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    PE Week Wire -- Friday, August 4

Friday Feedback

The heat wave is winding down, the beloved Red Sox are breaking down and unemployment is going up. In other words, it’s time for Friday Feedback.

Lots of emails about the proposed minimum wage hike (you don’t like it), the HCA deal (you like it) and the new VC fund model proposed by Stage1 Ventures (you like it, but aren’t sure it will fly). But yesterday’s Return of the Corporate Raiders column prompted a digital deluge, so that is what we shall focus on. No comments from me this time, just your (overwhelmingly supportive) thoughts.

UK Bill: “I thought your column yesterday to be the most perceptive, cogent, appropriate, direct, interesting and important commentary on our industry I have read in a long time. This behaviour could well lead to eventual SOX-like legislation throttling this industry. It is greedy and stupid. If the industry doesn’t regulate itself and stop this type of despicable practice the regulators will do it like a ton of bricks… This bunch better wake up and stop shooting itself and the private equity industry in the collective foot.”

Pete: “This could be an example of penny wise and pound foolish. Because the PE guys are such large shareholders of BK, they should be more concerned about the stock price rather than a measly $30 million fee. The loss in value of the shares they own is most likely significantly larger than the after tax value of their $30 million fee. I’m sure the disclosure of that fee and the impact on the quarterly earnings cost the PE guys way more than the fee itself.”

J: “Dan, I don’t understand why you think this is ‘unconscionable.’ At the time the PE sponsors took out the dividend, they were the only shareholders; so when you say ‘everyone else is getting slammed,’ I’m not sure who ‘everyone’ else is. And if you are suggesting that ‘everyone else’ is the investors who own the equity post-IPO? Well, they knew about the dividend and one-time management fee, so they knew what they were paying for and it should’ve been built into what they believed the stock is worth.”

Faizal: “Wow. You actually took a hard look at the buyout industry and did not come out an apologist extolling the virtues of capitalism. For the markets you wish to inform, the answer is caveat emptor. For the lending banks which have been so accommodating in the USA, Europe and Asia, they will find their comeuppance. It is only when the liquidity dries up that those listening will realize the prescience in your voice.”

Banker Bert: “The termination fee you object to is fairly common, and is meant to compensate the PE firms for terminating the 10-year or so contract to be paid a recurring management fee, as well as even largeradvising fees on every kind of possible future financing and strategic transactions. It would be hard to go public if you had to disclose the continuance of this form of heavy-handed related advisory cost. While I don't agree with them as a banker, they seem to be standard operating procedure among PE firms, and provide income hits that support PE expenses and gig reported returns. Since you are often concerned with LP treatment, how does that harm the LP investor (other than the long-term impact to the remaining equity holding if the termination fee is so onerous that the investment tanks)?”

Mike: “After reading today’s commentary I think you are probably a liberal, and I mean that in the way it would typically sound coming from a libertarian. That being said, I really liked your editorial, mainly because it goes against the theme of the private equity firms ‘getting away with what the market will bear.’ There is way too much engineering these days, which I’m sure most private equity firms would argue is due to valuations getting out of hand. So many firms these days seem to be much more concerned about capturing value than creating it. All of this ‘quick buy and lever it up an pay off debt with IPO proceeds, but make sure we have a convertible preferred so that we can get all of our money back and still own a majority of the company…’ Public investors have been getting hurt this year, and they will start pushing back in the near term.”

Andrew: “PE firms have been doing this for a long time, and it’s even worse than you suggest. Many PE firms get to take the fees they charge and apply them partially to the management company instead of it all being applied to the partnership (for the benefit of their investors). Think about the conflicts inherent in that practice. So, they get to screw the public shareholders and their own investors.”

John: “Well said. The press is largely avoiding the topic about how PE is making money these days… It will be interesting to see if the equity market starts to shy away from PE IPO deals, especially ones that were just taken private in the past few years. Will the institutional buyers continue to buy shares in the same company for a 50% premium to which they sold two years earlier?”

    Top Three

Royal Philips Electronics (NYSE: PHG) has agreed to sell an 80.1% stake in its semiconductor business to KKR, Silver Lake Partners and AlpInvest Partners. The deal values the total unit at €8.3 billion, including a €3.4 billion purchase price, €4 billion in leverage and €0.9 billion for Philips’ remaining 19.9% stake. It is expected to close during the fourth quarter.

Ion America Corp., a Sunnyvale, Calif.-based developer of solid-oxide fuel cells, has raised $101.93 million in Series D equity funding, according to a regulatory filing. It also secured nearly $2 million in convertible securities. Backers include Kleiner Perkins Caufield & Byers, Mobius Venture Capital and New Enterprise Associates. The company now has raised $165 million in total VC funding since 2002, including a $45 million Series C deal in 2004 at a post-money valuation of approximately $114 million.

