Jun 11, 2019

Axios Pro Rata

By Dan Primack
Dan Primack
Top of the Morning

Illustration: Aïda Amer/Axios

Private equity is again under fire for bankrupting a longtime retailer and stiffing its employees.

  • At issue this time is Shopko, a Wisconsin-based discount chain that was acquired by Sun Capital Partners in 2005 for around $1.1 billion. In January it filed for Chapter 11 bankruptcy protection and later opted to liquidate after failing to find a buyer.
  • Shopko employed around 14,000 people at the time of bankruptcy, operating 360 stores in 26 states.
  • Some employees say they were promised both retention bonuses and severance at the time of the bankruptcy, but only received the former.
  • There are parallels to the Toys "R" Us situation, which was (partially) resolved when former owners Bain Capital and KKR created a $20 million employees fund.

Sun Capital made money on its Shopko investment. Nothing to write home about, particularly given the long hold time, but profits nonetheless.

  • Sun put up a relatively small amount of equity and then, shortly after the buyout, sold Shopko's real estate via a sale-leaseback transaction (much like what was done with Toys "R" Us). The result was to add debt onto Shopko's balance sheet while simultaneously stripping it of assets.
  • Sun also paid itself several dividends, including a $50 million payback in 2015. Plus quarterly consulting fees of $1 million and 1% consulting fees on at least six Shopko transactions.
  • That last one is the most egregious, because it applied to the dividends. In other words, Shopko had to pay Sun an extra $500,000 on top of the $50 million dividend — just for the privilege of weakening its balance sheet.
  • And none of this even addresses how Shopko allegedly shortchanged Wisconsin over $8 million in sales tax between 2013 and 2016.

A source close to Sun argues that the company was doing well in 2015, and that its subsequent struggles were largely the result of dollar store pushes into the smaller Midwestern markets where Shopko put its stores — pointing to similar struggles of comparable retailer Fred's. Plus continued top-down pressure from Amazon and Walmart.

Even if we accept this explanation, which is tough to do, it still doesn't explain why Shopko promised severance in January.

  • These were written promises from corporate, not from store managers.
  • Axios has obtained one, sent by the company's head of HR, and it says nothing about severance being conditional on Shopko finding a buyer.
  • All creditors have been made promises — that's why they're creditors — and employees are almost always last in the payback stack. But corporate creditors understand the system. Most retail employees don't, and therefore have every reason to feel cheated.
  • Sun Capital declined comment, via a spokesman.

The bottom line: Sun Capital made fiscally irresponsible decisions and made money anyway. That's not uncommon in private equity. The question now is if Sun will adopt the Toys "R" Us model, making good to workers who suffered the consequences of those decisions and who were misled, or if that is the private equity anomaly.

🎧 Pro Rata Podcast focuses on the controversy over cash bail, which has pitted some local prosecutors and legislators against the bail bond industry. Listen here.

The BFD
Source: Giphy

Brex, a San Francisco-based provider of industry-specific corporate credit cards, raised $100 million at a $2.6 billion post-money valuation. Kleiner Perkins Digital Growth led, and was joined by fellow return backers YC Continuity, Ribbit Capital, DST Global, Greenoaks Capital and IVP. The company previously raised $125 million last fall at a $1.1 billion post-money valuation.

  • Why it's the BFD: Because it reflects how lending-related startups believe they need fortress balance sheets, much like what we recently saw with SoFi.
  • Bonus: CEO Henrique Dubugras tells me that he views the deal as a "repricing event" and that its size was, in part, dictated by VC market conditions: "Growth equity investors want to put a certain amount of money to work. Once you add in the existing investors with pro rata, $100 million is probably the minimum we could raise right now."
  • Bottom line: Brex launched in 2017 with cards specifically tailored to startups, but more recently expanded into e-commerce (now 1/3 of revenue) and now into life sciences. Dubugras says the life sciences offering will, for example, offer multipliers on purchases like lab supplies and conference costs.
Venture Capital Deals

Infarm, a German developer of vertical farms for grocery stores and restaurants, raised $100 million in Series B equity and debt funding. Atomico led, and was joined by Balderton Capital, Astanor Ventures, Cherry Ventures and TriplePoint Capital. http://axios.link/J7KV

Yanolja, a South Korean love hotel operator, raised $80 million in Series D funding at a valuation north of $1 billion co-led by GIC and Booking Holdings. http://axios.link/4W5e

🚑 Oncologie, an oncology therapeutics startup with offices in Boston and Shanghai, raised $80 million in Series A funding. Nan Fung Life Sciences and Pivotal BioVentures China co-led, and were joined by Panacea Venture Healthcare and Korea Investment Partners. http://axios.link/yQLI

