SA 1 124.3 said. KeyCorp/McDonald Investments 1 481.4 BB&T Corp 1 20.3 Industry Total 66 20,168.6 Bankers Tweak Terms On U.S. Equity Underwriting Leaders Acquisition Funds Ranked By Number Of Issues As more management teams and investment banks look to float Thurs. Nov. 10-Thurs. Nov. 17 specified purpose acquisition companies, some deal engineers are
adding sweeteners to make the vehicles more attractive to Proceeds Amount + investors, according to a panel of experts that spoke at the Book Runner Number of Issues Overallotment Sold (US$ Mil) JP Morgan 4 658.5 Reverse Merger & SPAC Summit in New York last week. UBS 3 248.1 “Some banks are aligning themselves with the SPAC by Lehman Brothers 3 254.7 Goldman Sachs & Co 3 481.3 deferring part of their fee to the ‘back end,’” said Mitchell Morgan Stanley 3 651.2 Littman, a partner at Littman Krooks. He was referring to Credit Suisse First Boston 2 274.5 Deutsche Bank AG 2 246.0 the final stage of a SPAC’s life when it consummates an Citigroup 2 316.0 acquisition. In a SPAC, money is raised with investors and Banc of America Securities LLC 1 123.5 MDB Capital Corp 1 14.0 then put in a trust until the vehicle’s managers find a target Merrill Lynch & Co Inc 1 126.0 and consummate an acquisition. Deutsche Bank deferred part AG Edwards & Sons Inc 1 66.8 Bear Stearns & Co Inc 1 38.3 of its compensation in Cold Spring Capital, a SPAC that Sandler O’Neill Partners 1 37.5 went public this month. Ryan Beck & Co 1 41.1 Another innovation has been to create a hierarchy of Industry Total 19 3,577.5
securities, similar to preferred and common shares, which gives Source: Thomson Financial investors a larger exposure to appreciation. HCFP Brenner
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November 21, 2005 www.corporatefinancingweek.com Corporate Financing Week
and a half. Under this stricter policy, any proceeds management If the AMEX had maintained its previous position not to spends on expenses related to deal searches would be returned to allow SPACs, these vehicles would be stuck with only the OTC investors in addition to the 90% or so of the funds that sit in an option, which is limiting because the exchange’s listings aren’t escrow account. The move dramatically reduces any downside for recognized by a number of U.S. states. That reduces the listed investors, said Littman. companies’ liquidity and access to capital. AMEX officials didn’t return calls by press time. AMEX Accepts Acquisition Vehicles The American Stock Exchange is accepting applications for Lenders Eye Housing Sector specified purpose acquisition companies, according to executives With Caution close to the exchange. The AMEX had previously said it wouldn’t Lenders will likely be leery of making loans to building products accept the vehicles, but Cold Spring Capital, a Deutsche Bank- and durable consumer products companies next year because of led SPAC, began trading on the exchange this month, marking a indications the housing market is softening, said Joe Kenary, departure from the typical route taken by these vehicles, which president of CapitalSource’s corporate finance group. The group involves a listing on the Over The Counter Bulletin Board writes senior and mezzanine cash flow loans for the Chevy exchange (CFW, 10/31). Chase, Md.-based middle market lender. While no official statements have been released on the matter, Kenary mentioned two indications of the softening exchange officials confirmed they would be accepting housing market. In a survey conducted earlier this month, applications from other blank check issuers, according to real estate consulting firm Real Trends found the number of executives who spoke on a panel at the Reverse Merger & SPAC home-purchase contracts signed in October fell 8% Summit in New York last week. compared with a year earlier at 48 of the nation’s large real- SPACs are publicly traded shell companies run by estate brokerage firms. Also, home builder Toll Brothers management teams whose mandate is to seek out an acquisition, recently reduced its sales forecast for fiscal 2006, blaming usually within 18 months following its IPO. weaker demand in several markets.
