Pe deals of the year

Introduction: Mission accomplished (mostly)   Terra Firma-EMI   3G-Burger King   BankUnited   Kinder Morgan   THL-Warner Music Group   Carlyle-China Pacific   Arcos Dorados   Sequoia-LinkedIn   Sun Capital-Bruegger's   Cerberus-Talecris   Court Square-FiberTech   Second best of the best

Cerberus Capital Management LP's long slog to exit its 2005 investment in Talecris Biotherapeutics Holdings Corp. ended June 1 when the U.S. Federal Trade Commission approved the sale of the blood plasma products maker to Spanish rival Grifols SA.

The sale to Grifols was Cerberus' second attempt to sell Talecris, the world's third-largest producer of plasma products. A 2008 deal with Australia's CSL Ltd. fell through when the FTC threatened to block it. A subsequent initial public offering in October 2009 allowed Cerberus to cut its stake from 74% to 38%. On June 7, 2010, Grifols, led by CEO Victor Grifols, announced it would buy out Cerberus and Talecris' other shareholders in a stock transaction originally valued at $4 billion.

At the time, all of the parties involved thought they could win antitrust approval for the sale in a matter of months. But what followed was a grueling yearlong ordeal -- roughly the same time it took the Justice Department to review the massive $39 billion merger of Comcast Corp. and NBC Universal Inc. -- that required three extensions of the FTC's review deadlines. The parties had to climb over one unexpected obstacle after another, including a game-changing exit of a competitor and a challenging document translation process.

In the end, a gain in Grifols' shares during the intervening 12 months pushed the deal's value to $4.3 billion. Accounting for the IPO, Cerberus walked away with a partly realized profit of more than $2.2 billion, or 27 times its original $82.5 million equity investment when it teamed with Ampersand Ventures to acquire Talecris, the blood plasma products business of Bayer AG.

Private equity exits from portfolio companies rarely pose antitrust problems. But Cerberus' travails in shedding Talecris highlight the difficulty private equity investors may face when trying to get out of a position in a highly concentrated market.

In the case of Talecris, the government was looking to protect competition among providers of plasma-derived products, a vital healthcare market. On initially looking at the deal, Grifols' lawyer, Proskauer Rose LLP partner Alicia Batts, and her team, Rhett Krulla, John Ingrassia, Keith Butler and John Nader, concluded that despite the FTC's unwillingness to clear CSL's offer, approval for Grifols' bid could be obtained with sufficient up-front work by her and her colleagues. The Proskauer lawyers were joined by Talecris' antitrust attorney, Arnold & Porter LLP partner William Baer.

"From the beginning, the Proskauer team thought we could get the deal done, but it would nevertheless be something the FTC would be highly likely to take a look at," Batts says, noting that there were only five players in the U.S. market -- leader Baxter International Inc., CSL, Talecris, Grifols and Switzerland-based Octapharma Group.

Rather than waiting until the merger notification documents were formally submitted, Batts and Grifols approached the FTC staff early in order to get the review moving as soon as possible. "We gave them a ton of information, and they told us we could probably do a quick look," she says. A "quick look" allows the FTC to undertake a more lengthy review of a deal, going beyond the initial 30-day period required by the Hart-Scott-Rodino Act, without requiring full compliance with the second request for information. During a quick look, merging parties and antitrust regulators typically enter a timing agreement after which the deal can close if the reviewing agency is satisfied competition won't be harmed.

Well into the agreed-upon time frame, approval appeared close. But quality-control problems at rival Octapharma upended those plans. Octapharma was forced to recall product and exited the U.S. market.

Octapharma's exit was believed to be temporary. But the timing of its return couldn't be reliably predicted, and the FTC no longer counted the company as a player in the market. The Talecris sale, once viewed as a consolidation of five U.S. players to four, was now a four-to-three merger, a level of concentration that antitrust regulators eye much more warily.

"A week before the quick look was scheduled to end was when the Octapharma issue happened," Batts says. "The FTC now said they weren't comfortable and demanded full compliance with the terms of the second request. If Octapharma had not had to withdraw from the market, I think our review might have been able to close much sooner."

Complicating the review were problems translating Grifols' documents from Spanish. "We agreed to be a test case for the FTC's use of electronically translated documents," she says. "We did a lot of hearings with Grifols officials that had to be translated electronically, and idioms used in the conversations posed problems."

The FTC objected to the quality of the translations. Despite ultimately having to hire human translators to clean up many of the submissions to the FTC, Batts says the experiment convinced her that electronic translation can save clients significant time and money. "I believe they can be cheaper for the clients, but the system we used was not as robust as I would have liked. I don't think I would use that system again."

Because Grifols is a leanly run company and did not have a large corporate finance operation, the lawyers had to retain accounting experts to quantify and substantiate the efficiencies that would be created by the merger. These reports proved instrumental in persuading the FTC of the benefits of the merger but added time to the review. The lawyers also retained economists to look at the market structure and the likely market impact of the proposed transaction.

In December, Grifols and Talecris announced that they had reached a timing agreement with the FTC and would not close the deal until Feb. 17. But the parties were not able to reach a settlement within the allotted time frame. It eventually became clear that the FTC would require a new entrant into the U.S. market, which Grifols could facilitate by divesting enough assets to get a rival up and running. Italy's Kedrion SpA, that country's largest plasma producer, was quickly identified as a willing buyer ready to get into the U.S. market.

But identifying Kedrion was the easy part. Figuring out what to sell to the company and making sure it would be a viable competitor required several months of negotiation. "It took a long time to figure out what might be an appropriate fix for the deal," Batts says. In fact, the timing agreement with the FTC had to be extended two more times before government staffers had an arrangement with which they were comfortable.

Ultimately, Grifols agreed to sell Talecris' Melville, N.Y., plasma fractionation facility. Grifols also will manage the plant for several years and agreed to provide plasma therapies to be sold under Kedrion's label for seven years.

"Normally, when the FTC requires a divestiture, you sell a bunch of assets or a division," says Batts. "In this case, Grifols wanted to keep the synergies and efficiencies of the merger but had to sell enough to let a new player into the market and give them the tools to be competitive. A lot of thought went into how the Kedrion deal should be structured. It took a long time to figure out what might be an appropriate fix."