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t o d ay ’ s t o p s t o r i e s f r o m t h e d e a l p i p e l i n e

MONDAY

JUNE 6, 2011

VOLUME 22 ISSUE 108

FULL STORY >

The story of how Donald Trump came to own the Kluge Estate Winery—and the litigation surrounding it—illustrates the vicissitudes of a luxury business based on agriculture

ChilleDBy Chris nolter

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INDEX

TOP STORYThe story of how Donald Trump came to own the Kluge Estate Winery—and the litigation surrounding it—illustrates the vicissitudes of a luxury business based on agriculture page 5

SafE haRbORThe settlement of a recent shareholder suit arising from the $1.3 billion sale of RehabCare to Kindred Healthcare suggests that defense lawyers don’t want to test Vice Chancellor J. Travis Laster on the issue of stapled financing page 8

mOvERS & ShakERSPersonnel changes at Citigroup, Credit Suisse, Rothschild and other firms page 9

bRIEflY NOTEDCasey’s General Stores•Kum & Go, Icelandic Group• Pacific Andes International, Samsonite International• CVC Capital Partners•Royal Bank of Scotland page 10

m&aA dinner meeting between Cephalon CEO Kevin Buchi and Teva Pharmaceuticals chief William Marth brings the two companies together amid heavy interest for Cephalon from other suitors page 11

baNkRuPTcYAn Alabama judge who previously denied confirmation of Colonial BancGroup’s Chapter 11 plan changes his mind and allows the bankrupt bank holding company to liquidate page 12

PRIvaTE EquITYBank of America Merrill Lynch’s main private equity arm, BAML Capital Partners, completes its previously announced divestiture and is ready to start raising its own funds page 13

Peterson Partners, one of JetBlue Airways’ original investors, closes its sixth private equity fund with $50 million in commitments page 14

REgulaTIONEuropean Union Commissioner Michel Barnier warns against attempts by some U.S. lawmakers to delay new regulations on derivatives and banking page 15

mIDDlE maRkETConstruction service company Tutor Perini seeks to capture an increase in spending on infrastructure projects with two acquisitions totaling $214.5 million in cash page 16

Air medical transportation company Air Methods acquires the parent company of Omniflight Helicopters from Wind Point Partners for $200 million page 16

fEEDbackTell us what’s on your mind page 17

cOmPaNY INDEXpage 18

aucTION blOckExtended information on companies that are new on the block and just off the block, along with the latest updates on auctions that continue to run page 19

Search fund veterans provide 10 commandments to live by when buying and running companies page 21

ThE DaIlY DEalSFor a summary of current risk arbitrage situations, click here

ThE DEal PIPElINELinks to current content page 3

ThE DEal magazINELinks to the current issue page 4

Eu cOmmISSIONER mIchEl baRNIER

2 ThE DaIlY DEal m O N D aY J u N E 6 2 0 1 1

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THE DEAL PIPELINE

Top acquisitions of alcoholic beverage companies, past 12 months

Target: Mey Icki Sanayi ve Ticaret ASAcquirer: Diageo plcDeal value: $2.1 billionAnnounced: Feb. 21, 2011

Target: Chongqing Brewery Co. Ltd. (12.3%)Acquirer: Carlsberg A/SDeal value: $379 millionAnnounced: June 10, 2010

Target: Brown-Forman Corp.’s wine businessAcquirer: Vina Concha y Toro SADeal value: $238 millionAnnounced: March 1, 2011

Target: Constellation Brands Inc.’s Australian and U.K. businessAcquirer: Champ Private EquityDeal value: $230 millionAnnounced: Dec. 23, 2010

Target: Bedele BreweryAcquirer: Heineken NVDeal value: $163 millionAnnounced: May 5, 2011

Source: The Deal Pipeline

Ahead of the newsAn executive summary of events impacting the markets tomorrowBankruptcy filing possible for Culligan International Click here

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MOST RECEnT AUCTIOnS• Blackburn Developments Ltd. -

05/31/2011• LCH.Clearnet Group Ltd. -

05/28/2011• Fushi Copperweld Inc. -

05/26/2011

MOST RECEnT BAnKRUpTCy• Joe Tecce Inc. - Filing -

06/02/2011• Olsen Agricultural Enterprises

LLC - Filing - 06/01/2011• Three Lights Development LLC -

Filing - 06/01/2011

MOST RECEnT M&A• Progress Energy Resources Corp.