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Corporate Financing Week www.corporatefinancingweek.com November 21, 2005
Private Equity/LBO News Gryphon Gets Back Half said the fund is looking for niche strategies where there is an information advantage the manager can exploit. In Six Months Because convergence is a new strategy, managers do not have Gryphon Investors recently recouped half of its $40 million long track records so a lot of due diligence needs to be done, said equity investment in Update Legal, a legal staffing company it Clayton Young, assistant treasurer. Economou expects picked up in May, through a dividend recapitalization. Nick convergence strategies to have higher returns and higher volatility Orum, a partner in San Francisco, said Gryphon decided to take than other hedge fund strategies. a dividend out for a couple of reasons. “The company is One example of a hedge fund morphing into a buyout firm is performing ahead of expectations. And we desired to generate a Edward Lampert’s ESL Investments. The 42-year-old billionaire return for our investors.” is credited with orchestrating the merger of Kmart and Sears, Gryphon is in the middle of raising a reported $750 million Roebuck and Co. last year. Highfields Capital Management, a fund. Orum declined to comment on the fund-raising effort. Boston-based hedge fund, offered $17 a share for Circuit City in But the payout generated from recapitalizing Update Legal February. Earlier this year, the tussle for Toys ‘R’ Us pitted an nudges up the existing fund’s rate of return, a selling point in investment group including hedge fund Cerberus Capital raising a successor fund. Management against a number of private equity bidders Details of the most recent deal weren’t disclosed because including veteran buyout house Kohlberg Kravis Roberts. Gryphon doesn’t want to reveal the company’s earnings, Orum said. The senior debt, provided by Madison Capital Indiana May Add More Venture Funding, amounted to 2.5X EBITDA. The mezzanine slice, provided by 1818 Mezzanine Fund and AlpInvest Partners, Capital Next Year amounted to 2X EBITDA. The $12.7 billion Indiana Public Employees Retirement Fund Gryphon has experience in acquiring staffing companies and will likely invest in venture capital next year as it works toward bulking them up through add-on acquisitions. The firm has used filling its roughly $635 million target to alternatives. So far, the Nursefinders as a platform in the medical staffing business, buying fund has around $190 million in its alternatives bucket, with Linde Healthcare and Kendall & Davis as add-ons earlier this year. $24.5 committed to firms investing in venture capital and the Orum said he expects to find acquisitions to fold into Update Legal, rest in private equity. Jeffry Carter, spokesman, said the board especially companies that would expand its geographic reach. likes venture capital because it’s a more conservative way to invest in alternatives and boost returns without getting tangled up in Pension Builds Exposure To Private complicated strategies, such as hedge funds, which the plan doesn’t invest in. He said it’s too soon to speculate on how large Equity Via Hedge Funds future venture capital mandates may be and there is no timetable ITT Industries is building an allocation for its pension fund to for meeting the target. David Adams, executive director, did not “convergence” strategies—hedge funds participating in private return calls. Mercer Investment Consulting advises the fund. equity-style investing. Hedge funds are moving toward illiquid The plan has 45% in domestic equity, 11% in international investments, such as buyouts, because there is a barrier to equity, 9% in global equity, 20% in core fixed-income, 10% in accessing company-specific data, so managers in the know have TIPS and 5% in alternatives. more of an edge, said Theodore Economou, assistant treasurer. “That’s probably the next frontier in the hedge fund space.” The NOW GET corporate financing week EVERY FRIDAY! fund is discussing what size allocation it wants to build and is Paid subscribers now have access to a PDF of likely to place mandates by mid-2006. the upcoming Monday’s newsletter on The engineering and manufacturing company in White CFW’s Web site every Friday afternoon Plains, N.Y., views 20% of its pension portfolio as an alpha before 5 p.m. EDT. That’s a 64 hour jump on mail delivery, even when the post engine, which should consistently outperform cash by 300-500 office is on time! Read the news online basis points with low volatility. Convergence strategies will sit at your desk or print out a copy to read at within this pool, which includes hedge funds and also long-only your leisure over the weekend. Either way, strategies that have high information ratios. ITT will likely you’ll be getting our breaking news even enlarge the alpha portfolio as it finds new managers. Economou sooner and starting your week off fully informed!
