WebMD aiming to collect final bids, sources say

Provided exclusively by Mergermarket, an Acuris company

WebMD Health [NASDAQ:WBMD] is asking suitors to submit final bids by mid-July, two sources briefed on the matter said.

Silver Lake is among the financial sponsors that has been pursuing the New York-based online health information service, these sources said. One of the sources said the sale process, which initially drew robust interest from private equity firms, has seen the interest dwindle.

This news service previously reported that WebMD management presentations commenced in early June. The Blackstone Group [NYSE:BX], Bain Capital, The Carlyle Group, Thoma Bravo, TPG and Vista Equity Partners along with Silver Lake were identified as sponsors eyeing WebMD. IAC [NASDAQ:IAC], a New York-based media and internet company, was also identified as a possible suitor.

Some financial sponsors have “stayed in” the process but do not appear to be doing a lot of work, one of the sources briefed said. The level of strategic interest could not be learned.

Financing packages for WebMD are expected to carry high leverage, the second source said. This news service previously reported that some banks have pitched financing over 7x EBITDA. Leverage at the start of the process was pegged in the 6x to 6.25x EBITDA range, the same report said. WebMD projects 2017 EBITDA will be between USD 233m and USD 243m.

The first source briefed said a concern for buyers has been that WebMD, which operates separate services for consumers and doctors, had put out lower revenue growth expectations in recent years. The company does enjoy a high-level of name recognition for its web portals.

WebMD’s physician business, Medscape, is the most attractive asset at the company, as reported. Around 80% of WebMD’s USD 705m in 2016 revenue comes from advertising. The physician site accounts for 60% of the advertising revenue.

Another ongoing concern in the auction is that WebMD has explored a sale multiple times in the past without success and there has been some skepticism about the company’s willingness to transact, as reported. The second source noted, though, that the auction, this time, has advanced farther than past sale attempts.

WebMD announced plans in February to explore strategic alternatives with JPMorgan and Shearman & Sterling advising.

Activist Blue Harbour Group filed a 13-D in March disclosing an almost 9% stake in WebMD and said it had held discussions with the company.

WebMD did not return request for comment. Silver Lake declined comment.

by Bhavna Kaul and Jay Antenen

As seen in the mergermarket, an Acuris company, newsletter on 10/7/17

Pyramid Healthcare likely to explore sale in late 2018 – source

Provided exclusively by Mergermarket

Pyramid Healthcare, a Duncansville, Pennsylvania-based behavioral health provider, should be positioned to explore a sale towards the end of next year, said a source familiar with the matter.

Backed by Clearview Capital since 2011, the addiction treatment company expects have roughly USD 150m in revenue and EBITDA close to 15% at the time of its sale, according to the source.

Multiples in the behavioral health space can reach upwards of 10x-12x EBITDA, especially for companies such as Pyramid, whose revenue stream comes entirely from in-network and government providers, which is more stable and reliable, the source added.

Despite a significant amount of inbound sale interest from financial and strategic buyers, the source explained that Pyramid is implementing a new electronic medical record (EMR) system and is also in the process of expanding several facilities, and waiting to bear fruit on those initiatives before exiting.

Pyramid provides treatment for adults and teens suffering from addiction or substance abuse, as well as individuals with mental health disorders. Founded in 1999, the company has at least 26 facilities located throughout Pennsylvania, according to its website. It more recently branched out via acquisitions into North Carolina and New Jersey.

The source said Pyramid expects to close a small acquisition later this week.

Addiction treatment centers are among the most highly coveted sub-sectors in the overall behavioral health space, according to a report earlier this month by Mergermarket, which pegged Pyramid as a likely near-term sale target.

The main strategic acquirers in the behavioral health space, as noted in that report, are Acadia Healthcare Company [NASDAQ:ACHC], Universal Health Services [NYSE:UHS] and AAC Holdings [NYSE:AAC], while PE-backed consolidators include Kohlberg & Company-backed Alita Care, Audax Group-backed Meridian Behavioral Health, Goldman Sachs-backed Advanced Recovery Systems and Centre Partners-backed Bradford Health Services.

