Feb 9, 2018

Axios Pro Rata

By Dan Primack
Dan Primack
Top of the Morning
Source: Giphy

Listed private equity firms are frustrated by what they view as artificially-low share prices, and are actively considering a structural fix: Converting from publicly-traded partnerships to C-corporations.

The conversion option was raised during several earnings calls in the past week — including for Apollo, Blackstone and Carlyle — but was brought into sharpest focus yesterday morning by KKR, which said it is "analyzing the potential impact of a conversion" and would likely have a final answer by its next quarterly earnings release.

  • Why do it? Publicly-traded partnerships are off-limits for many institutional investors, and also aren't eligible for most equity indexes (like the S&P 500) or exchange-traded funds.
  • Why do it now? The corporate tax rate has moved closer to parity with capital gains, via the recent tax cuts. At 35%, conversion was a nonstarter.
  • Why not do it? There are still negative tax implications, and firms are trying to determine if they'd get enough stock price boost to offset. For example, KKR estimates that its 2017 after-tax economic net income would have been around 17% lower, calculated with the new tax rate. That means it would need to "see approximately two turns of multiple expansion, all else being equal, for a break-even stock price." Moreover, as Carlyle's Glenn Youngkin put it, converting is a "is a no-going-back kind of decision."

Chip chat: Qualcomm yesterday rejected Broadcom's "best and final" takeover offer, which worked out to around $121 billion, or $82 per share. Qualcomm did, however, say it would be willing to meet with Broadcom. More:

  • Broadcom said it welcomed the chance to meet face-to-face, but expressed annoyance at the timing. Per a letter from Broadcom CEO Hock Tan: "We offered to meet with Qualcomm on Friday, Saturday or Sunday. I was astonished to hear that Qualcomm is not willing to meet until Tuesday."
  • Broadcom reiterated that $82 per share is its richest offer, but also said that it would include a whopping $8 billion regulatory reverse termination fee.
  • As you'll recall, the sweetened bid also required Qualcomm to either complete its own $47 billion purchase of NXP Semiconductor (at the agreed-upon price) or terminate the deal.
  • A source says that Broadcom still plans to redomicile from Singapore to the U.S., no matter the outcome of its Qualcomm pursuit.
  • This merger would create major competition for Intel and Samsung, by creating a third semiconductor company with double-digit market share.

On the docket: Former Xfund colleagues Hugo Van Vuuren and Patrick Chung may have settled their legal disputes, but Van Vuuren has now sued the fund's former law firm, Ropes & Gray, for breach of contract, breach of fiduciary duty, negligence and aiding and abetting a civil conspiracy. In short: Van Vuuren alleges that Ropes & Gray improperly took sides on Chung's behalf.

  • More court: A federal judge ruled yesterday that food delivery company Grubhub had correctly classified a California driver as a contractor, in a big labor win for gig economy companies.
The BFD
Photo by Don Emmert/Getty Images

Remington Outdoor Co., a Madison, N.C.-based firearms manufacturer owned by Cerberus Capital Management, is speaking with lenders about a prepackaged bankruptcy filing, according to Reuters.

  • Why it's the BFD: Because this might be the merciful end to an albatross of an investment for Cerberus, which over-leveraged, over-consolidated and completely misjudged political and reputational risk.
  • Bottom line: "Remington’s sales plunged 27% in the first nine months of 2017, resulting in a $28 million operating loss... [They] have declined in part because of receding fears that guns will become more heavily regulated by the U.S. government, according to credit ratings agencies."
Venture Capital Deals

🚑 Zenflow, a San Francisco-based developer of devices to treat obstructive urinary symptoms related to enlarged prostates, has raised $31.4 million in Series A funding from firms like Invus Opportunities, F-Prime Capital Partners and Medical Technology Venture Partners. www.zenflow.com

🚑 Syndesi Therapeutics, a Belgian neurology drug discovery startup spun out of UCB, has raised €17 million in first-round funding from V-Bio Ventures, Novo Nordisk, Fountain Healthcare, Walloon Investment Fund, VIVES Louvain Technology Fund and Johnson & Johnson. http://axios.link/dAcv

Agrinos, a Davis, Calif.-based developer of biological crop nutrition products, has raised $14.7 million in funding from Manor Investment, Havfonn and EuroChem Group. www.agrinos.com

Attentive, a New York-based messaging startup for brands, has raised $13 million in Series A funding. Bain Capital Ventures led, and was joined by Eniac Ventures and NextView Ventures. The company is co-founded by Brian Long and Andrew Jones, who previously co-founded TapCommerce (acquired by Twitter for around $100m). http://axios.link/KAIp

Honest Buildings, a New York-based provider of construction management software, has raised $8 million in new Series B funding (round total now $21m). Oxford Properties Group led the new tranche, and was joined by The Durst Organization and DivcoWest Real Estate Investments. www.honestbuildings.com

🚑 Appili Therapeutics, a Halifax-based developer of anti-infective drugs, has raised C$4.3 million in VC funding from backers like Innovacorp. http://axios.link/vMIG

Grove, a financial planning software startup led by Chris Hutchins (ex-Google Ventures), has raised $2.1 million from First Round Capital, Lowercase Capital, Upside Partnership, SV Angel, CFSI. www.hellogrove.com