Alkami Technology, a Plano, Texas-based provider of digital banking solutions to U.S. banks and credit unions, raised $55 million in Series E funding. General Atlantic led, and was joined by return backers S3 Ventures and Argonaut Private Equity. http://axios.link/Eleb

SpotOn, a San Francisco-based provider of payment processing with customer engagement tools, raised $40 million. Franklin Templeton led, and was joined by Dragoneer Investment Group. www.spoton.com

Vestaron, a Kalamazoo, Mich.-based developer of biopesticides, raised $40 million in Series B funding. Novo Holdings led, and was joined by Anterra Capital, Cultivian Sandbox, Open Prairie Ventures and Pangaea Ventures. http://axios.link/0cI0

RapidAPI, an Israeli API marketplace, raised $25 million in Series B funding. M12 led, and was joined by DNS Capital and return backers Andreessen Horowitz and Green Bay Capital. http://axios.link/ioM7

🚑 Genome Medical, a South San Francisco-based telegenomics company, raised $23 million in Series B funding led by Echo Health Ventures. www.genomemedical.com

Getaway, operator of remote cabin rentals, raised $22.5 million in Series B funding. Starwood Capital Group led, and was joined by L Catterton. http://axios.link/mEQm

Alyce, a Boston-based gifting platform for brands, raised $11.5 million in Series A funding. Manifest led, and was joined by General Catalyst, Boston Seed Capital, Golden Ventures, Morningside and Victress Capital. http://axios.link/LN4e

Foodles, a French corporate canteen service, raised €9 million from Creadev, DN capital and Adelie. Some of the round was a secondary sale by existing backer Elior. http://axios.link/bb2V

WorkRamp, a San Francisco-based employee onboarding platform, raised $8 million in Series A funding. Bow Capital led, and was joined by seed backers Initialized Capital, Susa Ventures and the Slack Fund. http://axios.link/S6Pj

Private Equity Deals

🚑 Angeles Equity Partners acquired Mini Pharmacy Enterprises, a Los Angeles-based provider of diabetic supplies. www.minipharmacy.net

Apollo Global Management agreed to acquire digital imaging company Shutterfly (Nasdaq: SFLY) for $1.7 billion (not including $900m of assumed debt), or $51 per share. It also will acquire online photo printing company Snapfish, and merge the two businesses. http://axios.link/nGhD

Cvent, a McLean, Va.-based portfolio company of Vista Equity Partners, acquired DoubleDutch, a San Francisco-based mobile event app that had raised $88 million from firms like Bullpen Capital, Bessemer Venture Partners, Floodgate, Index Ventures, KKR and Mithril Capital. http://axios.link/iGU6

Leonard Green and Ares Management agreed to buy Press Ganey, a Wakefield, Mass.-based healthcare measurement company, from EQT Partners. No financial terms were disclosed, but Bloomberg outs the enterprise value north of $4 billion. http://axios.link/Bzy1

🚑 Sheridan Capital Partners acquired Atlantic Vision Partners, a Richmond, Va.-based ophthalmology and optometry practice management company. www.sheridancp.com

Public Offerings

🚑 Akero Therapeutics, a Cambridge, Mass.-based developer of a drug to treat non-alcoholic steatohepatitis, set IPO terms to 5 million shares at $14-$16. It would have a fully-diluted market value of $430 million, were it to price in the middle, and plans to trade on the Nasdaq (AKRO) with J.P. Morgan as lead underwriter. The pre-revenue company raised around $135 million from Apple Tree Partners (21.2% pre-IPO stake), VenBio (17.4%), Atlas Venture (17.4%), Versant Ventures (17.4%), Amgen (7.25%), and Janus Henderson (5.28%). http://axios.link/Q0IG

Asset World Corp., a Thai hotelier, is prepping an IPO that could value the company at between $1 billion and $1.5 billion, per Reuters. http://axios.link/zdq3

🚑 Atreca, a Redwood City, Calif.-based developer of a solid tumor drug, set IPO terms to 7.4 million shares at $16-$18. It would have a fully-diluted market value of $430 million, were it to price in the middle, and plans to trade on the Nasdaq (BCEL) with Cowen as lead underwriter. The pre-revenue company raised over $220 million from firms like Baker Brothers, Boxer Capital, Wellington Management, Bill & Melinda Gates Foundation, Cormorant Asset Management, Aisling Capital, Tavistock Group, EcoR1 Capital, Redmile Group, Samsara BioCapital and Tekla Capital Management. http://axios.link/LOCj

