Jun 26, 2018

Axios Pro Rata

By Dan Primack
Dan Primack
Top of the Morning
Photo by Spencer Platt/Getty Images

Should the former private equity owners of Toys "R" Us pay around $70 million in severance to the company's 33,000 laid-off employees?

This is not an academic question. It's become the subject of some public pension investment committee meetings, prompted by a lobbying campaign by left-leaning nonprofit advocacy groups, and has gotten the private equity industry's attention.

  • The basic argument: Bain Capital, KKR and Vornado killed Toys "R" Us by saddling it with too much debt, while taking out fees along the way. It's only fair that they help folks who are without work because of private equity's mismanagement, particularly when PE firms are so rich and many of the employees were living paycheck-to-paycheck.
  • The legal argument: There is none. The private equity firms no longer own Toys "R" Us, and a bankruptcy court judge threw out the severance package because employees weren't high enough in the creditor stack.

This issue is far more complex than the pro-severance forces are making it out to be. For starters, the private equity firms didn't favor liquidation. They wanted to engage with one of several offers that would have kept many of the U.S. stores operational, but a small group of creditors felt differently (and by that point had control). There is no push to demand severance from those creditors, even though some of them have public pension money themselves and will make money on Toys once all is said and done.

Second, there are many others who lost out on Toys "R" Us, including small toy-makers who are above workers in the payback pile, but who are unlikely to see a penny.

Finally, the pro-severance folks are a bit liberal (no pun intended) with their math. They argue the PE firms took out $464 million, by adding up advisory fees ($185m), expenses ($8m), transaction fees ($128m) and interest on debt held by the sponsors ($143m). Yes, we were first to point out how the general partners may have gotten back more than they put in. But some of those fees were shared with LPs — including the now-aghast public pensions — while the interest was held in CLOs that had their own investors. In other words, PE "profit" was much smaller than claimed (although, on the flip side, you could argue the firms collected management fees on Toys-related capital that ended up being set on fire... again, it's complicated).

But, but, but: Despite all of those quasi-mitigating factors, PE firms do have moral obligations to portfolio company employees. You break it, you own it (even if you technically broke it while owning it, which caused someone else to own it).

  • They have the money. KKR alone reported $365 million of economic net income in just the first quarter, which is more than five times the total severance request.
  • As for precedent, Toys-like situations (i.e., total liquidations) are relatively unusual, even in bankruptcy. For example, KKR's biggest-ever bet (TXU) went bust but it didn't result in everyone losing their jobs. Bain's iHeartRadio also went bankrupt, but remains operational.
  • There are still some slippery slope arguments and some legal complications, but they pale in comparison to the existential threat faced by those who lost their jobs and have been unable to find new ones (if the PE firms choose to only focus on those folks, or on those who made below a certain income level, that's a legit discussion to have).

Bottom line: The PE firms should pay at least some of the severance, or figure out some other form of compensation. And I have a sense that they might. Not because of preening public pension staffers or legal obligations, but because it's the right thing to do. Sometimes it's just that simple.

The BFD
Source: Giphy

General Electric (NYSE: GE) said this morning that it plans to spin off its healthcare business and sell its 62.5% stake in oil services company Baker Hughes (NYSE: BHGE). It also wants to "materially shrink the balance sheet of GE Capital" by selling $25 billion of energy and industrial finance assets by 2020.

  • Why it's the BFD: Because GE's prior de-conglomerizing, including yesterday's $3.25 billion sale of its distributed power unit, was just a palate cleanser. This is the main course, and it's got all the fixin's.
  • Bottom line: GE will sell 20% of the health unit, which reported $19 billion in 2017 sales, and spin off the remainder to GE shareholders via a tax-free transaction. The Baker Hughes sales will occur over the next two to three years. Baker Hughes has a current market cap of $40.5 billion.
Venture Capital Deals

Jama Software, a Portland, Ore.-based enterprise product development platform, raised $200 million in growth equity funding. Insight Venture Partners led, and Madrona Venture Group participated. www.jamasoftware.com

Silver Peak, a Santa Clara, Calif.-based provider of broadband and hybrid WAN solutions, raised $90 million in funding from TCV. www.silver-peak.com

🚑 Akero Therapeutics, a Cambridge, Mass.-based developer of a drug to treat non-alcoholic steatohepatitis, raised $65 million in Series A funding from Apple Tree Partners, Atlas Venture, VenBio Partners and Versant Ventures. http://axios.link/kxlp

