Apple Leisure has three bidders through to final round, including Fosun and Tempus

Provided exclusively by Mergermarket

Three bidders have made it through to the final round of the sale of Apple Leisure, the US-based Bain Capital portfolio company, three sources briefed on the situation said.

The final bidders include Fosun Group and Shenzhen-based conglomerate Tempus Group, they said. A US-based private equity firm rounds out the list, the first source noted. The sellers are expected to select a preferred bidder as soon as mid-November, this source said.

China National Travel Service (Hong Kong) (HKCTS) and Shanghai Jin Jiang International, which were previously reported by this news service to be pursuing Apple Leisure, are said to be no longer in the running, the source said. Parties have also been told that Carlyle Group is no longer in the race.

Jin Jiang didn’t respond to a request for comment. Carlyle declined to comment.

Established in 1998, Shenzhen-based Tempus Group is engaged in business services, modern logistics, fine wine exchange platform and operation of “Shenzhen (Futian) Internet Financial Industrial Park”. Its subsidiary Shenzhen Tempus Global Business Service [SZ:300178], which has a market cap of CNY 10.63bn (USD 1.57bn), provides airline transportation agent sale services.

Last year, Fosun launched a joint venture with UK-based Thomas Cook to expand into Asia. Thomas Cook offers travel and agent services primarily to European customers.

Apple Leisure is organized as a vertically integrated travel company in North America with travel agencies and tour operators with varying profitability and margin levels. The company serves customers in vacation destinations like Mexico, the Caribbean and Hawaii.

The company is working with Credit Suisse on the sale. Reuters reported in June that Apple Leisure was up for sale, estimating the company could be valued at more than USD 1.5bn, including debt.

Bain and Apple Leisure didn’t respond to request for comment as of press time.

by Ling Yang, Sophie Jin and Fei’er Wang in Shanghai

As seen in the mergermarket newsletter on 26/10/2016

Grant Thornton’s CEO Discusses Innovation (Video)

J. Michael (Mike) McGuire Discusses Innovation and Disruptive Technologies at InterGrowth

In this Middle Market Growth Conversation, Grant Thornton CEO J. Michael (Mike) McGuire discusses the importance of innovation to business growth and the impact of disruptive technologies such as Uber. The interview took place in May at InterGrowth 2016 in New Orleans.

Panama Canal Offers Savings for Midmarket Firms

MMG | August 18th, 2016

Bank of America’s Doug Davidson Explains Why

n June, the 102-year-old Panama Canal reopened after a $5 billion project to allow bigger larger vessels to pass through the waterway. U.S. companies are recognizing growth opportunities enabled by the so-called Panamex expansion.

Q: What significant implications will the Panama Canal expansion have on trade route opportunities for U.S. businesses?

Doug Davidson: Trade routes across the United States will experience major shifts as a result of the Panama Canal expansion. Goods that were once transported via ships only to Western U.S. ports were trucked across the continent to multiple destinations, often times driving up transportation costs. The Panama Canal expansion has opened up opportunities for goods to travel directly to East Coast ports, creating a more seamless and timely delivery to consumers in the surrounding areas. This shift in trade routes also leads to infrastructure investments, such as improvements and expansions of railways and warehouses, to be able to house an influx of goods and transport them more efficiently.

I just met with a company called Flagler Global Logistics, a perishable-cargo handling company that had been transporting and fumigating fresh blueberries from South America through Philadelphia, loading them onto trucks and then driving them down to Florida. Because of the canal expansion, blueberry shipments can now be brought into the U.S. and fumigated directly through Florida, meaning fresher blueberries delivered to grocery shelves an entire week earlier, saving an estimated $3,500 in transportation costs.

Q: What are the key logistical and financial considerations businesses need to think about?

DD: Businesses need to be sure that they can meet consumer demand in terms of moving their goods across the U.S. with the proper equipment, storage space and talent, as well as supply chain processes in place, especially if there is an increase in demand. In preparation for the canal expansion, I’ve seen many businesses invest in updating their technology, anticipating an influx of imports, as well as make improvements to facilities and warehouse space to ensure their company’s supply chain will be properly supported.

On a larger scale, some businesses may need to rethink how their goods are delivered. Instead of shipping them all the way up the coast and having them trucked across the nation, goods can be delivered to more centrally located ports, substantially cutting transportation costs.