Pyramid did not return request for comment. Clearview declined to comment for this report.

by Deborah Balshem in Fort Lauderdale

As seen in the mergermarket newsletter on 27/06/2017

PQ Group Holdings files for USD 100m IPO

Provided exclusively by Mergermarket

PQ Group Holdings Inc., a Malvern, Pennsylvania-based provider of specialty materials and chemicals, has filed an S-1 with the US Securities and Exchange Commission with a current placeholder of USD 100m.

Morgan Stanley & Co. and Goldman Sachs & Co. are the book-runners for the offering. Citigroup Global Markets, Credit Suisse Securities, JP Morgan Securities, Jefferies, Deutsche Bank Securities and KeyBanc Capital Markets are the underwriters. PQ has enlisted the legal services of Ropes & Gray LLP. The underwriters are being represented by Latham & Watkins LLP.

The company plans to use the proceeds of the offering for working capital and other general corporate purposes.

PQ lists CCMP Capital Investors III and INEOS investments Partnership as its principle stakeholders.

The proposed maximum aggregate offering of USD 100m currently listed in the prospectus is subject to change pending the company’s roadshow and market conditions.

Link to SEC filing.

As seen in the mergermarket newsletter on 10/06/2017

Etsy in review with Goldman – sources

Provided exclusively by Mergermarket

Etsy (NASDAQ: ETSY) is working with Goldman Sachs on reviewing its strategic and operational plans, said two sources following the situation.

The review is at an early stage as new management is still “figuring out what makes sense”, said a person familiar with the situation.

The New York-based online marketplace worked with Goldman and Morgan Stanley on a successful IPO in April 2015. Shares were priced at USD 16 and opened at USD 31 in market debut.

But Etsy’s honeymoon with investors quickly ended. In early May, Black & White Capital urged the company to find ways to maximize value, including exploring a sale, as its share price had tumbled more than 30% since its IPO amid a challenging operating environment. The company trades at USD 13.26 in today’s session, for a market cap of USD 1.55bn.

Internet retailing is a crowded space and stocks are suffering, an industry advisor said.

Besides poor price performance, the insurgent complained about Etsy’s growth slowdown, as well as operational and corporate governance issues.

This news service reported that Etsy was at risk of being targeted by an activist in December 2016 as it was underperforming.

The company quickly appointed a new CEO, Director Josh Silverman, in response to the activist threat, completing a senior management reshuffle initiated in April with the hire of new CFO Rachel Glaser.

Among other roles, Silverman co-founded Evite, held various executive roles at eBay [NASDAQ:EBAY], and was the CEO of Skype and Shopping.com, according to Etsy’s website. The board of six members is chaired by lead independent director Fred Wilson, founder of Union Square Ventures.

But the move failed to prevent other agitators from popping up. Private equity firm TPG Group Holding and Dragoneer Investment Group said in separate 13D filings on 15 May they were forming a group, collectively holding 8% of the shares, to engage in discussions with the company. Etsy responded by launching the review on that same day.

Etsy received pitches from other banks to successfully fend off the activists, a second sector advisor said. But the company appears to be well covered on defense advisory, the person said.

TPG’s investment was surprising, a third sector advisor said. Market participants have been wondering if it could be a first step in potentially making a bid in what would be an unusual move for private equity, he noted.

In announcing the review, Silverman said Etsy would prudently invest in higher-return areas, as well as tapping opportunities to scale its marketplace business model and driving efficiencies, while seeking operational excellence and focused execution.

Dragoneer has worked with TPG before, including in a funding round for home-rental site Airbnb.

Etsy declined to comment. Goldman Sachs did not respond to a request for comment.

