Deal diary: Sept. 3, 2012
Historically low spreads on high-yield debt and more realistic seller expectations led to strong private equity activity in July and August and could result in even more buyouts this fall. Carlyle Group was particularly active with five large deals. The Washington-based buyout firm agreed to pay $4.9 billion for DuPont Co.'s automotive coatings business on Aug. 30; struck a deal to buy a controlling stake in Getty Images Inc. on Aug. 15 in a deal that valued the target at $3.3 billion; and on July 20 teamed with BC Partners Ltd. on a $3.46 billion deal to buy Hamilton Sundstrand Industrial from United Technologies Corp.
Carlyle also announced plans to invest $800 million in Genesee & Wyoming Inc., money that will help the short-line rail operator complete the $2 billion purchase of RailAmerica Inc. from Fortress Investment Group LLC, announced July 23. In addition, Carlyle agreed to buy asset manager TCW Group Inc. from Société Générale SA for a figure reportedly north of $700 million.
Carlyle is spreading around its advisory work on the deals. It has historically had a very close relationship with Latham & Watkins LLP, and partners Daniel Lennon and David Dantzic advised it on the DuPont deal, while Lennon and Paul Sheridan Jr. worked on the Hamilton Sundstrand transaction. Lennon also worked on the Genesee & Wyoming investment, along with David Brown. DuPont, meanwhile, tapped Brandon Van Dyke, Thomas Greenberg and Lou Kling of Skadden, Arps, Slate, Meagher & Flom LLP for legal advice, and Gerald Lodge and Spyros Svoronos of Credit Suisse Securities (USA) LLC and Robert Greenhill and Birger Berendes of Greenhill & Co. LLC for banking advice. United Technologies, for its part, went with Igor Kirman and Trevor Norwitz of Wachtell, Lipton, Rosen & Katz and David Leach and Matthew McClure of Goldman, Sachs & Co.
Wachtell and Goldman advised United Technologies on its $18.4 billion purchase of Goodrich Corp., a deal that pushed United Technologies to divest several divisions.
Genesee & Wyoming turned to Joseph Coco and Thomas Greenberg of Skadden, which advised Fortress on its 2007 initial public offering. Sean Costello, Bettina Dix, Jim Fuehrer and Jim Ratigan of Deutsche Bank AG provided banking advice. RailAmerica used Simpson Thacher & Bartlett LLP's Bill Curbow, Bill Sheehan and A.J. Kess and a Bank of America Merrill Lynch team that included Steven Baronoff, Chris Dopp, Eleba Ende, Philipp Klingelhofer, Andrew Martin, Tom Reilly and Loli Wu.
Carlyle has also used Debevoise & Plimpton LLP over the years on fund formation and M&A work, and Paul Bird, Jonathan Levitsky and David Brittenham advised on the Getty Images deal.
The Getty deal was a rousing success for Hellman & Friedman LLC, which purchased the Seattle-based image distributor in 2008 and stands to make a 250% return on the investment. Chad Skinner of Simpson Thacher helped advise Hellman & Friedman, a longtime Simpson Thacher client, on the original purchase and is advising both the PE shop and Getty Images on the sale. The company is also using Kyle Krpata of Weil, Gotshal & Manges LLP in Redwood Shores, Calif., who was Getty Images' counsel on the 2008 sale.
On both deals Sarah Solum and Daniel Kelly Jr. of Davis Polk & Wardwell LLP represented Getty Investments LLC, the investment vehicle of Mark Getty, an heir to the Getty oil fortune who co-founded Getty Images in 1993 with Jonathan Klein. The two men retained a significant stake in the company after the 2008 deal and will continue to own about a quarter of Getty Images when Carlyle becomes the controlling shareholder.
Simpson Thacher represented Carlyle on its IPO earlier this year, and the law firm's Lee Meyerson, Elizabeth Cooper and Chris Brown are advising it on the TCW deal. For banking advice, Carlyle used BofA Merrill Lynch's Steve Niemczyk, Filip Rensky and Damon Clemow and Sandler O'Neill + Partners LP's Jimmy Dunne.
Advising TCW's management team was Morgan Stanley, with a team that included managing directors Gary Shedlin, Terry Sullivan and Guillaume Gabaix. A Debevoise team led by partner Jeffrey J. Rosen provided legal advice.
Société Générale tapped Skadden partners Ralph Arditi and David Hepp for legal advice. Its financial advisers were JPMorgan Securities LLC's Isabelle Seillier, Joel Chapellier, Mark Feldman and Paul Dabbar and Société Générale Corporate & Investment Banking. -- David Marcus
In the landscape of post-financial crisis leveraged buyouts, the $6.6 billion deal for Suddenlink Communications by BC Partners Ltd. and Canada Pension Plan Investment Board would stand out for its size alone.