Hellman & Friedman has agreed to acquire a majority stake in Southfield, Mich.-based turnaround firm AlixPartners, in partnership with AlixPartners management and employees. The deal values AlixPartners at $800 million, with founder Jay Alix staying aboard as co-chairman and the largest individual shareholder. Philip Hammarskjold of Hellman & Friedman will serve as the other co-chairman, while Michael Grinfors will continue to serve as AlixPartners’ CEO.

    VC Deals

Eusa Pharma Inc., a King of Prussia, Pa.-based drug startup, has secured $17.5 million from Essex Woodlands Health Ventures, according to a regulatory filing. The infusion is part of a planned $50 million Series A round.

Sicel Technologies Inc., a Raleigh, N.C.-based developer of implantable sensors to measure the effectiveness of cancer radiation treatment, has raised $12 million in Series F funding. Backers include Adinvest AG.

SentitO Networks Inc., an Acton, Mass.-based provider of voice gateway and signaling solutions for telecom service providers, has raised $6 million in fifth-round funding. Columbus Nova Capital led the deal, and was joined by return backers Core Capital Partners, Inflection Point Ventures, Kodiak Venture Partners, Mid-Atlantic Venture Funds and Technology Venture Partners. SentitO has now raised $69 million in total VC funding since its 2000 inception.

CaseRev Inc., a San Diego-based provider of software-as-a-service solutions insurers and claims administrators included in high-volume litigation, has raised $4 million in Series B funding. Rustic Canyon Partners led the deal, and was joined by return backer Miramar Venture Partners.

    Buyout Deals

LBO France has agreed to acquire airport services group WFS from Vinci for €315 million. The deal is expected to close next month.

Champ Private Equity, the Australian affiliate of Castle Harlan, has agreed to acquire Study Group International, a provider of educational programs for pre-college and college students from more than 120 countries. No financial terms were disclosed for the deal, which also includes equity participation from Sydney-based Peterson Investments.

H.I.G. Capital has sponsored a recapitalization of Redfish Rentals Inc., a Houma, Lou.-based provider of portable equipment rental services to the offshore oil and gas industry along the US Gulf Coast and in the Gulf of Mexico. No financial terms were disclosed for the deal, which was done in partnership with company management.

    PE-Backed IPOs

US BioEnergy Corp., an Inner Grove Heights, Minn.-based ethanol production company, has filed to raise $300 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol USBE, with UBS, Credit Suisse and Piper Jaffray serving as co-lead underwriters. Shareholders include Capitaline Advisors.

    PE Exits

Applied Micro Circuits Corp. (Nasdaq: AMCC) has agreed to acquire Quake Technologies Inc., an Ontario, Canada–based fabless semiconductor company that provides 10 Gigabit Ethernet HY technology. The deal is valued at approximately $69 million in cash, and is expected to close later this month. Quake has raised around $42 million in VC funding from firms like Mohr, Davidow Ventures, Bowman Capital, Emerging Alliance Fund, Cisco Systems and Mitsubishi Corp.

3i Group has agreed to sell its 51% stake in Specialized Petroleum Services Group Ltd. to M-I Swaco for approximately $84 million. SPS is a UK-based provider of wellbore clean-up products and services for the oil and gas industry.

    PE-Backed M&A

Cinemark is considering an acquisition of rival movie theater chain Century Theaters, according to The Wall Street Journal. The deal could be worth up to $1 billion. Madison Dearborn Partners bought Cinemark for around $1.5 billion in 2004, from The Cypress Group. Quadrangle Group also is a Cinemark shareholder.

Tanszact, a Fort Lee, N.J.-based provider of marketing solutions to the financial services, telecom and insurance sectors, has acquired Data Warehouse Corp., a Boca Raton, Fla.-based direct marketing company for the mortgage and financial services markets. Tranzact is a portfolio company of Halyard Capital.

    Firm & Fund News

Comerica Inc. (NYSE: CMA) has agreed to sell its 90% stake in Munder Capital Management to Crestview Partners and Munder management. Grail Partners, which advised Munder’s management team, also will participate. The deal is valued at $302 million, including $232 million in cash. The deal also includes an agreement whereby Comerica will acquire Munder subsidiary World Asset Management.

    Human Resources

Lawrence Deering has joined Behrman Capital as an operating partner. He most recently served as chairman and CEO of Tandem Health Care Inc., a provider of post-acute healthcare services that Behrman owned until selling it last month to JER Partners and Formation Capital for $620 million.

Fried, Frank, Harris, Shriver & Jacobson LLP has elected seven new partners. They include Brian Mangino (Washington DC) and David Shaw (New York), both of whom are corporate attorneys focused on M&A and private equity transactions.

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August 4, 2006

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