by David Carnevali

As seen in the mergermarket newsletter on 12/06/2017

5 IDEAS YOU MISSED LAST WEEK – Family Office Update

1	Separating the Private Equity Firm and Family Office: It is very important that the private equity firm and the family office are separated to have better autonomy for each. A separate management team for family office can make decisions without having any conflict of interest with either the private equity firm or any of the investors. The separation also makes sure that the deal which the private equity firm is looking into is not passed on to the family offices and vice versa, thus giving each fund the independence to look into deals, make their decisions, and not be influenced by the other. If the manager of the family office is also part of the management team of the private equity fund, then it becomes difficult for such managers to make the right decision for the fund or the family office. Hence, it is better to have to separate entities in place where there is more professionalism, making it easier for anyone to give answers when asked about any conflict of interest.
2	SEC Involvement in Family Offices: If there are any co-investments with an unregistered or exempt firm, then it is better to have procedures in place and make sure that the investments criteria stated by the SEC are followed. Otherwise, this can be a challenge if the SEC conducts an audit. Primarily, the SEC looks into possible conflict of interest cases in deals which involve family offices. They also look into club deals, which have broken deal expenses. “It was all fees; they were focused on fees, co-invest fees. Since we are a small fund, we do a lot of co-investment,” said Andy Unanue of AUA Private Equity Partner. The SEC further would want the family office to disclose any payments made to any adviser to the family business and private equity fund. Separately, it is observed that the auditors are not as knowledgeable/aware as they should have been about the family office space.
3	Professionalizing Family Offices: It is better to register the family office before the SEC makes it compulsory for family offices to be registered and professionalized. “What we are starting to see now is a little bit more institutionalized and professionalized concept: having these family offices operate as a business and bring in good quality, professional people to manage the assets of the family,” said Jay Levy of CohnReznick. Currently, there is a trend for a family office to move away from investing in hedge funds and getting more involved in private equity funds; these have more procedures and complicity involved. Hence it is better for the family offices to be professionalized.
4	Cyber Security: When there is a club deal, the family offices are exposed to other co-investors regarding personal information. There is a risk of possible cyber-attacks in such deals and the information of one or more family offices’ data can become compromised. “SEC expectations are for registered investment advisors, which we see both registered and non-registered family office adopting. The SEC wants to see a risk assessment that’s being performed, initially and on-ongoing as the business changes.” said Christopher Ray of ACA Compliance Group. He added that SEC wants to see supervisory procedures and measures in place for data loss prevention like procedures/measure relating to mobile devices and access to mobile storage; portable storage and phishing testing; and mock phishing testing done with employees. Recently, cybersecurity has become a hot topic and the regulators and investors have started paying more attention. There is regulatory compliance published by the SEC and also a best practices page published by ACG, with emphasis on cybersecurity.
5	Procedures and Documentation: Having internal control processes within the family offices, which are documented and followed are of utmost importance. Procedures should be in place about the authorization, approval, and reconciliation of the transactions, thus making sure that there is accountability for the same at the end of it. “If there is one thing I would definitely pass on, it is ‘documenting.’ One of my favorite sayings is that if it is not documented, that means that it doesn’t exist or didn’t happen. I can’t overstate the importance of writing down your procedures because if a regulator or examiner comes in, it won’t do you any good until it’s written down,” said Scott Gluck of Duane Morris.

 

Spotless assets targeted by Delaware North – report

Provided exclusively by Mergermarket

Delaware North, the New York-based group, is said to be targeting assets owned by Spotless [ASX: SPO], The Australian reported. According to the report in the paper’s Dataroom column, which did not cite sources, Delaware North is not large enough to buy Spotless in its entirety, but it may be interested in its catering division.

The item noted that Downer EDI [ASX: DOW] has offered to buy Spotless for AUD 1.15 per share (USD 84c) and could sell the catering division to Delaware North at a later date. The catering operations may not interest Downer, an engineering services business.

The report noted that Delaware North was mentioned as a possible buyer for Spotless one year ago. ISS [CPH: ISS] and Sodexo [EPA: SW] were also mentioned as potential suitors at that time, the newspaper said.

The item noted that Spotless may be continuing to market certain divisions to potential buyers. The article said that Spotless has pitched its laundry business to potential suitors, such as Champ Private Equity, and its cleaning unit and contracts operations have been on the market.

Yesterday, Downer extended its offer for Spotless to 14 June, the item noted. Downer, which now owns just over 21% of Spotless, is advised by UBS.

Citi is advising Spotless.

As seen in the mergermarket newsletter on 22/05/2017

Spotify direct listing music to some investors’ ears, sources say

Provided exclusively by Mergermarket

Tiger Global quietly building position in Swedish music service

Private valuation rises after new licensing agreements with labels

 

---

Spotify’s flirtation with a direct listing on the New York Stock Exchange is finding support among existing shareholders and buy-in from a new set of institutional investors, said two sources briefed on the matter.

Trading of the Sweden-based subscription music service’s shares has picked up in the private secondary markets in recent months, they said. One advantage a direct listing has over an IPO is that investors will not be tied to a lock-up period that limits when they can unload their shares, the sources said.