On a larger scale, some businesses may need to rethink how their goods are delivered. Instead of shipping them all the way up the coast and having them trucked across the nation, goods can be delivered to more centrally located ports, substantially cutting transportation costs.

Ports are often considered the economic engines of their surrounding regions. The increase of shipping to the Eastern ports, by as much as 10 percent according to the U.S. Department of Commerce, is going to have a vast impact on the logistics of the ports themselves. With larger ships and larger shipping containers arriving at East Coast ports, port infrastructures and entire intermodal systems have been remodeled and upgraded to accommodate more goods.

Q: Which region in the U.S. will see the biggest uptick in international or domestic trade opportunities?

DD: Given previous restrictions on the size of ships coming through the Panama Canal, there are now significant opportunities for many regions along the East Coast, shortening transportation arrival time to consumers, while minimizing costs for businesses. Based on our research, 61 percent of companies will have some foreign market involvement this year, and the top three regions U.S. companies will have international operations with are Asia (62 percent), Europe (61 percent) and Latin America (50 percent).

While many companies headquartered in Latin America often established operations with cities in Florida, such as Miami, there is now more opportunity to reach other East Coast cities as ports expand to accommodate the larger Panamax ships. For example, ports in Virginia have heavily invested in their transportation infrastructure, allowing goods to flow from the ports to their end destination most efficiently. Also, the Port of Charleston in South Carolina has deepened its harbor to allow for larger ships. These types of developments are helping to create job opportunities, while improving efficient trade from around the world to the continental U.S.

Q: Are middle-market businesses prepared for the Panama Canal expansion? What are you telling your clients as they start seeing the impact the expansion has on the local business environment?

DD: They are ready. The businesses I’ve been working with have the equipment secured and ports dredged. But it’s not just about equipment or ports, it’s about the entire intermodal system. Businesses have been investing in the cranes and talent—such as stevedores—and facilities to hold larger shipment containers, among other aspects of their businesses. I’ve seen a lot of companies make large investments in their infrastructure already and this is just the beginning.

Doug Davidson is market executive with the Global Commercial Banking division at Bank of America Merrill Lynch.

Expert Panels on Transformational Value Creation Offer Creative Insights, a Look to Future

ACG New York panels and conversations challenge traditional approaches to value creation strategies in the middle market

By Zoë Bodzas

(New York) ACG New York recently hosted a series of panels and a fireside chat on transformational value creation strategies for portfolio companies, offering a variety of experienced perspectives on how to differentiate and compete in today’s changing middle market. Sponsored by Katz, Sapper & Miller, Venetia Partners, Pepper Hamilton, and TM Capital, the event, “Transformational Value Creation: You Paid 10X, Now What?” presented conversations on three critical strategy areas: Growth Initiatives, Operational Improvements, and Talent Acquisition/Assessment. In addition to networking opportunities, there was a fireside chat with Bertram Capital’s Jared Ruger and Michael Goldman, Founding Partner and Managing Director of TM Capital.

Bob Fitzsimmons, Managing Partner of High Road Capital, moderated the morning’s first panel, Growth Initiatives, which featured Grant Hunter, Partner of Inventis Strategies, LLC; Don McNichol, Director of Performance Improvement Partners; David Reynolds, Partner of Venetia Partners; and David Wojcik, Senior Vice President of Insight Resourcing Group. Common themes emerged when Fitzsimmons questioned panelists about a “standard playbook” in their approach to value-creation. Panelists emphasized the power of thorough
data-collecting early on in the assessment of a potential investment and envisioning what McNichol calls “a holistic roadmap from an acquisition perspective” for the company’s future. Wojcik also advocated for rigorous programs that begin with data and consider the supplier base: “You’re only as fast as the slowest company,” after all. Reynolds further warned that company culture is an important consideration in growth initiatives, as “leadership [could be] sold on a goal/result, but not sold on what it takes to get there.” A third-party perspective, in this case, helps.

Afterwards, a second panel delved into Operational Improvements for portfolio companies, pre- and post-acquisition. Corey Massella, Partner of Katz, Sapper & Miller, lead a discussion with John Bisack, President and Managing Director of Performance Improvement Partners; Tom Gesky, CEO of Resourcive; and Alex Miller, Senior Vice President of Synergetics. Two key takeaways from this panel included the potential value of informed technology implementation and the role of timing. As Bisack concisely put it, “Technology shouldn’t be done for the sake of technology” in an acquisition; rather, firms should champion a cost-benefit perspective, examining technology options in business terms and seeking to leverage technology in an efficient manner. Miller emphasized the necessity of gaining knowledge very early on in the process if a team hopes to commit to the financial outcome of a company. Gesky urged a strategy that is both light-touch and “future-proof,” a preparation for acquisition and beyond.

