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    PE Week Wire -- Friday, June 2

Positive Returns for Vonage?

Woe is Vonage. The ubiquitous VoIP company was a punditry piñata even before going public late last month, and its sinking share price has only intensified the whacking. Among the more common complaints are that the company is unprofitable, has unacceptably high customer acquisition costs, is facing bundle-ready competition from cable providers and sells a product that needs to be reset more than a digital stopwatch. Oh, and its planned sale of IPO shares to customers was so badly bungled that it might ultimately be forced to buy back the shares at their original IPO price (some banker is getting extra bonus money for adding an underwriter indemnity clause).

But I am not here to pile on. Please don’t mistake this for a proclivity toward the positive, because that’s simply something I don’t possess. Instead, it’s the result of a basic valuation analysis that shows how Vonage has proven to be anything but a money pit for the VCs who invested a total of $396 million between 2001 and 2005. Clearly not the homerun some were anticipating, but far from the strikeout that some are now be assuming.

When Vonage priced at $17 per share, it had a market cap of around $2.65 billion. As of market close yesterday, that figure had dropped to around $1.81 billion (although it was up to $1.85 billion in early trading today). Not so good for those who paid $17, but the VCs obviously bought in much lower. What follows is Vonage’s institutional VC funding history, including post-money valuations:

  • Series B: $15m at $67.69m (2003)
    New Enterprise Associates
  • Series C: $40m at $125m (2004)
    Meritech Capital Partners, NEA, 3i Group
  • Series D: $105m at $405m (2004)
    Institutional Venture Partners, NEA, 3i, Meritech
  • Series E: $200m at $915m (2005)
    Bain Capital Ventures, NEA, 3i, Meritech, IVP

In other words, even the most expensive VC deal -- Series E -- still valued the company at around half its current value. For Series E shareholders to lose money on Vonage, they would have to sell at below $5.87 per share. This calculation is based on dividing the post-money valuation by the number of outstanding shares (post-conversion). For Series D shareholders, this tipping point drops to $2.60 per share. For Series C, it’s an incredibly low $0.80 per share. Who says LBO pros have all the fun?

It is, of course, possible that Vonage will continue to drop in aftermarket performance, particularly if it is indeed forced to buy back thousands of shares at the $17 IPO price. I’m not smart enough to predict where the skid will stop, but can say that many market watchers believed that $10 per share was a reasonable IPO price. I can also cite an unscientific poll of GigaOm readers that resulted in 63% believing the shares will dip below $10, and another 27% who warn that it will go below $5 per share. But like all stock market prognostication, take it with a giant dollop of salt.

Vonage's venture capitalists are clearly not yet out of the woods, and surely  would prefer to have seen aftermarket gains. But they also needn't call for rescue any time soon.

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    Top Three

Portugal Telecom could soon receive a €14 billion takeover bid from a private equity consortium, according to The Times of London. The group reportedly includes Blackstone Group, Cinven, KKR, Permira, Providence Equity Partners and Texas Pacific Group. Portugal Telecom is publicly-traded in Lisbon, and earlier this year rejected an €11 billion takeover bid by Portuguese conglomerate Sonae.

CTC Media Inc., a Wilmington, Del.-based operator of a Russian television network, priced around 29.43 million common shares at $14 per share (below $16-$18 range), for an IPO take of approximately $346 million. It is trading on the Nasdaq under ticker symbol CTCM, while Morgan Stanley and Deutsche Bank Securities served as co-lead underwriters. Shareholders include Baring Vostok Capital Partners, Fidelity Investments, Alfa Capital, MTG Broadcasting and Northwood Ventures.

Ignition Partners has raised $80 million in additional limited partner commitments for its third VC fund, which originally closed in October 2004 with around $300 million. The Seattle-based firm says that most of the new money will be used to provide certain portfolio companies with acquisition capital.

    VC Deals

WebGen Systems Inc., a Cambridge, Mass.-based provider of software for energy conservation and control in commercial buildings, has raised $9.5 million in Series B funding. Sigma Partners led the deal, while other significant shareholders include B-W Energy LLC and Greenlight Private Equity Partners.

Permolex, an Alberta, Canada-based ethanol producer, has received an undisclosed amount of funding from Citigroup Venture Capital, according to VentureWire. The money will be used as part of Permolex’s commitment to a new ethanol facility being built in Fulton, New York. The facility – named Northeast Biofuels – is being financed via around $217 million in bank notes arranged by Goldman Sachs.

Vector International AS, a Norway-based provider of flanges and pipe connectors to the oil, gas and petrochemical markets, has received up to $36 million in private equity funding commitments from HitecVision Private Equity and Four Seasons Venture.