- North Montney Shale assets - 06/02/2011

• Medion AG - 06/01/2011• Hilcorp Resources LLC - Texas’

Eagle Ford Shale properties - 06/01/2011

MOST RECEnT FInAnCIngS• EndoSphere Inc. - VC -

06/02/2011• Esperance Pharmaceuticals Inc. -

VC - 06/02/2011• Serina Therapeutics Inc. - VC -

06/02/2011

Exclusive VideoBoston Generating case ‘incredibly bitter’Constellation Energy’s $1.1 billion acquisition of Boston Generating has been an ‘incredibly bitter’ case, says Latham & Watkins’ Robert Rosenberg, outside counsel to Boston Generating. View all videos

3 THE DAILy DEAL M o N D Ay J u N E 6 2 0 1 1

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Contents

The Deal magazineIssue of May 23-June 12, 2011

speCial report THE WORLD ACCORDING TO LIMITED PARTNERSby Vyvyan Tenorio

LAWRENCE SCHLOSS, NEW YORK CITY PENSION FUNDS

ANDREW KWEE AND TYCHO SNEYERS, LGT CAPITAL

MARCO MASOTTI, PAUL WEISS

STEPHEN VOGT, MESIROW’S ADVANCE STRATEGIES

MARC SACKS, MESIROW FINANCIAL

MeDiaCUMULUS, CLEAR CHANNEL AND THE FUTURE OF RADIOIt’s a tale of two: Giant Clear Channel pulled off an LBO that left it hobbled with debt. A Cumulus buyout deal failed, but after its Citadel acquisition it’s a lot better off. We’re about to find out how much life this century-old industry has by Chris Nolter

DealMakersMovers & shakersNAFH’S OPERATORS AND WHO’S HIRING ON WALL STREET

Deal diary MICROSOFT, HERTz, ELAN, APPLIED MATERIALS

Due DiligenCeNEVER TURN DOWN A CASEA conversation with antitrust litigator J. Robby Robertsonby Bill McConnell

REG RACEThe DOJ sent Nasdaq and ICE packing. Next up: The EU gets to tackle the implications of a Deutsche Börse-NYSE tie-up for derivativesby Suzanne Miller

URbAN SHUFFLEGoldman Sachs found itself stuck with debt from New York’s po-litically connected Inner City Broadcasting. The answer? A nifty pass to Magic Johnsonby Richard Morgan

WHATEVER IT TAKESIn South Africa, dealmakers try to navigate a newly interventionist government. The economy’s growth potential is too great to ignoreby Laura Board

View from the City A CASE FOR CONTINUITY

Capital calls IPO FRENzY?

Corporate dealmaker NURTURING DISRUPTION

Silicon Valley specialMObILE MILESTONES

Follow the moneyHIGH-FIVE, HIGH YIELD

RISK ARb UPDATE CoMMentaryTRANSACTIONS

Deal sense DEAL bOOK

Media maneuvers A MIND OF ITS OWN

Safe harborTOO CLOSE FOR COMFORT

Rules of the road THE FEDS ARE COMING

Soapbox COLD AS ICE

Industry insight CONSIDER THE ALTERNATIVES

Judgment call SPEED bUMPS AHEAD

voice of the deal economy. 9 . 9 23— 12 2011

Regulation Confessions of a former FTC litigator page 10

Tale of Two Cumulus, Clear Channel and The fuTure of radio page 48

More on exchanges page 12 goldMan Meets Magic page 14 dealing with south africa page 15

Our big limited partner issueSchloss, Miller, Vogt, Sacks, Masotti, Sneyers and Kwee on the crisis, the recovery, buyout and hedge funds, public offerings and that all-important carry page 32

All users of The Deal Pipeline can receive a complimentary annual subscription to The Deal magazine

Click here to request a copy today.

T o s e e f u l l s T o r y , c l i c k o n T h e h e a d l i n e

4 the Daily Deal M o n D ay J u n e 6 2 0 1 1

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Donald Trump will most likely never be president, but he still has a lot go-ing for him. For one thing, Trump possesses one of the premier estates in Virginia wine country.

Trump Organization won an April auction for Kluge Estate Winery, pre-viously owned by Patricia Kluge, the ex-wife of the late media tycoon John Kluge, and her husband William Moses. The company paid $6.2 million for the vineyard, event pavilion, large office barn, wine production facility and a bar-rel cave on 776 acres of land, as well as the rights to the Kluge brand. Kluge and Moses will continue to run the operation, which has been tentatively named Eric Trump Winery.

“My father did this as a real estate play,” said Eric Trump. “One of the things that came with it is one of the largest vineyards on the East Coast.”

Because of the ratings that some wines received, Trump said the company would keep some of the Kluge brands. The new owners will also develop some of its own labels for the high-end wines that the estate produces.