The transaction is also noteworthy because sellers Goldman Sachs Capital Partners, Quadrangle Group LLC, Oaktree Capital Management LP and Jordan Co. arranged the sale, which matches the high end of recent deals' metrics and includes a $2 billion equity check, without holding an auction.
"We've had a lot of incoming calls about Suddenlink," says the company's chairman and CEO, Jerry Kent. "Most of those were from PE shops. There is a small list of PE shops that can write $2 billion checks."
Kent, who has a storied track record, had earned the right to pick his new partners. GS Capital's Gerry Cardinale describes Kent as a "player-owner" who has been as adept at "navigating the capital markets" as in operating cable systems over three decades. The deal, he says, "was about finding the right partner rather than just putting the company on the block."
The sale evolved through talks among Kent, Cardinale, BC Partners co-chairman and managing partner Raymond Svider and Suddenlink adviser Aryeh Bourkoff of LionTree Advisors LLC.
The transaction is a signpost for each of the parties. It gives Kent a new slate of backers and provides a signature exit for Cardinale, who retires from GS Capital in December.
It's also BC Partners' first investment in the U.S. cable sector, and the first U.S. outlay from the firm's ninth fund. And it's the debut transaction for recently founded LionTree.
Svider hit it off with Kent and Cardinale, who have known each other for 15 years. Bourkoff has ties to both the buyers and the sellers. Reflecting the tightness of the group, there were no leaks.
"Here we were dealing directly with the decision makers at BC Partners and CPPIB and not a deal team, which is often the case in auctions," Cardinale says. "That made a tremendous difference."
Kent's reputation helped the parties to agree on price without the pressure of competing bids. The Suddenlink chief has had a number of successful ventures. The best known may be Charter Communications Inc., which he co-founded in the 1990s.
Microsoft Corp. co-founder Paul Allen bought the company for $4.5 billion in 1998, and the following year Kent and management took Charter public for more than $3 billion, then one of the largest IPOs.
Another factor was Suddenlink's portable capital structure, which allowed the company's debt to remain in place. The target also has attractive markets, with limited competition from the pay-TV offerings of Verizon Communications Inc. and AT&T Inc. Among other points, recent upgrades in Suddenlink's network would leave more of its cash to delever or pay dividends.
The buyers, meanwhile, gain a marquee property in the U.S. cable sector. BC Partners has made similar investments overseas. It has money in Swedish pay-TV company Com Hem AB. The firm and Apollo Global Management LLC backed German cable operator Unitymedia GmbH, which they sold to John Malone's Liberty Global Inc. for $5.2 billion in 2009.
LionTree's Bourkoff advised Svider and Apollo on the sale of Unitymedia. Bourkoff started LionTree earlier this year with Ehren Stenzler after leaving UBS Investment Bank, where he oversaw investment banking for the Americas.
Goldman also advised Suddenlink. Counsel to the sellers included Paul Hastings LLP lawyers Barry Brooks, Luke Iovine III, Jeffrey Pellegrino and Richard Denhup, as well as Stanley Bloch and Andrew Lucano of Seyfarth Shaw LLP. The Suddenlink equity holders retained Fried, Frank, Harris, Shriver & Jacobson LLP lawyers Robert Schwenkel, Steven Steinman and William Reindel.
Credit Suisse Group bankers Kristin Allen and John Trousdale advised BC Partners and CPPIB. The bank had participated in a recent Suddenlink recap.
The buyers retained Latham & Watkins LLP lawyers Raymond Lin, Taurie Zeitzer and Matthew Brill, as well as a group from Wachtell, Lipton, Rosen & Katz that included Steven Cohen. Zeitzer left Latham for Kirkland & Ellis LLP on Aug. 21.
CPPIB also hired Torys LLP lawyers Matthew Cockburn, Guy Berman and John Cameron.
Suddenlink's sponsors collectively invested close to $1 billion. Most will reap about a 210% gain, which includes roughly $900 million of debt-funded dividends Suddenlink paid in 2011 and this year.
Since 2004, GS Capital has invested $350 million. In return for its 36% stake, it will earn about $1.1 billion, or roughly 3 times its original investment. Quadrangle and Jordan, which initially invested in 2006 and own 17% and 8%, respectively, will see similar returns. Oaktree has a 10% stake.
Recent sales of Bresnan Communications LLC and Insight Communications Co. to cable operators meant that management would leave the sector. With the new investment in Suddenlink, one industry source observed that Kent is doubling down.