After Operational Improvements, the room considered Talent Acquisition and Assessment in a thoughtful discussion moderated by Jim Rosener, Managing Partner at Pepper Hamilton. Joined by Scott Estill, Partner at Skillcapital; Steven Nigro of TAG Financial Institutions Group, LLC; and Tim Foster, Principal at Sales Benchmark Index. When Rosener presented the common concern about internal confusion in a company during an acquisition, Foster offered a best practice of tying the pay of chief officers to the performance of revenue marketing and denounced an “over-emphasis on industry experience;” ultimately, there is value potential in unconventional but common-sense strategies. Nigro and Estill also advocated for up-front transparency about management changes.

Following the panels, guests listened to a literal fireside chat that offered insight on how some of the strategies and tools considered earlier in the morning can lead to real-world value and growth in middle market portfolio companies. As Michael Goldman chatted with Bertram Capital’s Jared Ruger, attendees explored some case studies of innovative value creation strategy. Ruger shared elements of Bertram’s five-sided methodology for value transformation in newly acquired companies, highlighting the underutilized potential of mainstream companies with a “long tech backlog.” In-house web developers helped differentiate Bertram’s portfolio companies, a technique that has proved to be a “value-creation engine.” The conversation proved to be a productive capstone for the day’s concepts: with proactive, robust strategies and unconventional thinking, there could be untapped growth available in management, operations, technology, and elsewhere.


Rite Aid/Walgreens signing up suitors for divest process, sources say

Provided exclusively by Mergermarket

Walgreens Boots Alliance (NASDAQ:WBA) and Rite Aid (NYSE:RAD) recently signed confidentiality agreements with divestiture suitors, two sources briefed on the matter said.

The major pharmacy chains have been discussing a divestiture plan with the Federal Trade Commission (FTC) to resolve antitrust concerns about their proposed USD 17.2bn merger. Last month, Walgreens said it expects to divest between 500 and 1,000 stores based on communication with the FTC.

Walgreens and Rite Aid are open to divesting all the stores to a single buyer or dividing them up among various acquirers, one of the sources said. It is unclear if the government would prefer one buyer for the divestiture package, a sector advisor said.

Divestiture suitors include CVS Health (NYSE:CVS), Kroger (NYSE:KR), KPH Healthcare Services Kinney Drugs and Fred’s (NASDAQ:FRED), one of the sources said. Some private equity firms are also interested in the assets, but they may not want to acquire the entire collection of stores, the sector advisor said.

CVS, the country’s largest pharmacy chain, would likely only be able to buy some of the stores for antitrust reasons. Kroger, a major grocery store chain based in Cincinnati, does not operate standalone pharmacy stores and an acquisition would represent a strategy change, this news service has previously reported.

Kinney is a privately held pharmacy chain based in the Northeast, in Gouverneur, New York. Fred’s operates dollar stores and pharmacies, primarily in the Southeast. The Memphis-based company explored a buyout with Sycamore Partners and other private equity firms in 2014.

This news service reported in August that the FTC review of the Rite Aid sale was following precedent cases involving pharmacy mergers. The report added that the FTC believes pharmacy benefit managers (PBMs) have a strong hand in negotiations with pharmacies over drug prices.

The large national PBMs that control most of the market are unlikely to be concerned about the deal, two additional sector advisors and an industry attorney said.

Small PBMs that focus on specific states or regions may have concerns if they believe the merger would create a monopoly in their region unless there is an increase in store divestitures, the third sector advisor and attorney said. If they could successfully make this case, the FTC may focus on the small PBMs’ specific markets, the attorney said.