“This is a very sexy business that will be very complementary with our brands and with our clientele,” he said.

But there’s more to the story than a bu-colic Blue Ridge Mountain estate, a glamor-ous business and high-profile owners

The Kluge case underscores the diffi-culty in making and selling wine, a luxury product that is subject to the whims and travails of agriculture. It also proves the ad-age that the best way to make a small for-tune in the wine business is to start with a large one.

Though the estate will continue to pro-duce wine, some of which will wind up in

Trump’s hotels, casinos and golf clubhouses, the legacy of Kluge Estate Winery is causing unrest in Virginia’s wine country.

Kluge and Moses are embroiled in litiga-tion with their lender, Farm Credit of the Virginias ACA, which provides loans to ag-ricultural businesses in the state and is part of the federal Farm Credit Administration.

Farm Credit foreclosed on the properties in December 2010, after a long period of de-fault, and held the April auction. The lender has filed suit against Kluge and Moses in Virginia state court, seeking recoveries for the more than $16 million balance of loans that the winemakers guaranteed.

Meanwhile, the winemakers sued Farm Credit and related entities in U.S. District Court, alleging that the lenders breached loan agreements and impeded their efforts to hold onto the prized estate that they founded in 1999.

Kluge and Moses aimed to produce world-class wines at their vast Virginia estate. They planted Cabernet Sauvignon, Merlot, Chardonnay and other grapes at the edge of the Blue Ridge Mountains and had their first vintage in 2002.

The estate contracted influential wine consultant Michel Rolland, who has ex-ported the Bordeaux style throughout the globe.

With that pedigree in hand, the estate has achieved recognition within the indus-

try. The wines have taken medals at competitions in Hong Kong, Los Angeles and San Francisco, among others. Jean-Georges Vongerichten’s Washing-ton steakhouse added the Kluge Estate Viognier to its wine list this year. Guests at Chelsea Clinton’s wedding sampled two of Kluge’s sparkling wines.

“Home to one of the most prestigious wineries along the East Coast, Kluge

Estate Winery is located near the birthplace of American and Virginian viticulture, Thomas Jefferson’s Monticello,” noted the auction bulletin from J.P. King Auction Co.

But despite the wines’ evident quality, too many bottles went unsold.

Kluge and Moses explained in pleadings that they scrambled to find a backer for the troubled business in 2010. With the support of an unnamed investor, the winemakers stated, they offered $20 million to $25 mil-lion for the property but were rebuked.

Kluge and Moses did not specifically identify their backer, although clues in their court papers suggested it was Trump. “Indeed,” pleadings state, “the offerer was so serious about buying the property that he later participated in the April 2011 auc-tion and acquired the property at a fraction of what he was offering to pay for it in fall 2010.”

Farm Credit foreclosed in October 2010. The bank held its first auction in December, although no bidders challenged the initial offer.

Kluge and Moses argued in their suit that they should have had the right to pur-chase the property at a fair market apprais-al. The duo charged that the lenders relied on a flawed appraisal that valued the win-

TOP STORY

By chris nolter

ChilledStory of the Kluge Estate Winery illustrates the vicissitudes of the business

CONTINUED >

5 ThE DaIlY DEal M O N D aY J U N E 6 2 0 1 1

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TOP STORY

ery at $22.6 million, based on comparisons to Napa Valley properties. A later appraisal put the value at about $18 million.

Bill Shmidheiser of Lenhart Obenshain PC, counsel to the lenders, denied that the lenders tried to block Kluge and Moses from participating in the auction.

“This is a loan in which Farm Credit went to extraordinary lengths to give the borrower every opportunity to find an al-ternative to foreclosure,” Shmidheiser said.

The loans went into default in 2008, he said. The bank kept most of the winery’s employees after foreclosing and continued to operate the business, which was losing money.

Shmidheiser said that when the parties engaged in talks with Trump during 2010, Kluge and Moses wanted the banks to let

them off the hook for the difference be-tween the sale price and the total value of the loans.

Though Kluge and Moses knew of the impending auction long in advance, they unsuccessfully sought a restraining order in April on the eve of the sale.

“What is really obviously motivating this is that the owners are personally liable for the deficiency balance,” Shmidheiser said.

Further, Farm Credit said that it gave Kluge Estate Wines the opportunity to match the bid at the auction, but that the estate declined.

Farm Credit is not the only lender that has pursued Kluge.

Bank of America Corp. foreclosed on her country mansion in January. Southern National Bancorp of Virginia Inc. has foreclosed on another property.

