Mar 19, 2018

Axios Pro Rata

By Dan Primack
Dan Primack

Our current March Madness leader is Thomas Lee, a private equity associate at San Francisco-based New Island Capital. But Lee's glory will be fleeting, as he has Virginia winning it all... Okay, here we go:

Top of the Morning
Illustration: Sarah Grillo / Axios

The future of Toys "R" Us may be determined tomorrow in a Virginia courtroom, in a hearing that one source tells me will be "explosive." Another source used the term "fireworks," so that sounds pretty consistent.

  • At issue will be whether liquidation will move forward as the only option (per preference of the "B-4 lender" group) or if a parallel process can continue whereby other debtors can keep working to find a strategic or financial partner that would help keep around 200, strong-performing U.S. stores alive (and likely merge them with the company's much-healthier Canada business).
  • Thousands of jobs hang in the balance.
  • A liquidator bidding process also needs to be established, particularly because the job is likely too large for any one firm (even if those 200 U.S. stores are saved).

A narrative is beginning to take hold about how Toys is emblematic of private equity's corrosive leverage model, and how a few more big busts could fuel populist anger against the buyout bunch. And, just today, Apollo-backed Claire's filed for Chapter 11.

But I don't really see it, at least not without a much broader economic pullback. Remember that both Toys and Claire's were pre-crisis deals, and there just aren't too many of those still in PE portfolios. Most of today's retail buyouts are being viewed as salvage jobs from the outset (e.g., Staples), so the downside PR risk should be far smaller.

This isn't to say PE did a good job managing Toys. It didn't. Many of the stores never lost their Sears-like aesthetic, nor did the company adequately work with smaller toy-makers who create differentiated product.

So if you want to blame private equity — as opposed to Amazon or a group of seemingly-intransigent lenders — blame it for execution over model.

Stunner: Defy Ventures, a nonprofit that works in prisons to help convicts become entrepreneurs, is usually in the headlines for all the right reasons. But a new Daily Beast investigation finds allegations of sexual harassment against founder Catherine Hoke, plus possible fraud in terms of what she tells donors about success rates.

  • Why it matters: Defy is a beloved program in Silicon Valley, having taken numerous groups of tech execs and VCs into prison for what they later call transformative experiences. Sheryl Sandberg even wrote the forward to a new memoir by Hoke, who began her career in private equity. The board — which fired a top exec who blew the whistle (ostensibly for also sharing his concerns with partners and donors) — says it has hired an outside law firm to investigate.

Showdown: The fate of AT&T's $85 billion gambit for Time Warner will be determined in a trial that kicks off later today. Here's what you need to know, and Axios' David McCabe introduces us to the the presiding judge.

Bad date: Last month we reported that dating app Tinder secured patents on the swiping and double opt-in tech that are also used by rival Bumble. Tinder's parent company, Match.com, on Friday night sued Bumble for patent infringement and misappropriation of trade secrets.

  • Bottom line: Match had previously offered to buy Bumble for $450 million, and may be using this suit to restart those stalled negotiations.
The BFD
Expand chart
Data: Brookings Institution; Chart: Chris Canipe

Promise, a provider of incarceration alternatives to local governments, has raised $3 million. First Round Capital led, and was joined by Roc Nation, 8VC and Kapor Capital.

  • Why it's the BFD: Because thousands of Americans each year are jailed due to their inability to afford bail, even if their alleged offense is a low-level misdemeanor. It can be devastating for the individual, and expensive for taxpayers.
  • Go deeper at Axios: How the U.S. imprisons the poor
  • Bottom line: "Promise provides counties with a comprehensive intake procedure and then sets up each participant with a care plan specific to them. Promise will then monitor and support participants by helping them ensure they know when they’re supposed to appear in court, and remind them of obligations like drug testing or substance abuse treatment needed. The app also provides participants with job training, housing, counseling and referrals." — Megan Rose Dickey, TechCrunch
Venture Capital Deals

Alibaba is investing an additional $2 billion into Lazada, the Southeast Asia-focused e-commerce marketplace it took control of in 2016 from Rocket Internet. It also installed Alibaba co-founder Lucy Peng as CEO, replacing Max Bittner. http://axios.link/Pozb

🚑 TwoXAR, a Palo Alto, Calif.-based drug discovery startup that utilizes AI, has raised $10 million in Series A funding. SoftBank led, and was joined by Andreessen Horowitz and OS fund. http://axios.link/V2Tf

SeamlessDocs, a New York-based provider of paper process digitization for government entities, has raised $7.5 million. SJF Ventures led, and was joined by Motorola Solutions, Entrepreneur Roundtable Accelerator, NY State Innovation Ventures and CapRock. www.seamlessdocs.com

Serious Factory, a French behavioral simulations startup, has raised €3 million in second-round funding from Odyssée Venture and the Paris Region Venture Fund. www.seriousfactory.com

PieSync, a Belgium-based synchronization platform, has raised €2.8 million in funding led by Fortino Capital. www.piesync.com

Strix Leviathan, a Seattle-based cryptocurrency trading and management service for enterprises and institutions, has raised $1.6 million in seed funding led by Liquid 2 Ventures. http://axios.link/hQ3g

Yestock Car Rental Co., a Shenzhen-based car rental company, has raised an undisclosed amount of strategic funding from Didi Chuxing. http://axios.link/86Rk

Private Equity Deals

Equistone has acquired a majority stake in BOAL Group, a Dutch maker of aluminum greenhouse roofs, from company founder Ronald Boers. http://axios.link/4eNT