🚑 Dermavant Sciences, a Phoenix-based dermatological therapies developer being spun out of Roivant Sciences, set IPO terms to 7.7 million shares at $12-$14. The pre-revenue company would have a $319 million market cap, were it to price in the middle, and plans to trade on the Nasdaq (DRMT) with Jefferies as lead underwriter. http://axios.link/3iKC

🚑 Prevail Therapeutics, a New York-based gene therapy startup focused on Parkinson’s disease, set IPO terms to 7.4 million shares at $16-$18. It would have a fully-diluted market value of $672 million, were it to price in the middle, and plans to trade on the Nasdaq (PRVL) with Morgan Stanley as lead underwriter. The pre-revenue company raised $129 million in VC funding from firms like OrbiMed (48.6% pre-IPO stake), RA Capital (9.1%), Pontifax (5.9%), EcoR1 Capital (5.8%), Surveyor Capital, AbbVie, Adage Capital, Boxer Capital, Omega Funds, BVF Partners and Alexandria Venture Investments. http://axios.link/xRYG

Liquidity Events

👖 BlueJeans Network, a Mountain View-based enterprise video conferencing company, is seeking a buyer, per Bloomberg. It's raised around $175 million from firms like NEA, Battery Ventures, Accel, Derek Jeter, Wing WC and Norwest Venture Partners. http://axios.link/22Ol

Intel (Nasdaq: INTC) acquired Barefoot Networks, a Santa Clara, Calif.-based maker of programmable chips for networking, that had raised over $150 million from firms like Tencent, Alibaba, Alphabet, Andreessen Horowitz, Goldman Sachs, Dell, Lightspeed Venture Partners and Sequoia Capital. http://axios.link/bpDe

MBK Partners is considering a sale process for Apex Logistics Group, a Chinese freight forwarder that could fetch up to $1 billion, per Bloomberg.

🚑 Merck (NYSE: MRK) agreed to buy Tilos Therapeutics, a Cambridge, Mass.-based developer of antibodies for treating cancer and fibrosis, for $773 million. Tilos had been seeded with around $9 million by ShangPharma Innovation, Boehringer Ingelheim Venture Fund and Partners Healthcare. http://axios.link/pPQV

🚑 Unilever agreed to buy San Francisco-based skincare brand Tatcha. Sellers include Castanea Partners and M13. http://axios.link/HYZe

More M&A

AGL Energy (ASX: AGL) offered to buy Australian telco Vocus Group (ASX: VOC) for A$3.02 billion. Last week, EQT Infrastructure pulled a A$3.3 billion bid for Vocus, citing unspecified issues raised during due diligence. http://axios.link/YTa3

Richard Baker, co-executive chairman of Hudson’s Bay (TSX: HBC), is leading a C$1.74 billion takeover offer for the retailer, which owns both Saks Fifth Avenue and Lord & Taylor. Baker’s group currently holds around 57% of the company’s outstanding stock. http://axios.link/1sLu

Comstock Resources (NYSE: CRK) agreed to buy Covey Park, a Dallas-based oil and gas company operating in Louisiana’s Haynesville basin, for $1.1 billion in cash and stock. http://axios.link/vm7A

PayU, a digital payments unit of Naspers, agreed to buy Turkey’s Iyzico for $165 million. Iyzico had raised around $24 million from firms like Amadeus Capital Partners, IFC and Vostok Emerging Finance. http://axios.link/bbyc

Readerlink, a privately-held book distributor, is working on a takeover bid for Barnes & Noble (NYSE: BKS) that could top last week’s $476 million offer from Elliott Management, per the WSJ. http://axios.link/oNLj

Vimo and mPOS, both Vietnamese digital payments companies, agreed to merge and seek to raise $30 million in new funding, per Bloomberg. http://axios.link/iPEf

Fundraising

Crane Venture Partners, a London-based early-stage VC firm, raised $90 million for its debut fund. http://axios.link/u2QN

HSBC formed an $880 million growth equity fund focused on tech startups in mainland China, Macau and Hong Kong. http://axios.link/H9ly

It's Personnel

Melissa Mounce joined GTCR as a managing director of leadership talent. She previously was with Baird Capital. www.gtcr.com

Robert Peck joined Barclays as chairman of global Internet investment banking. He previously was with Credit Suisse.

Sebastien Siou and Nadeem Kheraj left CPPIB to join Whitehorse Liquidity Partners as a senior principal and principal, respectively. Whitehorse also promoted Julian Mirsky to senior principal. www.whitehorseliquidity.com

Final Numbers
Source: Refinitiv. Data through June 6, 2019.
Dan Primack

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