Shmidheiser gives Kluge credit for her

devotion to the winery. “She believed in the business, and she

poured her not inconsiderable fortune into trying to make it a profitable business,” he said. The winery produced 34,000 to 40,000 cases of wine a year, however, and sold about 10,000 cases.

“They did a great job of growing grapes. They did a great job of making wine,” Shmidheiser said.

“They couldn’t get the last part, the mar-keting component,” the lawyer said. “That’s where Trump can help.”

Magistrate Judge B. Waugh Crigler will hear Farm Credit’s motion to dismiss Kluge and Moses’ case in the U.S. District Court for the Western District of Virginia on Fri-day.

Farm Credit’s case against the winemak-ers will go to trial in Virginia’s Circuit Court for Albemarle County on July 18. n

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Vice Chancellor J. Travis Laster’s flaying of Barclays Capital for its conduct in the sale of Del Monte Foods Co. has garnered sig-nificant attention for its suspicion of stapled financing. Laster’s opinion in the case has spurred vigorous debate on when a seller’s investment bank may provide financing to a buyer. The settlement of a recent shareholder suit arising from the $1.3 billion sale of Re-habCare Group Inc. to Kindred Healthcare Inc. suggests that defense lawyers don’t want to risk testing Laster on the issue—even in cases with favorable facts.

RehabCare and Del Monte share a significant fact: In both cases, the seller took advice from the same investment bank that provided financing to the buyer. But RehabCare’s board was far more engaged in the sale process than Del Monte’s and thus in a better position to defend against a lawsuit. Even so, RehabCare may not have wanted to risk a harsh ruling or the possible delay of a deal that came at a 37% premium to its stock price on Feb. 7, the day before the transaction was announced.

Instead, RehabCare agreed to pay its shareholder plaintiffs $2.5 million, make additional disclosures, reduce the breakup fee on the deal from $26 million to $13 million and eliminate the require-ment for a three-business-day period during which Kindred has the right to match a superior proposal. One lawyer not involved in the case calls the settlement harsh, but notes that RehabCare an-nounced the deal just a week before the Del Monte opinion came down. “It is clear that the Del Monte decision impacted the Kin-dred settlement negotiations and terms,” the lawyer adds.

According to RehabCare’s May 12 supplemental disclosure with the Securities and Exchange Commission, Kindred and Re-habCare began discussing a deal in late 2007. Kindred offered $25 a share in cash and stock, but RehabCare rejected the offer. Barry Blake, then at J.P. Morgan Chase & Co., advised Kindred on the talks; he moved to Citigroup Global Markets Inc. two years ago and is advising RehabCare in the current deal.

Last August, RehabCare’s board, alarmed by a drop in the com-pany’s stock, decided to reopen talks with Kindred after conclud-ing that the rival post-acute healthcare services company was the only “logical strategic acquirer.” The board consulted with Citi-group in reaching that decision and the next month hired the bank as its financial adviser. Citi canvassed the private equity world for another bidder, a search that yielded a few preliminary offers at between $25 and $30 a share but nothing more.

Meanwhile, according to the prospectus, “throughout 2010” Citi discussed potential acquisitions with Kindred and provided “acquisition financing to Kindred.” In October, Kindred CEO Paul Diaz asked Citi to run the numbers on a possible takeover of Re-habCare, a task the bank performed after getting approval from

RehabCare CEO John Short. Diaz told Short that he’d be willing to pay $32 to $34 in cash per RehabCare share, at which point the RehabCare board set up a special committee to handle the nego-tiations and eventually extracted $35 a share in cash and stock.

The committee focused on certainty of financing as a key is-sue. In December, it asked J.P. Morgan, Morgan Stanley and Citi to bid for the financing work that a sale of RehabCare to Kindred would require. Citi agreed to set up a Chinese wall between its M&A and financing teams and told RehabCare it would need to hire a second bank to provide a fairness opinion. RehabCare ended up tapping RBC Capital Markets, and Citi reduced its own fee by the full amount of RBC’s fees and expenses.

According to the supplemental filing, “The RehabCare special committee concluded that CGMI’s participation in the financ-ing syndicate could enhance the certainty of Kindred’s ability to finance the transaction and increase competition among lenders, which could lead to Kindred securing more favorable financing terms.” The special committee ended up choosing J.P. Morgan to lead the financing but allowed both Morgan Stanley and Citi to participate as well.

