A stronger capital structure opens to doors to bigger deals, but are there then too many chiefs?
By Marrecca Fiore
The teaming of private equity firms on a single deal is nothing new in the publishing industry, but "club deals," as they’re sometimes called, are getting larger and becoming more frequent as evidenced in the recent $10 billion acquisition of VNU by a consortium of six PE firms and the partnership of Wasserstein & Co. and MidOcean Partners on the $530 million Penton Media deal.
"I think what this really means is that there’s no deal that’s too big for private equity anymore," says Reed Phillips, partner of the media investment bankers, DeSilva & Phillips. "In the past, some of these billion dollar deals, like you saw with VNU, would have been unattainable. Now, it’s possible to acquire huge companies with private equity backing because they’re working together in a consortium."
The teaming of PE firms is good news from both a buying and selling perspective, says Matthew Flynn, chief financial officer for publisher Hanley Wood. "From a seller’s perspective it gives you more bidders, therefore you can get a more active process for the sale of your property and, from a valuation perspective, it gives you more valuation for your company," he says. "With buyers, it enables more players to be part of a transaction that they normally could not be part of. Some of those investors couldn’t make it on their own so instead they all decide to share the risk with others."
Clay Hall, CEO of Aspire Media, says he’s always preferred to have more than one private equity firm at the table when working on his entrepreneurial ventures. "That’s just the way I’ve always done it, even before it was a trend," he says. Hall presented plans for his enthusiast media start-up to 30 private equity firms before deciding to move forward with Frontenac Company of Chicago and Catalyst Investors of New York. "I was determined to find the right parties," he says.
Melding of the Minds
Contrary to the too many cooks spoiling the broth theory, Hall says having more than one investor can be a plus. "As an operator, when you have only one private equity investor, you could be subject to the material personalities of one company and to one person’s agenda," he says. "With multiple companies, it gives you a little bit of a safety net and the wisdom of a larger group. Plus these private equity firms are filled with very talented and smart investors with different risk factors and sweet spots. It just raises the bar and encourages more dialogue and discourse."
Robert Krakoff, CEO of VNU Business Media – the U.S.-based b-to-b division of Haarlem, Netherlands-based VNU B.V., worked as a consultant to the Blackstone Group, one of the private equity firms that bought VNU, before taking over as CEO of the company’s business media division following the sale. "No one firm would have written that check," Krakoff says. "You read about these deals being done for $20 billion, $30 billion. No firm is going to put all of their capital into one business."
Krakoff says in his company’s case, the six different PE firms have taken different roles within the company depending on their expertise. "Obviously every one of these has a different investment cycle and many have differences in terms of the lifestyle of the funds," he says. "And they don’t all think alike. But that’s part of that broad area called governance and they all have to work to be consistent. And once the deal is done, they turn over the running of the company to the operating team."
Hall says that most PE firms that team up on deals maintain their independence by doing their own research and financial calculations. "They tend to be cautious and careful and insist on arriving at independent assessments and they do not share analysis with each other," he says. "They don’t want to arrive at same conclusions. They look at companies very independently, some of which is for legal reasons and some of which is to be good custodians of their investors’ money. Functionally, they have the same role, but they also have differences based on their business practices."
Even though most PE firms aren’t involved in the day-to-day operations of the company, Hall says he still uses the expertise of the firms he works with to bounce ideas off of them. "If I want to know the risk assessment of something, I’ll go to one of my private equity firms," he says. "If I want to talk about something entrepreneurial, I’ll go to another."
Working Out the Kinks
Still, Phillips believes some of the club deals need to play out before concluding that every teaming of private equity firms will result in a happy marriage. "I don’t think the story is over," he says. "We have to watch how those deals work out, especially where you have three, four, five partners involved in one deal. The only drawback would be if the private equity firms are unable to find ways to cooperate and lose the advantage of moving money quickly through their funds. If they’re problematic, then you won’t see as many."
Hall agreed. "All operators need to work with a manageable number of investors," he says. "One investor is too few, but four or five is too many."