If the decision had been to seek the highest bidder at auction, Kent says he would have been fine with a sale to a cable operator. He notes that an auction is not necessarily the best way to maximize value. For instance, CPPIB typically has a policy of not participating in auctions outside of Canada
"If we had participated in an auction," he says, "one of our investors might not have participated at all."
As it turns out, CPPIB and Kent share more than their viewpoint on cable. Kent described a meeting in Toronto with the fund's management.
"Somehow it came out that I'm a part owner of the St. Louis Blues," he notes, regarding his stake in the professional hockey team. "After a half-hour of talking about hockey, I knew it was a good fit." -- Chris Nolter
Aetna Inc. CEO Mark Bertolini clearly had his eye on the clock when he was crossing the t's and dotting the i's on one of the year's largest healthcare deals. "Time was running out," he said on a conference call on Aug. 20.
That is not to say that Aetna was recklessly barreling forward when it inked a $7.3 billion agreement to buy rival managed-care company Coventry Health Care Inc. in the fourth-largest deal this year. But the Hartford, Conn.-based company was keenly interested in leaving enough time to have its target largely integrated by the time the Affordable Care Act begins its implementation in 2014. "It more speaks to why [Aetna would] do a deal now as opposed to, say, next year," says one source with knowledge of the situation, regarding Bertolini's comments on the call.
The reason? Aetna was interested in boosting scale and breadth across the board and making itself a bigger force for both Medicaid and Medicare, which will both see a significant coverage hike once the ACA is rolled out.
Coventry will add more than 5 million members and double Aetna's Medicaid business. Aetna has estimated that with Coventry in the fold, Medicare and Medicaid will account for more than 30% of its annual revenue, up from 23%.
In boosting exposure to government programs, Aetna appears to be following the likes of Cigna Inc. and WellPoint Inc., which have each made multibillion-dollar acquisitions over the past year for similar reasons. Cigna paid $3.8 billion for HealthSpring Inc. in October, while WellPoint snapped up Amerigroup Corp. for $4.46 billion in July.
But the deals aren't carbon copies of one another. WellPoint and Cigna, like Aetna, were seeking more diversified business models, but WellPoint's and Cigna's targets were each focused on one specific product line. HealthSpring's business, for example, was centered around Medicare, while Amerigroup had one of the largest Medicaid footprints in the U.S. Neither possessed Coventry's breadth. Its commercial health insurance business brings in 40% of its yearly revenue, with Medicare and Medicaid accounting for 51% of its annual take.
Aetna turned to Robert King and Peter van der Goes of Goldman, Sachs & Co. and Robert DiGia and Marc-Anthony Hourihan of UBS Investment Bank for financial advice. King in March represented Bausch & Lomb Inc. in its $500 million buyout of Ista Pharmaceuticals Inc. Van der Goes, meanwhile, has been very active in the pharmaceutical sector in 2012. He advised Human Genome Sciences Inc. in its buyout by GlaxoSmithKline plc and Hologic Inc. in its deal for Gen-Probe Inc.
DiGia and Hourihan were both part of the UBS teams that worked on Metropolitan Health Networks Inc.'s $416 million buyout of Continucare Corp. in June 2011 and HealthSpring's $545 million deal for Bravo Health Inc. in August 2010. DiGia and Hourihan advised the targets in both of those deals.
David Caplan and H. Oliver Smith led a team from longtime Aetna outside counsel Davis Polk & Wardwell LLP that advised on the deal. Phillip Proger of Jones Day in Washington was antitrust counsel. Jon Biasetti of Locke Lord LLP in Chicago was insurance regulatory counsel, and Wendy Krasner of Manatt, Phelps & Phillips LLP in Washington was healthcare regulatory counsel.
To run its auction, Coventry hired Greenhill & Co.'s Richard Jacobsen Jr., a former head of Citigroup Inc.'s healthcare services investment banking team.
David Katz of Wachtell, Lipton, Rosen & Katz has been close to the lawyers at Nashville's Bass, Berry & Sims plc since the 1990s, and the relationship paid off again on the Coventry deal. Bass Berry's Bob Thompson introduced Katz to the client many years ago, and Katz got the call from Thompson and Coventry general counsel Thomas Zielinski when Aetna contacted Coventry. Bass Berry first did work for Coventry in the 1990s, when it was still headquartered in Nashville and has continued to be its primary M&A counsel. Arthur Lerner of Crowell & Moring LLP in Washington was antitrust counsel. Mark Morton and Donald Wolfe Jr. of Potter Anderson & Corroon LLP in Wilmington were Delaware counsel.