The supplementary disclosure fails to make absolutely clear whether the RehabCare board knew in August 2010 that Blake had advised Kindred in the companies’ earlier talks, though the board clearly knew in October that Citi was doing work for Kindred on a possible purchase of RehabCare. And while in the Del Monte case Barclays asked the board for permission to provide financing to the bidders before the deal was signed, the RehabCare board requested that Citi pitch for the financing work on that deal. In theory, an informed board should be able to waive such a conflict and allow its bank to provide acquisition financing. But the Rehab-Care settlement is another piece of evidence that suggests boards will be chary of doing so. n

By david marcus

Too close for comfortAfter Del Monte, allowing a seller’s investment bank to provide financing to a buyer is a risky move

SAFE HARBOR

vicE cHAncEllOR j. tRAviS lAStER

8 tHE dAily dEAl M O n d Ay j u n E 6 2 0 1 1

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Citigroup Inc. hired Nick Tansley as a managing director in its global industrials group. He was co-head of industrials at Nomura Holdings Inc.

Separately, Citigroup tapped Andrew Baum as man-aging director, head of pharmaceuticals and healthcare research for Europe. Baum, who will join in September, was head of pharmaceutical research at Morgan Stan-ley, where he worked since 1997.

In Asia, Citigroup and Orient Securities Co. Ltd. signed agreements, subject to regulatory approval, establishing a securi-ties joint venture to operate in the Chinese domestic market. The JV will be called Citi Orient Securities Co. Ltd. Orient Securities will have a 67% stake in the new entity with the remaining 33% owned by Citigroup, consistent with existing Chinese regula-tions.

Alejandro Przygoda will rejoin Credit Suisse Group in New York as co-head of the global financial institutions group, work-ing together with London-based Ewen Stevenson. Przygoda joins from Greenhill & Co., where he ran the global insurance practice since early 2009. Prior to that, he was global head of in-surance at UBS. He started his banking career with Credit Suisse in 1995.

Rothschild has appointed former Colgate-Palmolive Co. vice chairman Steve Patrick as a senior adviser. He will work closely with the mergers and acquisitions and financing advisory teams. Patrick joined Colgate-Palmolive in 1982 as a manager, financial reporting. He retired in March.

Morgan Stanley hired Michael Brakey from Bank of America Merrill Lynch as head of high-net-worth lending. He was head of global wealth credit strategy and investment lending at BofA and spent 17 years with Merrill.

Steven Goldberg will join Robert W. Baird & Co. as a manag-ing director and head of real estate investment banking, based in McLean, Va. He was most recently group head of real estate investment banking at FBR Capital Markets.

Standard Chartered appointed David Hodson as a managing director in the regional strategic client coverage group for the oil and gas segment, based in Dubai. Hodson has worked at Exxon Mobil Corp., BNP Paribas SA and Société Générale SA.

General Atlantic LLC said Andrew Given joined as a senior vice president in the global resources group, with a focus on GA’s investments in Europe. Given was a partner with Pricewater-houseCoopers LLP in the transaction services group in London. He was responsible for delivering deal advisory services to major private equity investors, including General Atlantic. He also led PwC’s telecoms, media and technology industry group and com-

pleted two-year secondments to New York and Zurich.

Michael Ducey was appointed to the board of Apollo Global Management LLC, and to the board’s audit and conflicts committees. The appointment will bring the number of independent directors on Apollo’s eight-member board to four.

From March 2002 to May 2006, Ducey was with Compass Minerals International Inc., where he had been pres-ident, CEO and director prior to his retirement. Prior to Compass, Ducey spent nearly 30 years at Borden Chemical Inc., where he became president, CEO and director.

Mergers and acquisitions and corporate attorney Craig Menden joined Cooley LLP as a partner in its Palo Alto, Calif., office. Menden was a partner in the corporate practice and venture technology group at SNR Denton. He previously practiced with Fenwick & West LLP.

SNR Denton announced that Bill McCollum and Jeff Modisett joined the firm and will lead its state attorneys general practice. McCollum recently concluded his four-year term as Attorney General of Florida and joins as a partner in Washington. Mo-disett, most recently a partner in Bryan Cave LLP’s regulatory and public policy group and managing partner of its Los Angeles office, is the former attorney general of Indiana and joins in Los Angeles.

Morgan, Lewis & Bockius LLP said Donna Lee Yesner and Stephen Ruscus, who focus on government healthcare contracts, joined the firm as partners in its Food and Drug Administration and healthcare practice, resident in Washington. Yesner is co-chair of the healthcare contracting committee of the ABA Public Contracts Section.

Kilpatrick Townsend & Stockton took on Clay Wheeler, a former assistant United States Attorney for the eastern district of North Carolina from 2002 to 2011, and chief of the economic crimes section there from 2009 to 2011, as a partner in its litiga-tion department, resident in the Winston-Salem and Raleigh, N.C., offices.