Private Equity Deals

Ant Financial Services, an online payments affiliate of Alibaba Group, is seeking to raise up to $5 billion in new equity funding at a valuation north of $100 billion, according to Reuters. http://axios.link/H1K2

🚑 BC Partners has agreed to acquire Zest Dental Solutions, a Carlsbad, Calif.-based maker of dentistry products, from Avista Capital Partners. http://axios.link/muMh

Clearlake Capital has acquired a minority stake in Diligent Corp., a New York-based corporate board and governance software provider backed by Insight Venture Partners. www.diligent.com

🚑 Confluent Medical Technologies, a Fremont, Calif.-based medical device contract manufacturer backed by Ampersand Capital Partners, has acquired Campbell, Calif.-based medical device maker Corpus Medical. www.corpusmed.com

Davies Group, a UK-based portfolio company of HGGC, has acquired: TLSS, a British provider of motor loss claim adjusting services, and Randall & Quilter’s insurance services and captive management operations. http://axios.link/tk0z

Shanda Games, a Chinese online gaming company, has raised $474 million from Tencent. http://axios.link/rWCx

Thomas H. Lee Partners has agreed to acquire Alfresco Software, an open-source provider of process automation, content management and information governance software. Alfresco had raised around $60 million from Sageview Capital, Accel, Mayfield Fund and Sapphire Ventures. http://axios.link/EKIM

Public Offerings

Cardlytics, an Atlanta-based marketing analytics company, raised $70.2 million in its IPO. The company priced 5.4 million shares at $13 (low end of $13-$15 range), and will trade on the Nasdaq under ticker CDLX. BofA Merrill Lynch served as lead underwriter. Cardlytics had raised over $180 million in VC funding from firms like Canaan Partners, Polaris Partners, Discovery Capital, TTV Capital, ITC Holdings, Total Technology Ventures and Kinetic Ventures. www.cardlytics.com

🚑 Evolus, an Irvine, Calif.-based developer of a biosimilar version of Botox, raised $60 million in its IPO. The company priced 5 million shares at $12 (low end of $12-$14 range), and will trade on the Nasdaq under ticker EOLS. Cantor Fitzgerald served as lead underwriter. http://axios.link/Mqji

Huami, a Chinese maker of wearable devices, raised $110 million in its IPO. The company priced 10 million shares at $11 (middle of range), for a fully-diluted market value of around $662 million. It will trade on the Nasdaq under ticker HMI, while Credit Suisse served as lead underwriter. Huami reports around $14 million of net income on $195 million in revenue for the first nine months of 2017, while shareholders include Banyan Capital. http://axios.link/muvt

IPSCO Tubulars, the U.S. subsidiary of Russian steel pipe-maker TMK, has postponed its planned $500 million IPO. http://axios.link/1puy

🚑 PolyPid, an Israeli drug release extension platform for preventing infection, has filed for an $86 million IPO. It plans to trade on the Nasdaq under ticker POLY, with Goldman Sachs serving as lead underwriter. Shareholders include Aurum Ventures (18.3% pre-IPO stake), Shavit Capital (9.1%) and Xenia VC (6.1%). The company previously filed for an IPO in October 2014, but pulled it the following May. www.polypid.com

More M&A

Bayer (DB: BAYN) is offering to sell its global vegetable seeds business to get its $63.5 billion purchase of Monsanto (NYSE: MON) approved by EU regulators, according to Reuters. Bayer also would be willing to give BASF exclusive access to its digital farming data. http://axios.link/UMvT

BitPesa, a blockchain payments platform for Africa and Europe, has acquired TransferZero, a Spain-based international money transfer platform. BitPesa backers include Greycroft and Plug and Play Ventures. http://axios.link/koRb

L’Oreal (Paris: OREP) said it is willing to purchase Nestle’s (SWX: NESN) 23% stake in the company, were Nestle willing to sell. http://axios.link/veeh

Dr. Oetker of Germany has offered to buy the Alsa baking and dessert business of Unilever for an undisclosed amount. http://axios.link/dE0X

Fundraising

Altegris and Artivest are merging into a single provider of alternative investment solutions for wealth managers, fund managers and independent advisors. Shareholders in the merged company, which will have around $3 billion in AUM, include Aquiline Capital Partners, Genstar Capital, KKR and Thiel Capital. http://axios.link/t9MJ

B Capital Group, a tech venture capital firm co-founded by Eduardo Saverin (Facebook co-founder) and Raj Ganguly (ex-Bain Capital), has closed its debut fund with $360 million. www.bcapgroup.com

Moonrise Capital, a Connecticut-based firm led by former Commonfund CEO Don Pascal, is raising $100 million for a China-focused VC fund, per an SEC filing.

It's Personnel

Dennis Berman has stepped down as financial editor of The Wall Street Journal, in order to join Lazard as a managing director in its financial advisory unit. If the history of financial journalists becoming financial pros is any guide, he will not become a valuable source to his former peers. www.lazard.com

Alexis Ohanian is stepping down from his day-to-day duties at Reddit, the company he co-founded, in order to work fulltime on his VC firm, Initialized Capital. http://axios.link/pdqC

Matt Rogers, co-founder of Nest, is leaving Google to focus on his venture capital lab, Incite. http://axios.link/4ULj

Final Numbers
Data: The Observatory of Economic Complexity; Chart: Chris Canipe / Axios
Dan Primack