Walgreens declined to comment. Rite Aid, CVS, Kroger, Kinney and Fred’s did not return requests for comment.

by Bhavna Kaul, Dane Hamilton and Esther D’Amico

As seen in the mergermarket newsletter on 07/10/2016

Management Fee Waivers as Disguised Compensation

In July 2015, the Treasury and the Internal Revenue Service issued proposed regulations that address whether arrangements in which the private equity fund managers receive an interest in the managed partnership’s future profits in exchange for waiving part or all of their management fees (generally a fixed payment for services provided to the partnership) constitute disguised compensation.  The proposed regulations attempt to determine whether such arrangements should be characterized as a disguised fee, which would be taxable as ordinary income to the manager, or whether such arrangements should be respected as a legitimate allocation of the partnership’s profits, which would generally be taxable as capital gains to the manager.  Under the proposed regulations, any arrangement that is determined to be disguised compensation will be treated as disguised compensation for all tax purposes, meaning it will be taxed as compensation for purposes of all sections of the Internal Revenue Code of 1986, as amended (the “Code”), including section 707.  If finalized in their current form, the proposed regulations could adversely affect some fee waiver practices that private equity funds currently utilize.
Management Fee Waivers Generally
Management fee waivers can take many forms, but generally involve a decrease in the fee paid to the manager for managing the partnership (often because the manager has waived the fee) in return for the receipt of a profit interest in the partnership.  The specific details of the fee waiver mechanism often vary from partnership to partnership, such as when the manager is allowed to waive its fee, the timing of the profit allocations to the manager, and the type of allocation involved.  In some instances, a waiver is not required by the manager; rather, the manager’s fees and profit interests are determined using a formula agreed to at the inception of the partnership.
Operation of the Proposed Regulations
The proposed regulations provide that several factors should be used in determining whether a fee waiver arrangement is treated as a disguised compensation arrangement, though ultimately it is a facts and circumstances determination and the factors are a non-exhaustive list.  However, the most significant factor in determining the treatment is whether the arrangement has “significant entrepreneurial risk”.  Under the proposed regulations, if an arrangement lacks significant entrepreneurial risk, it is automatically reclassified as disguised compensation and thus subject to ordinary income rates, regardless of the application of the remaining factors to the arrangement.  Significant entrepreneurial risk is presumed not to be present when one or more of the following are true:

  • sufficient net profits are highly likely to be available to make the allocation to the manager;
  • there is a cap on the additional partnership income allocated to the manager as partner (if the cap is reasonably expected to apply in most years);
  • the allocation applies to a fixed number of years under which the amount of the manager’s distributive share of income can be determined with reasonable certainty;
  • the allocation consists of gross (rather than net) income; and
  • the waiver is not binding on the manager, or the manager fails to timely notify the partnership of the waiver and its terms.
The preamble to the propped regulations describes additional factors that may be used to determine whether sufficient net profits are highly likely to be available to make the allocation to the manager:
The value of partnership assets is not easily ascertainable and the partnership agreement allows the manager or a related party to control the determination of asset values (or events that impact such values); and the manager or a related party controls the entities in which the partnership invests.  The significant entrepreneurial risk factors discussed above attempt to determine whether the manager can expect to receive the allocation of partnership income, and the presence of any of the factors can only be rebutted through the presentation of clear and convincing evidence.  For example, if the profit interest is “highly likely” to yield the amount of the waived fee to the manager, the manager is not taking sufficient economic risk for the arrangement to be respected.  The proposed regulations provide additional factors of secondary importance  to consider in determining whether or not an arrangement is a disguised payment for services:

  • the arrangement provides for different allocations for different services provided;
  • the differing allocations are subject to different levels of entrepreneurial risk;
  • the manager holds, or is expected to hold, the partnership interest for a short period of time, or holds a transitory partnership interest;
  • the manager receives an allocation in a time frame that is similar to the time frame that the manager would receive payment for services if the manager were a third party (and not a partner);
  • the primary purpose of the manager becoming a partner in the partnership was to obtain tax benefits unavailable to the manager if the services were rendered and the manager was a third party; and
  • the manager’s allocation is significantly larger than the manager’s interest in the partnership’s continuing profits.
The proposed regulations provide several examples illustrating the difference between an arrangement that is respected as the right to receive future allocations of partnership income and distributions and an arrangement that is treated as a disguised payment for services.  In so doing, those examples illustrate the importance of the following factors:

  • the timing of a management fee waiver;
  • the existence and scope of a clawback obligation;
  • whether allocations of net profits to the manager are reasonably determinable or highly likely to be available based on all facts and circumstances that are available at the time of the waiver;
  • whether the manager can control the timing of the realization of gains and losses by the partnership.
Other Potential Changes
In addition, the preamble to the proposed regulations indicates the intention to possibly preclude additional, or possibly all, partnership interest distributions in lieu of waived fees from qualifying for the safe harbor under Revenue Procedure 93-27.  Revenue Procedure 93-27 provides that, in some circumstances, if an individual receives an interest in a partnership in exchange for providing services to that partnership in anticipation of becoming a partner, that receipt of that interest will not be a taxable event for either the partnership or the partner.
The proposed regulations provide that traditional “catch-up allocations” typically will not lack significant entrepreneurial risk, and thus typically will not be classified as disguised compensation.  However, all of the facts and circumstances need to be taken into account when the determination is made.
Effective Date
The final regulations will apply to fee waiver arrangements entered into or modified on or after the date the final regulations are finalized.  It appears that for fee waivers that occur periodically, the regulations will apply to any waiver that occurs after the effective date of the final regulations.  The preamble to the proposed regulations indicates that the IRS may seek to apply the principles embodied in the proposed regulations to fee waiver arrangements entered into before the regulations are finalized on the theory the proposed regulations reflect Congressional intent.
Pending further guidance from the IRS regarding management fee waivers, we recommend our private equity clients do the following:

  • Review current fee waiver arrangements to determine the best administrative practices for such arrangements given the factors identified in the proposed regulations.
  • Consider whether fee waiver arrangements should be utilized moving forward, and, if so, what structural changes should be contemplated in light of the factors outlined in the proposed regulations.

Any private equity fund, independent sponsor or other investor that has questions about tax regulations and new tax developments pertinent to your business should contact Jerry Chen (212) 294-8212, Mark Christy (312) 558-9502, Eva Davis (213) 615-1719), Rachel Ingwer (212) 294-4760, Roger Lucas (312) 558-5225, Soyun Park (212) 294-5327, Nick Pesavento (312) 558-8771, Justin Trapp (312) 558-6374, or any member of your Winston deal team.

5 THINGS YOU MISSED: Transformational Value Creation You Paid 10X, Now What?

Missed last week’s ACG New York Value Creation Event? Here are five top takeaways from the panel. Prepared by TresVista

  1. Cost reduction remains a major theme in Private Equity: Middle market companies tend to leave room for improvement on the cost side by not testing their multi-generational supplier relationships and renegotiating for better terms. Jake Wojcik of Insight Sourcing Group, believes that cost optimization remains the quickest way to drive EBITDA improvement, given it can yield significant results within a few months. Private equity investors can also look at pool purchasing to drive procurement synergies if portfolio companies have common direct raw materials. However, focusing on optimization of a single portfolio company is a relatively easier task.  Moderated by Bob Fitzsimmons, Managing Partner, High Road Capital
  2. Focus on organization design: Human capital and resources management remain the key to success of small and middle market companies. “Organizational design, we find, is one of the biggest elements, especially from the smaller- to mid- market companies. Often companies do not have the right resources and the skill set in order to really move the ball forward in terms of support of their strategic intent,” said Don McNichol of Performance Improvement Partners. According to David Reynolds of Venetia Partners, private equity investors could reap further benefits from their portfolio companies by better understanding the intricacies of their processes.
  3. Investor focus on IT: Private equity investors have increased their focus on IT infrastructure considerably, and undertake diligence to find possible red flags before investing. This approach is a tectonic shift from previous years, when investors audited IT only once they had C-level executives in place after acquisition. According to John Bisack of Performance Improvement Partners, investors have gone from not wanting to do IT diligence to consciously looking out for IT risks. He said, “As a general comment, private equity folks from the get-go in today’s age want to know how we can leverage technology and secondly, how can we do it efficiently. So, it’s a change in dynamic.” Moderated by Corey Massella, Partner, Katz, Sapper & Miller
  4. Software development and value creation: Michael Goldman of TM Capital said, “Value creation requires time, effort, people, and money.” Value creation can be achieved with a strong software development team. Jared Ruger of Bertram Capital believes in the thesis that paying a software developer a premium (1.5x-2x the industry average) results in higher productivity. Incentives on carry and on completion of the projects also motivate the team.
  5. Best practices in hiring key professionals: Tim Foster of Sales Benchmark Index (SBI) suggests, “Tie your Chief Marketing Officer’s pay to your VP Sales’ pay.” This helps align their interests as they work hand-in-hand. “At the senior level, such as the CFO or Chief Human Resources Officer – if they don’t have private equity experience, and if they don’t know how to manage cash, or to recruit people who know how to do that, you are setting yourself up for maybe the right people on the wrong business,” said James Rosener of Pepper Hamilton. Out-of-box hiring also helps bring in different perspective. However, problem-solving capability is on top of the requirement list.