Sutherland Asbill & Brennan LLP said Robert Owen joined the firm as a partner in the litigation practice in New York. He was previously a partner with Fulbright & Jaworski LLP. He also practiced at the boutique firm he co-founded, Owen & Davis PC, which was acquired by Fulbright & Jaworski in 2002.

Willkie Farr & Gallagher LLP brought in Michael Katz, for-merly with Sullivan & Cromwell LLP, as a partner in the New York office. Katz will practice in Willkie’s executive compensa-tion and employee benefits department. n

MOVERS & SHAKERScompiled by baz Hiralal

9 tHE dAily dEAl M O n d Ay J u n E 6 2 0 1 1

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BRIEFLY NOTEDEDITED by ThE DaIly DEal sTaff

Casey’s General baGs 22 Kum & Go stores in iowaAnkeny, Iowa, convenience store operator Casey’s Gen-eral Stores Inc. said Friday it agreed to buy 22 stores in Iowa from Kum & Go LC of West Des Moines, Iowa, for an undisclosed sum. The stores will be rebranded to Casey’s once the transaction closes, which is expected in July. Casey’s CEO Robert My-ers said the stores are mostly in rural locations, which have proven to be a good fit for the company’s business model and its proprietary prepared food program. Kum & Go owner and CEO Kyle Krause said the proceeds will be

reinvested in the company’s 400 remaining stores and its long-term business and growth strategies. Casey’s expects the stores to add to earnings in their first full year of operation. The deal must clear regulators and will be funded with cash. Ahlers and Cooney PC counseled Casey’s. —Claire Poole

iCelandiC Group sheds German, FrenCh divisionsIcelandic fish process-ing and seafood marketing company Icelandic Group plc agreed Friday to sell its German and French opera-tions to a consortium led by Hong Kong-based integrated

seafood group Pacific Andes International Holdings Ltd., for an undisclosed price. Icelandic Group said the sale of German subsidiary Pick-enpack Hussmann & Hahn GmbH and France’s Icelandic Boulogne Sur Mer together with its sales office in Paris were part of a review carried out on its behalf by Bank of America Merrill Lynch. The sales will sharpen Icelandic’s operational focus and help reduce debt, the seller said. —Jonathan Braude

pe-baCKed samsonite plots $1.5b honG KonG ipoPrivate equity-owned luggage maker Samsonite Interna-

tional SA plans to raise up to $1.5 billion in an initial public offering in Hong Kong sched-uled for June 16. The compa-ny, which is based in Luxem-bourg despite its origins in Denver, said on Thursday, June 2, it will sell 671.24 mil-lion shares or 48% of the com-pany, in a bookbuilding range of HK$13.50 to HK$17.50. That would raise HK$9.1 bil-lion to HK$11.7 billion ($1.2 billion to $1.5 billion). Private equity firm CVC Capital Partners Group, which owns 54.3% of the company, and 30% owner Royal Bank of Scotland Group plc, will sell part of their holdings in the IPO. n —J.B.

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M&Ahealthcare m&a IndustrIals m&a tmt m&a energy m&a all m&a deals ytdmore at the deal PiPeline >

Less than a week after Valeant Phar-maceuticals International Inc. first proposed to acquire Cephalon Inc. on March 18, Cephalon’s newly appointed chief executive, Kevin Buchi, met over dinner with William Marth, president and chief executive of Teva Pharma-ceuticals USA Inc.

A public document shows that the dinner was the beginning of a month-long courtship that resulted in the $6.8 billion acquisition of Frazer, Pa.-based Cephalon by Teva, announced May 2. Buchi, who was not available for com-ment Friday, June 3, was appointed to the top post after Cephalon founder Frank Baldino died in December. The dinner with Marth was arranged by a mu-tual colleague, who also dined with the two executives, so the group could discuss the state of the biotechnology and pharmaceu-tical industries.

The document, filed at the end of May with the Securities and Exchange Commis-sion, provides few details about what was discussed at the March 24 dinner, merely noting that the two did not discuss a poten-tial transaction between Teva and Cepha-lon.

Yet the dinner appears to have created a spark between the companies. By March 30, Buchi and Marth were talking again, on the phone to set up an April 7 meeting with Shlomo Yanai, the chief executive of Jerusalem-based Teva Pharmaceutical Industries Ltd. At that meeting, Teva first told Cephalon it was interested in making a deal.