TourRadar, an Austrian online travel agency for multi-day tours, raised $50 million in Series C funding. TCV led, and was joined by return backers Cherry Ventures, Endeit Capital, Hoxton Ventures and Speedinvest. www.tourradar.com

Unison, a San Francisco-based provider of home ownership investments, raised $40 million in Series B funding. F-Prime Capital led, and was joined by Citi Ventures and RBC. www.unison.com

DroneDeploy, a San Francisco-based drone data platform, raised $25 million in Series C funding. Future Fund led, and was joined by AirTree and return backers Scale Venture Partners, Uncork Capital, Emergence Capital and AngelPad. www.dronedeploy.com

Aclima, a San Francisco-based environmental intelligence platform, raised $24 million in Series A funding. Social Capital led, and was joined by the Schmidt Family Foundation, Emerson Collective, Radicle Impact, Rethink Impact, Plum Alley, Kapor Capital and First Philippine Holdings. http://axios.link/pA9O

Winnie, a San Francisco-based content platform for parents, raised $4 million in new seed funding. Reach Capital led, and was joined by Rethink Impact, Homebrew, Ludlow Ventures, Afore Capital and BBG Ventures. http://axios.link/4N2j

Private Equity Deals

Apollo Global Management and Värde Partners completed their purchase of a 40.5% stake in OneMain Financial (NYSE: OMF), the Evansville, Ind.-based subprime lender spun off by Citigroup after the financial crisis, at $26 per share from Fortress Investment Group. http://axios.link/Zs0G

🚑 Centauri Health Solutions, a Scottsdale, Ariz.-based portfolio company of Silversmith Capital Partners, acquired NHI Billing Services, a Phoenix-based provider of Medicaid-related billing services to hospitals and health systems. www.centaurihs.com

EQT has acquired Zemax, a Kirkland, Wash.-based provider of optical and illumination design software, from Arlington Capital. www.zemax.com

🚑 Kramer Labs, a Coral Gables, Fla.-based portfolio company of Avista Capital, has acquired anti-dandruff shampoo brand Nizoral from J&J subsidiary Janssen Pharmaceutica. www.kramerlabs.com

Ingenico (Paris: ING), a French payments processor with a market cap of around €4.7 billion, is receiving private equity interest from such firms as Bain Capital, CVC Capital Partners and Hellman & Friedman, per Bloomberg. http://axios.link/qgUL

United Claim Solutions, a Phoenix-based portfolio company of Great Point Partners, acquired Zebu Compliance Solutions, a Portsmouth, Ohio-based provider of payment integrity and ongoing credentialing software. www.unitedclaimsolutions.com

Public Offerings

Lovesac Co., a Stamford, Conn.-based seller of beanbag chairs, increased the number of shares being offered in its IPO from 3 million to 3.3 million. The range remains $14-$15, with the company planning to trade on the Nasdaq (LOVE) with Roth Capital as sole underwriter. It reports a $5.5 million net loss on around $102 million in revenue for its most recent fiscal year. Shareholders include Satori Capital and Mistral Equity Partners. www.lovesac.com

More M&A

Hudson’s Bay (TSX: HBC) is in talks to Austria’s Signa Holding about a joint venture for German retailer Kaufhof, after Hudson’s Bay previously rejected Signa’s €3 billion takeover bid for the business, per Reuters. http://axios.link/JuhR

Fundraising

Andreessen Horowitz has raised a $300 million fund to invest in cryptocurrency-related startups, and that it will be led by former federal prosecutor Kathryn Haun. http://axios.link/0x1W

Sequoia Capital has closed on $6 billion for its new global VC fund, which is targeting a total of $8 billion, as reported by the FT and confirmed by a source to Axios.

It's Personnel

Rupert Howard (ex-Rothschild) has joined 3i Group as a London-based director focused on the consumer sector. www.3i.com

Chune Loong Lum joined Ropes & Gray’s private investment funds practice as counsel in Hong Kong. She previously was with Skadden Arps. www.ropesgray.com

Stacia Schlosser Ryan joined Perella Weinberg Partners as a partner in the firm’s advisory business, leading the consumer and retail team. She previously was with Morgan Stanley. www.pwpartners.com

Zach Fuchs has joined Apax Digital as a vice president, per his LinkedIn account. He previously was with Francisco Partners. www.apax.com/digital

Final Numbers
Source: Cambridge Associates; data through 12/31/17
Dan Primack

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