Tiger Global is among the investors quietly building a significant position in Spotify, the two sources said.

The New York City-based investment firm has been buying shares of Spotify in the private markets for the last 18 months, a person familiar with Tiger Global’s strategy said. Recent reports of Spotify’s potential direct listing have not influenced Tiger Global’s trading activity, the person said. Tiger Global is investing in Spotify because it thinks “it is a good business,” according to the person, and it is taking “a long position,” adding shares to one of its 10 venture capital funds and not its hedge fund.

Tiger Global declined to comment.

Rather than raise new money in an IPO, Spotify is “strongly favoring” a direct listing, a person familiar with the company’s strategy said, echoing a 22 March report by this news service. If it does go forward with a direct listing, it is likely to occur on the NYSE in 4Q17 or 1Q18, the person said. A direct listing is sometimes seen in the financial services and REIT sectors but it is rare in the wider US market.

Escalating costs connected to the USD 1bn convertible debt that Spotify issued to TPG and Dragoneer Investment Group last year are not weighing on the timing of a direct listing, the person added. Only an IPO will convert the debt into equity, the person explained, and Spotify is trying to renegotiate terms of the convertible note with TPG and Dragoneer with the expectation “everyone will walk away happy.”

Meanwhile, Spotify’s valuation is rising. The company’s shares were valued as high as USD 13.3bn in the private markets earlier this spring, the person said. The price of its shares regularly “moves up and down,” the person noted. More recently, Spotify’s shares have been valued at roughly USD 10bn in secondary trades, according to the first source. Whatever the numbers, they are a notable premium to the USD 8.5bn valuation Spotify fetched in June 2015 when it raised USD 526m in a Series G round.

Since it was founded in 2006, Spotify has raised more than USD 1.5bn in total equity from backers such as Goldman Sachs, GSV Capital, Halcyon Asset Management, Kleiner Perkins Caufield & Byers, Northzone, Senvest Capital, Technology Crossover Ventures, and Wellington Partners.

New licensing agreements Spotify struck with Universal Music Group and Merlin Network in April are boosting the company’s valuation and removing some uncertainty for investors, the first source said. Spotify is negotiating a new licensing agreement with Warner Music as well, according to a New York Post report on 17 May, which said Sony Music has so far been unwilling to negotiate with the music service.

Brokering new royalty agreements will go a long way to providing visibility into Spotify’s path to profitability, the sources said. Spotify is generating USD 3.1bn in annual revenues and operating losses of more than USD 335m, according to an 18 May report on the technology news site The Information.

Although losses are widening overall, Spotify is profitable in some markets and its revenues grew by approximately 50% annually between the end of 2016 and the end of 2015, the two sources said.

Moreover, Spotify is generating positive free cash flow and its balance sheet is healthy, the sources said.

The fact Spotify says it does not need to raise new capital in a public offering is further evidence of its strong capital position, the sources said. The company counts more than 50m paid subscribers. Its total monthly active users reportedly reached 126m at the end of last year, up from 100m users a year earlier.

Morgan Stanley, Goldman Sachs and Allen & Company are advising Spotify on its potential listing.

Spotify and its advisors declined to comment for this story.