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November 21, 2005 www.corporatefinancingweek.com Corporate Financing Week
M&A News Medical Management Co. company purchased Health IQ Diagnostics, a Chicago health support company. Seeks Acquisitions American Healthways, a medical management company in Friendster Seen Fetching Nashville, Tenn., is looking to acquire healthcare services companies promoting healthier lifestyles and healthcare Less Than $50M technology players. Paul Wallace, senior v.p. of strategic Online social networking company Friendster, which is development, said the company is interested in purchases reportedly up for sale, will probably fetch a price below costing $5-500 million and is also open to a merger. The $50 million because it has few unique offerings in a crowded business has a $1.4 billion market capitalization. marketplace, according to Michael Maxworthy, founding The desire for acquisitions stems from a customer partner of Marlin & Associates, a New York investment bank preference to have all healthcare management services under specializing in the media and IT sectors. Last week, several one roof, said Wallace. That means providing employers and reports said Friendster had hired investment bank Montgomery health insurance plans with a full range of services, such as & Co. and was looking to sell itself for $50-100 million. assisting cancer patients and recovering alcoholics. Friendster has little else to offer aside from a customer base American Healthways is interested in service providers of 21 million user profiles, said Maxworthy. It is not the that for instance help people quit smoking, said Wallace, leader in its space and doesn’t cater to a specific niche, he adding he’s also attracted to technology companies that have added. In addition, its venture capital backers, which include tools to help assess the needs of patients over the phone. Kleiner Perkins Caufield & Byers, Benchmark Capital and Acquisitions might be financed by a variety of instruments Battery Ventures, have only poured in $13 million into the including bank debt or the public markets. In July, the company since 2003. A price of $50-100 million would mean
You
read JUNE 13, 2005 WALL STREET JOURNAL it WARBURG RAISES $7.8B PRIVATE AUGUST 15, 2005 EQUITY FUND Warburg to Unveil $8 Billion For Warburg Pincus has raised a $7.8 billion buyout fund, which will give the private equity firm a top three slot in the ranking New Private-Equity Fund here Investing firm of the big funds. The only U.S. firms with larger funds are today to announce Warburga new private-equity Pincus fund with Goldman Sachs which raised $8.5 billion and The Carlyle approximately $8 billion in capital, accordingLLC is expected to a person Group, which raised two funds worth a combined $10 billion familiar with the matter, the latest in a line of big-ticket first! (CFW, 4/11). The final size of the Warburg fund may vary fund raising. slightly, according to an industry official. These are flush times for private-equity houses, whose The Warburg fund should be announced soon, the investors—primarily pension funds, universities and We stay ahead industry official said. A spokeswoman at Warburg declined tohigh-income individuals—have proved eager to take on comment. The New York firm’s previous fund is the $5.3 increasingly larger deals even while overall private-equity returns level off and competition intensifies. of our competition billion Warburg Pincus Equity Partners VIII raised in 2001, In the last year alone, Warburg was part of groups so you can stay according to Capital IQ. Its most high-profile deal this yearthat purchased retailer was the $5.1 billion buyout of luxury retailer Neiman Marcus$5.1 billion, and technologyNieman company Marcus Group ahead of yours. with Texas Pacific Group. Technologies Inc. for This year buyout players have raised mega-funds as part of a broaderInc. explosion for $1.3 ofbillion. private Those equity,Telcordia deals which were in just the investors have been looking for returns that beat the public markets. They’ve also benefited from investors flocking to To Subscribe Call 212firms 224 with 3570 the (USA), best returns. + 44 20 7779 8999 (UK), EMAIL: [email protected] CAPAD_tugbw_8x10.5_0223 3/8/04 9:50 AM Page 1
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