Jul 7, 2017

Axios Pro Rata

By Dan Primack
Dan Primack

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Pro Rata is officially on vacation, in part because we figured the July 4th week would be slow. We were wrong. So below is a roundup of what you might have missed while at the beach, via a Top 10 format I'm stealing borrowing from Mike Allen. Your regular Pro Rata will return on Monday...

1. Silicon Valley's sexist swamp

500 Startups is the latest venture capital firm to be rocked by accusations of sexual harassment and associated cover-up.

  • Firm founder Dave McClure is out.
  • Two other 500 Startups executives — Elizabeth Yin and Eric Bahn — resigned after learning of the situation. Yin claimed in her resignation letter that the firm was not transparent with employees.
  • New CEO Christine Tsai has repeatedly declined interview requests.
  • LPs are worried about the broader issues, and are trying to figure out next steps.
  • Kia on cover-ups: "Although more women are finding the courage to come forward publicly with their stories, much of this can be undermined by company efforts to cover up the misconduct, especially via legal means like non-disclosure and non-disparagement agreements. When firms work to protect the transgressors' professional image and opportunities, they're saying that the men's careers are more important than the women's safety."
2. Deal Data

There was $1.6 trillion in announced global M&A activity in the first half of 2017, per Thomson Reuters. That's up 2.2% over the first half of 2016, although the actual number of deals fell 4.1%

  • U.S. announced M&A had the opposite trends, with overall value falling 15.9% to $584 billion but the number of deals climbing 17.3% to 6,504.
  • Private equity activity is easily outpacing 2016, and becoming an increasing percentage of overall M&A activity (up to 21.1%). U.S. private equity activity represented over half of all global private equity activity in the first half.
3. Lockjaw

Jawbone, a consumer hardware company once valued at $3.2 billion by VCs, is being liquidated, as first reported by The Information and confirmed by Axios.

  • Jawbone 2.0: Co-founder and CEO Hosain Rahman has formed a new startup, named Jawbone Health Hub, that has hired many of Jawbone's employees and will take over servicing Jawbone's products. BlackRock, which loaned Jawbone $300 million in 2015, reportedly has a stake in the new company. No other existing Jawbone investor has a stake in the new startup, with one telling Axios that his firm has thus far been kept in the dark.
  • Nothing shocking: Jawbone has been a falling unicorn for years, due to both product and financial troubles. This was really more a case of when than if.
4. Risk Factors

President Trump's escalating feud with CNN may bleed into the regulatory review of AT&T's proposed $85 billion merger with Time Warner, per The New York Times:

"White House advisers have discussed a potential point of leverage over their adversary, a senior administration official said: a pending merger between CNN's parent company, Time Warner, and AT&T. Mr. Trump's Justice Department will decide whether to approve the merger, and while analysts say there is little to stop the deal from moving forward, the president's animus toward CNN remains a wild card."

Flashback: Trump signaled his opposition to the deal with it was first announced, and reiterated it in a January interview with Axios (although he also admitted: "I haven't seen any of the facts yet").

Why it matters: There could be a chilling effect on M&A activity if it was believed that DoJ would block a merger — or require applicants make certain concessions — due to a political beef between an applicant and the White House. It also would be sure to spark legal challenges.

5. Power Play

Warren Buffett's Berkshire Hathaway Energy has agreed to acquire electric grid giant Oncor at an equity value of around $11.25 billion and enterprise value of around $18 billion.

  • Try, try again: Buffett is doing this via a purchase of bankrupt Energy Future Holdings, which private equity vets recall was once called TXU (and subject to the largest leveraged buyout in history). It's Buffett's second go-around with EFH, having once bought $2 billion in company bonds that he later sold for just around $1.1 billion.
  • Not so fast: The deal still would require regulatory approval, which is no boilerplate in this case. Texas regulators previously stopped both NextEra Energy and the Hunt family from buying Oncor.
6. Next Up IPO

Dropbox is talking with investment bankers about a possible 2017 IPO, per Reuters.

  • Unicorns: If Dropbox does move forward, expect a lot of focus on if it can maintain its $10 billion private market valuation. Kind of like what we've seen with both Blue Apron and Snap.
  • Caveat: Bloomberg basically reported the same thing a year ago, so don't take this to the bank (fees) yet.
7. Econ 101

U.S. Energy Sec. Rick Perry yesterday toured a coal-fired power plant in West Virginia, and reportedly said:

"Here's a little economics lesson: supply and demand. You put the supply out there and the demand will follow."

I reached out to the Department of Energy for comment, but never heard back. Perhaps I should have also called the Department of Education.

8. Medicare M&A

Kindred Healthcare (NYSE: KND) agreed to sell its 96 skilled nursing facilities for $700 million to BlueMountain Capital Management.

  • Bob Herman: "The deal was not about advancing care with new owners — it was about getting out of a business that treats a lot of poor patients on Medicaid and could also face Medicare payment cuts. The Medicare Payment Advisory Commission has criticized the high Medicare profit margins for skilled nursing operators and recommended this year that Congress freeze payment rates."
9. You're Hired

The U.S. economy added 222,000 jobs in June, beating economist estimates of 178,000, while the unemployment rate climbed slightly to 4.4%.

  • Wage growth remained sluggish.
  • Healthcare and food services led the way on gains, while there also was a big boost in government jobs (mostly at the state and local levels). In fact, there have been more new government jobs created in 2017 than in manufacturing and mining combined.
10. Cirque Bleu

Cirque du Soleil has acquired Blue Man Group, combining two of North America's more popular live entertainment brands. No financial terms were disclosed for the deal, which results in Blue Man's founders retaining some equity.

  • Sponsor swap: Cirque du Soleil has been majority-owned by private equity firm TPG Capital since July 2015, while Blue Man sold a minority stake to GF Capital in 2010.
  • What's the plan? TPG's investment thesis on Cirque is around the concept of programming real estate, whether that be at a casino, on a cruise ship or at a mall (yes, you'll eventually see live Cirque programming between Banana Republic and Orange Julius). Blue Man gets folded into that, even though the two brands will remain separate from a creative perspective. Also expect Cirque to help Blue Man expand more internationally, particularly in China.
Dan Primack