Between Teva’s first hint of interest and its eventual conquest, Cephalon by no means remained exclusive, the document shows. Mississauga, Ontario-based Valeant placed two offers on the table, which were made public March 29: one for $73 per share and a second, separate offer to buy a por-

tion of Cephalon’s pipeline for $2.8 billion. Cephalon’s board rebuffed each offer as too low. Valeant tried to go hostile, attempting a board overhaul at Cephalon and hinting at the possibility of raising its bid. However, Valeant eventually gave up, likely seeing a takeover as futile.

Meanwhile, as Cephalon and Teva began their engagement, Cephalon also decided to gauge its other options. On April 5, the Ce-phalon board directed its financial advisers, Deutsche Bank Securities Inc. and Bank of America Merrill Lynch, to contact 26 potential strategic partners and five poten-tial financial sponsors to see what interest it could garner.

Through the end of April, six unnamed pharmaceutical companies responded with interest, most of which took the step of sign-ing confidentiality agreements so that they could perform due diligence on Cephalon’s data. Two financial sponsors also respond-ed to the possibility of a deal.

However, Teva, which also signed a con-fidentiality agreement on April 11, “spent significantly more time reviewing material in Cephalon’s electronic data room than any other interested party,” according to the

SEC document.It also appears that Teva was the

only party, other than Valeant, to make Cephalon an offer: It proposed $80 per share for the biopharmaceutical com-pany on April 25. There was a caveat, however. Teva, likely knowing that Ce-phalon was talking with other suitors, asked Cephalon to sign an exclusive negotiating agreement through May 2, when Teva hoped the companies could announce a deal.

The document portrays Cephalon’s board as torn: It was enticed by the $80 per share price, which represented a 30% to 40% premium to its stock prices prior to Valeant’s takeover attempt, but it was also apprehensive about giving

up the possibility of a better deal from one of the other companies still interested.

The Cephalon board decided to ask Teva for a higher price. Buchi and Marth traded phone calls throughout the day April 25, which continued late into the evening. Af-ter Marth upped the offer to $81, “Buchi emphasized the importance to our board of directors of receiving Teva’s best price in exchange for any limited agreement regard-ing exclusivity,” the document said.

Marth conceded that he may be able to raise the price to $81.50, translating to $6.8 billion total.

After multiple meetings, and additional negotiating on items such as a $275 million termination fee Cephalon would pay if the deal failed, Cephalon agreed to a sale to Teva on May 1.

Revenue estimates for Cephalon may have helped the company secure its higher price. The document shows that its finan-cial advisers estimated Cephalon’s revenue could increase from approximately $3.1 billion in 2011 to as much as $7.4 billion by 2020.

Teva did not immediately return re-quests for comment Friday. n

by david holley

Dinner, evening phone calls brought Teva and Cephalon togetherDrugmaker won over target with $6.8 billion offer, despite interest from nine other companies

11 The DAily DeAl M o n D Ay J u n e 6 2 0 1 1

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BANKRUPTCYbankruptcy m&a by industry bankruptcy auctions by industry 2009 bankruptcies in review dip financingsmore at the deal PiPeline >

An Alabama judge who previously denied confirmation of Colonial BancGroup Inc.’s plan has changed his mind and will allow the bankrupt bank holding company to liquidate under Chapter 11.

Judge Dwight H. Williams Jr. of the U.S. Bankruptcy Court for the Middle District of Alabama in Montgomery on Thursday con-firmed the debtor’s liquidation plan after Colonial amended it to remedy the issues that previously caused him to deny confir-mation.

Williams had denied confirmation of the plan on May 20, concluding it didn’t “meet the ‘best interests of creditors’ test” based mainly on objections by the Fed-eral Deposit Insurance Corp. and Branch Banking & Trust Co., which shared many concerns.

The objectors argued that Colonial failed to prove that confirmation of its liquidation plan was more desirable than liquidation under a hypothetical Chapter 7 case. Distri-bution under the plan would have been the same under the Chapter 11 plan and a Chap-ter 7, but the Chapter 11 plan contemplated “burdensome” administrative expenses to be incurred by the plan trustee.

Colonial then filed an amendment to the Chapter 11 plan that put the trustee’s com-pensation “on equal footing with a Chapter 7 trustee” because compensation will be limited and subject to court approval.

The FDIC and BB&T both objected to Colonial’s renewed request for confirma-tion, saying the Bankruptcy Code did not include any provisions allowing a debtor to amend its plan once confirmation was denied, but Williams held a hearing on the amendment on June 1.

It was during that hearing that Williams overruled both the FDIC’s and BB&T’s ob-jections while also asserting that the plan amendment still had a few problems, ac-cording to debtor counsel C. Edward Dobbs of Parker, Hudson, Rainer & Dobbs LLP.