    Buyout Deals

Black Diamond Capital Management has completed its previously-announced acquisition of LaPlace, La.-based Bayou Steel Corp. for approximately $154 million, including around $30 million of assumed debt.

Exponent Private Equity has become the favorite to acquire online UK-based train ticker retailer from Virgin Group, according to The Telegraph of London. The deal is expected to be valued at £168 million, with two other private equity firms having also submitted bids. The report also suggests that a flotation is still viewed as a viable alternative to a sale.

Electronics For Imaging Inc. (Nasdaq: EFII) has agreed to sell its Mobile Workforce Automation product line to a consortium led by Greyrock Capital Group. The deal is valued at $10 million, with EFI retaining a 5% stake.

    PE-Backed IPOs

Town Sports International Holdings Corp., a New York-based health-club chain operator, priced 7.65 million common shares at $13 per share, for an IPO take of approximately $99.5 million. It had originally filed to sell 10 million shares at between $16 and $18 per share. It will trade on the Nasdaq under ticker symbol CLUB, while Credit Suisse and Deutsche Bank Securities served as lead underwriters. Significant Town Sports shareholders include Bruckmann, Rosser, Sherrill & Co., Farallon Capital Partners and Canterbury Mezzanine Capital.

Techwell Inc., a San Jose, Calif.-based semiconductor company focused on mixed-signal ICs for video applications, has set its proposed IPO terms to 5.5 million common shares at between $11 and $13 per share. It plans to trade on the Nasdaq under ticker symbol TWLL, with Lehman Brothers and Cowan & Co. serving as co-lead underwriters. Technology Crossover Ventures holds a 23.2% pre-IPO stake, while Sanyo Semiconductor holds five percent.

Golfsmith International Holdings Inc., an Austin, Texas-based specialty retailer of golf equipment, apparel and accessories, has set its proposed IPO terms to 6 million common shares at between $14 and $16 per share. It plans to trade on the Nasdaq under ticker symbol GOLF, with Merrill Lynch and JPMorgan serving as co-lead underwriters. The company is controlled by First Atlantic Capital.

    PE Exits

Oracle Corp. (Nasdaq: ORCL) has agreed to acquire Demantra Inc., a Waltham, Mass.–based provider of demand-driven enterprise planning solutions. No financial terms were disclosed for the deal, which is expected to close later this month. Demantra has raised $35.5 million in VC funding from firms like Advent International, Cargill Ventures, Challenge Fund, Formula Ventures, Intel Capital, Shamrock Holdings, UBS Capital and Vanenburg Group.

OpSec Security Inc., a unit of Applied Optical Technologies PLC (London AIM: ALT), has agreed to acquire GenuOne Inc., a Boston-based provider of brand protection management solutions. The deal is valued at $13 million in cash, and is expected to close later this month. GenuOne has raised over $11 million in VC funding from firms like Delta Partners, VenFin Ltd. and Brookline Venture Partners.

    PE-Backed M&A

Honsador Holdings LLC, a Hawaiian building materials supplier controlled by Key Principal Partners, has acquired Aloha Lumber Corp. for an undisclosed amount. First Hawaiian Bank provided senior note financing.

E4E Inc., a Santa Clara, Calif.-based provider of Internet-based infrastructure services and outsourcing, has acquired Omni Pros Ltd., a San Jose, Calif.–based provider of IT solutions to tech and financial services customers. No financial terms were disclosed. E4E shareholders include Canaan Partners, Walden International and GIV Venture Partners.

    Firm & Fund News

Aztec Equity Partners has launched as a Warren, N.J.-based private equity firm focused on green technologies. Its management team includes: Ali Akansu, a professor with the New Jersey Institute of Technology; Alex Garcia, a founding member of engineering and architectural firm El Taller Colaborativo; Graciela Diaz, former technical project manager at Prudential Financial; and Luis Diaz, former executive vice president at IDT Corp.

Advantage Capital Partners has been awarded another $70 million allocation under the federal New Markets Tax Credit program. This brings the total amount allocated to Advantage under this program to $230 million. The firm invests nationwide out of offices in cities like New Orleans, St. Louis and New York, but the entire $70 million will be invested in the Gulf Opportunity Zone.

The Hilco Organization has formed Hilco Retail Acquisitions LLC, which will acquire small to mid-sized retail companies with multiple store locations within North America. It will be headed by Michael Lynch, former CEO of Kmart Canada who joined Hilco in 2000.

    Human Resources

Kenneth Allen has joined Lexington Partners as a senior advisor in Australia and the Asia-Pacific region. He is the former Australian Counsel-General in New York.

John Greenwood has joined CalPERS as a portfolio manager in the alternative investment management division. He previously covered alternatives for the Ohio Public Employees’ Retirement System.

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June 2, 2006

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