by Troy Hooper in San Francisco

As seen in the mergermarket newsletter on 22/05/2017

5 THINGS YOU MISSED: ACG’s NY Luncheon ‘Family Office Update’ event

1	Separating the Private Equity Firm and Family Office: It is very important thatthe private equity firm and the family office are separated to have better autonomy for each. A separate management team for family office can make decisions without having any conflict of interest with either the private equity firm or any of the investors. The separation also makes sure that the deal which the private equity firm is looking into is not passed on to the family offices and vice versa, thus giving each fund the independence to look into deals, make their decisions, and not be influenced by the other. If the manager of the family office is also part of the management team of the private equity fund, then it becomes difficult for such managers to make the right decision for the fund or the family office. Hence, it is better to have to separate entities in place where there is more professionalism, making it easier for anyone to give answers when asked about any conflict of interest
2	SEC Involvement in Family Offices: If there are any co-investments with an unregistered or exempt firm, then it is better to have procedures in place and make sure that the investments criteria stated by the SEC are followed. Otherwise, this can be a challenge if the SEC conducts an audit. Primarily, the SEC looks into possible conflict of interest cases in deals which involve family offices. They also look into club deals which have broken deal expenses. “It was all fees; they were focused on fees, co-invest fees. Since we are a small fund, we do a lot of co-investment,” said Andy Unanue of AUA Private Equity Partner. The SEC further would want the family office to disclose any payments made to any adviser to the family business and private equity fund. Separately, it is observed that the auditors are not as knowledgeable/aware as they should have been about the family office space.
3	Professionalizing Family Offices: It is better to register the family office before the SEC makes it compulsory for family offices to be registered and professionalized. “What we are starting to see now is a little bit more institutionalized and professionalized concept: having these family offices operate as a business and bring in good quality, professional people to manage the assets of the family,” said Jay Levy of Cohn Reznick. Currently, there is a trend for a family office to move away from investing in hedge funds and getting more involved in private equity funds; these have more procedures and complicity involved. Hence it is better for the family offices to be professionalized.
4	Cyber Security: When there is a club deal, the family offices are exposed to other co-investors regarding personal information. There is a risk of possible cyber-attacks in such deals and the information of one or more family offices’ data can become compromised. “SEC expectations are for registered investment advisors, which we see both registered and non-registered family office adopting. The SEC wants to see a risk assessment that’s being performed, initially and on-ongoing as the business changes.” said Christopher Ray of ACA Compliance Group. Headded that SEC wants to see supervisory procedures and measures in place for data loss prevention like procedures/measure relating to mobile devices and access to mobile storage; portable storage and phishing testing; and mock phishing testing done with employees. Recently, cybersecurity has become a hot topic and the regulators and investors have started paying more attention. There is regulatory compliance published by the SEC and also a best practices page published by ACG, with emphasis on cybersecurity.
5	Procedures and Documentation: Having internal control processes within the family offices which are documented and followed are of utmost importance. Procedures should be in place about the authorization, approval, and reconciliation of the transactions, thus making sure that there is accountability for the same at the end of it. “If there is one thing I would definitely pass on, it is ‘documenting.’ One of my favorite sayings is that if it is not documented, that means that it doesn’t exist or didn’t happen. I can’t overstate the importance of writing down your procedures because if a regulator or examiner comes in, it won’t do you any good until it’s written down,” said Scott Gluck of Duane Morris.

5 IDEAS YOU MISSED: ACG DEAL SOURCE: CROSS BORDER TRANSACTION BETWEEN US & CANADA

1	Early stage market compared to the U.S.: Comparing the markets, Michelle Alphonso, Director at Transaction Advisory Services Grant Thornton  remarked, the mid-market in Canada would be the lower mid-market in the U.S. Canadian companies are smaller and more regionally-focused compared to those in the U.S, according to Valerie Scott, Principal at Swander Pace Capital. The other area of concern is the banking and financing in Canada. There are 5-6 banks and not much syndication between them.
2	The market is less sophisticated: The financial information of the companies is less sophisticated, Michelle Alphonso mentioned. Also, the business owner’s ability to talk about the financial data is less than it would be in the U.S. EBITDA as per the standard definition might mean one thing, but across most Canadian marketplaces, EBITDA might have an altogether different meaning. To mitigate this issue, it is important for the investors to have a conversation with the business owners to get such things standardized so that they both can be on same page.
3	Market for Private Equity is still in its nascent stage: Daryl Yap, Partner at American Industrial Partners says that investors will have to allay the fears of the companies as there might be a bias towards Private Equity Groups, given the market is still young.
4	Excess capital chasing fewer deals: The Canadian market is a fairly small market, according to Valerie Scott and Michelle Alphonso, and firms and pension funds have a lot of capital at their disposal, which leads to excess capital chasing fewer deals.
5	Valuations are lower: There is a growing interest by American. investors in Canadian companies, according to David Clark of Financial Sponsors Group Raymond James. The interest is primarily driven by the low valuations of the Canadian companies. The leverage tends to be lower compared to the debt markets in the U.S., leading to low valuation of the Canadian companies. Also, another reason to invest is to expand the operations of the company in the U.S.

is this the full name of the company or a department at Grant Thornton?