Onward Capital has acquired Connecticut Electric, an Anderson, Ind.-based maker of electrical products like circuit breakers and manual transfer switches, from Thompson Street Capital Partners. www.connecticut-electric.com

Parthenon Capital Partners has invested in Trinity Partners, a Waltham, Mass.-based commercialization strategy and analytics consultancy for the life sciences sector. www.trinitypartners.com

Spectrum Equity has acquired a minority stake in Origami Risk, a Glencoe, Ill.-based risk and insurance SaaS company. www.origamirisk.com

YFM Equity Partners has sponsored a management buyout of Checkmate Fire Solutions, a British provider of fire protection services. www.checkmatefire.com

Public Offerings

Three companies plan to price IPOs on U.S. exchanges this week: Dropbox, PolyPid and Sunlands Online Education. http://axios.link/npOL

🚑 Alzheon, a Framingham, Mass.-based developer of small-molecule therapies for Alzheimer's disease, filed for an $81 million IPO. It plans to trade on the Nasdaq under ticker ALZH, with Citi serving as lead underwriter. The pre-revenue company raised around $27 million in VC funding from firms like Ally Bridge Group. www.alzheon.com

Bilibili, a Chinese animation streaming platform, set its IPO terms to 42 million shares at $10.50-$12.50 per share. It would have a fully-diluted market value of $3.2 billion, were it to price in the middle. The company plans to trade on the NYSE under ticker BILI, with Morgan Stanley as lead underwriter. Shareholders include IDG-Accel (7.6% pre-IPO stake), Legend Capital (5.9%) and Tencent (5.2%). http://axios.link/J9n1

iQiyi, a Netflix-style service in China that is owned by Baidu (Nasdaq: BIDU), et its IPO terms to 125 million at $17-$19. It would have a fully-diluted market value of $13.7 billion, were it to price in the middle, and plans to trade on the Nasdaq under ticker IQ. Goldman Sachs (Asia) is lead underwriter. iQiyi reports a $574 million net loss on $2.67 billion in revenue for 2017. http://axios.link/J9n1

OneSmart, a Chinese provider of K-12 after-school education, set its IPO terms to 16.3 million shares at $11-$13. It would have a fully-diluted market value of $2 billion, were it to price in the middle. The company plans to trade on the NYSE under ticker ONE, with Morgan Stanley as lead underwriter. Shareholders include Goldman Sachs.

⛽ Varo Energy, a European downstream energy joint venture between The Carlyle Group and Dutch oil trader Vitol, is prepping an Amsterdam IPO. http://axios.link/2DZF

Zuora, a Foster City, Calif.-based provider of subscription billing software, filed for a $100 million IPO. It plans to trade on the NYSE under ticker ZUO, with Goldman Sachs as lead underwriter. The company reports a $47 million net loss on $168 million in revenue for the year ending 1/31/18, compared to a $39 million net loss on $113 million in revenue for the year-earlier period. It has raised around $250 million in funding from backers like Benchmark (11.1% pre-IPO stake), Wellington Management (9.4%), Shasta Ventures (8.3%), Tenaya Capital (6.6%) and Redpoint Ventures (6.5%). http://axios.link/vuy4

Liquidity Events

Warburg Pincus has agreed to sell Extant, a Melbourne, Fla.-based maker of aftermarket-focused avionics components, to TransDigm (NYSE: TDG) for around $525 million in cash. www.extantcomponentsgroup.com

• Wartsila, a Finland-listed ship technology company, has agreed to acquire Transas, a UK-based marine navigation company, for €210 million. Sellers include Industrial Investors. http://axios.link/J6XN

More M&A

Cloudian, a San Mateo, Calif.-based data management company backed by Digital Alpha, has acquired Infinity Storage, a Milan-based provider of software-defined file storage solutions. www.cloudian.com

Dubai Ports World has acquired Cosmos Agencia Maritima, a Peruvian provider of logistics and maritime services, for $315.7 million. The deal also gives DP World a 50% stake in Peru’s second-largest container terminal. http://axios.link/JeAR

Fundamental Advisors has paid $112 million to acquire a mezzanine loan secured by interests in Tandem Health Care, a skilled nursing and long-term healthcare portfolio, from HCP (NYSE: HCP). www.fundamentaladvisorslp.com

🍷 Oetker Group of Germany has acquired nearly a 51% stake in Spanish sparkling winemaker Freixenet. http://axios.link/wyvI

• Newell Brands (NYSE: NWL) has reached a truce with Carl Icahn, who holds around 6.9% of Newell shares. http://axios.link/Tfo5

Sherborne, the activist investment firm led by Edward Bramson, has acquired a 5.16% stake in Barclays (LSE: BARC). http://axios.link/ZLym

Fundraising

Brightstar Capital Partners, a New York-based private equity firm focused on closely-held middle-market companies, has closed its debut fund with $710 million. www.brightstarcapitalpartners.com

Harbour Group has closed its fourth private equity fund with $402 million. www.harbourgroup.com

VentureFriends, a Greek VC firm, has raised €45 million for its second fund. http://axios.link/UIEq

Final Numbers
Source: St. Louis Federal Reserve

Shark Tank host Kevin O'Leary told CNBC this morning that he's helping in a $400 million, SEC-approved coin issuance for a one-third stake in a well-known hotel building. If successful, it might further depress new public equity listings on traditional exchanges.

  • Key: This would be a taken offering backed by real assets, not by future services (i.e., not the typical ICO model).
  • More from O'Leary: "I am a big believer that asset-based coins will soon replace small-cap stocks."
Dan Primack