5 IDEAS YOU MISSED ACG PRIVATE EQUITY: Playbook 2017

1	Middle Market Outlook: Middle Market Competition is fierce, coming from all constituents like independent sponsors, family offices with dedicated PE efforts, and also from Strategics who are participating far down below their league. The trillions of dollars in PE funds raised in the last four years now in search of deals, along with the Consumer Confidence Index reaching its peak since December 2000 positively impacts the valuation of private companies. Plenty of groups are willing to pay rich multiples for companies despite critical risk factors like product service concentration, challenging capital structures, and significant customer concentration. However, the only thing that can possibly dampen this trend will be legislative gridlocks if the Trump Administration tries to enact more economic and tax reforms. The valuations for companies in the middle market are frothy and these companies have more add-on activities, allowing them to mitigate the high value that they may have paid on their platform. Changing management quicker than talent transitions in the past is another trend to observe. PE firms are trying to capture synergies that they might be able to tackle, like Bain is creating shadow portfolios and tracking business plans for those companies that they don’t actually own but acquire once they enter the market. Middle market companies are required to complete due diligence, which is a strain on them, and as a result, PE firms are trying to get expense reimbursements on their diligence efforts.
2	Deal Flow – Sourcing and Funding: Though markets are consolidating, the middle market is highly fragmented, with many layers below the Strategics being almost empty, and lower middle markets, with relatively low multiples, try to add-on and reach attractive levels for Strategics. For niche industries like waste management, where the majority of deal source is direct, deal sourcing is not always executive-driven, as sales managers and operations managers in the field are the ones who take the lead. Sponsors are more concerned with preserving the vision, retaining core values and strategic plans. The relationship between PE firms and investment advisors is prudent in positioning themselves in management presentations, as to decide if the PE firm is a credible buyer.
3	Deal Closing: PE firms are incorporating third party resources, spending more time evaluating relationship dynamics between and among the senior management team in order to get an assessment of the capabilities and talent of the CEO in executing a vision. From a sell-side perspective, quality of earnings before the sale is the key to smoothly pass through the diligence and Quality of Voice (QoV) is always better to be performed if it balances the costs. Time to close deals from financing side is lengthy, with the volume of legal documents, inter-credit documents, and ancillary documents, which take a while. On the deal side, with second- or third-generation businesses,

 

 

 

emotions set in as one gets closer to closing the deal, which might not work out in their favor all times. Reps and Warranty Insurance are being used extensively to ensure the closing of deals. Right now, financing markets are attractive as ever,due to a low interest rate environment coupled with significant deal volume, as non-banks are getting more aggressive than regulated banks with have ceiling issues.
4	Value Creation: Firms are laying out very detailed acquisition-integration plans that cover all functional areas–HR, Operations, Risk, and Environmental– and depending on size and complexity of the deal, continue to ensure all synergy assumptions are in place, and run through integration. Portfolio companies need to fully understand the marketplace and document the management team’s philosophy that is differing with the market trends and determine the ideal amount of leverage required to achieve desired results. The management team has a tremendous relationship with PE partners, with support in understanding market dynamics through financial modelling/engineering and help through their strategic view. Portfolio companies figure out ways to cut costs and support the growth of small companies by rebranding, upgrading websites,and acquiring PEs investments. Focus is on IT spending, work with outside consultants on supply chain optimization, and ensuring that their platform is scalable, following the kaizen (“continuous improvement”) process by improving their processes, adding line of businesses, and increasing geographical presence.
5	Exit: Holding periods are shortening from 6.1 years in 2014 to 5.3 – 5.1 years right now, and salaries are taking advantage of the frothy multiples. But that trend is expected to reverse, as during boom, the PEs with portfolio companies paid up with multiples and now probably need those assets to mature a little longer. Holding periods depend on the position of a company in the business cycle, as every deal is different depending on the industry, and when inevitable decline comes, holding periods will lengthen . Growth is the frontrunner leading to potential exit opportunities as compared to EBITDA optimization, and showing stronger organic growth and a clear roadmap goes a long way in the sale, which also helps the future buyers. Despite positive comments on markets since the election, the IPO market has been depressed. YTD, there’s been 25 IPOs, which is down by 200% as compared to this time last year, with a lot of IPOs happening in the energy and infrastructure space. Private markets are becoming more developed, in order to get liquidity to investors or capital for growth, who don’t have to necessarily access public markets and can instead go through private rounds. M&A outlook is expected to increase for the current year as compared to last year.