Dobbs said Williams was still concerned

with certain provi-sions in the plan that call for the creation of a committee to oversee liquidation of the Colo-nial estate along with the liquidating trust-ee. Under the original plan, the committee would have been able to undertake litigation that the trustee de-clined to pursue on behalf of the estate. The committee would also have been compen-sated for its services.

In the debtor’s amendment, the com-mittee would only be able to pursue litiga-tion approved by the court and wouldn’t be compensated, though it would receive reim-bursements for any expenses.

During the hearing Wednesday, Wil-liams said he still felt the provisions sur-rounding the committee’s duties weren’t in the best interest of creditors, according to Dobbs.

Colonial then conferred with its official committee of unsecured creditors and de-cided to scrap the plan committee’s ability to commence litigation and the provision for expense reimbursements, said Dobbs.

The day after the hearing, Williams signed the order confirming the plan.

Dobbs said the debtor wasn’t deterred when Williams initially denied confirma-tion of the plan because the issues were “easily remedied.” The changes to the plan don’t affect recoveries for creditors, and only affect the cost of effectuating the plan.

In his decision to deny confirmation of the plan, Williams opined that Colonial failed to prove its liquidation plan was more desirable than liquidation under a hypo-thetical Chapter 7 due to the trustee fees.

In a Chapter 7, the trustee is entitled to “reasonable compensation for his services,” which the Bankruptcy Code caps at 25% of up to $5,000 in disbursements and 10% of any amount above $5,000 up to $50,000.

After that, the trustee gets 5% of any amount of disbursements up to $1 million and 3% on any amount in excess of that.

Conversely, Colonial’s plan originally proposed paying the trustee $525 per hour plus an addi-tional amount based on the distribution to credi-tors. The trustee would

receive an amount equal to 5% of the dis-tribution once unsecureds recovered 25% of their claims and a further 10% of distri-bution when unsecureds recovered 40% of their claims.

To illustrate his point, Williams noted that if the FDIC’s $308 million claim is re-paid, the plan trustee would receive $17 million plus the hourly rate. A Chapter 7 trustee, on the other hand, would receive $9 million for the same repayment.

Colonial’s May 23 amendment proposed paying the trustee according to Section 326(a) and Section 330(a) of the Bankruptcy Code. The sections allow for “reasonable compensation” equal to 25% of the first $5,000 or less of disbursements to creditors, 10% on any amount between $5,000 and $50,000 and 5% on any amount between $50,000 and $1 million. Above $1 million in disbursements, the trustee would recoup 3%.

Under the plan, filed and approved Feb. 2 and Feb. 23, respectively, administrative and priority claims will be paid in full.

Secured creditors will receive their col-lateral or cash in the amount of their collat-eral. The Alabama Revenue Department’s secured claim will be paid in full within five years of the Aug. 25, 2009, petition date.

Convenience creditors will recover 75% of their claims.

General unsecured creditors and inden-ture claimants will receive a pro-rata share

by aviva gat

In reversal, judge confirms Colonial BancGroup plan

CONTINUED >

12 ThE DAIlY DEAl M O N D AY J U N E 6 2 0 1 1

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PRIVATE EQUITYripe pe candidates by industry pe auction bidder listings pe auctions latest sellers•assetsmore at the deal PiPeline >

Bank of America Corp.’s main private equity arm, BAML Capital Partners, has completed its previously announced divestiture and is ready to start raising its own funds.

The Thursday announcement detailed how the newly formed fund, dubbed North Cove Partners, will continue to manage BAML’s $6 billion portfolio and will be led by managing partners Christopher Birosak, Brian Gorczynski and Angel Morales.

Though the investment criteria will remain much the same, the new fund will be “much more focused on middle-market compa-nies,” given the fact that it will no longer have a large financial par-ent as its investment anchor, Birosak said in an interview. Sector focus will continue to be on healthcare, energy, consumer products, media, industrials and certain financial service companies, he said.

While it does not currently have a fund to invest out of, “North Cove intends to raise a new private equity fund in the near future,” North Cove stated in the release.

The core team for North Cove are legacy Merrill Lynch private equity employees, including all five principals and two vice presi-dents, according to a comparison of the team lists. The three man-aging partners heading to North Cove were managing directors at Merrill Lynch Global Private Equity prior to the merger of Bank of America and Merrill Lynch & Co. in 2009. The newly freed invest-ment company appears poised to recapture some of that old Merrill magic: North Cove, named for the cove near the World Financial Center that once housed Merrill Lynch, expects to eventually move back to the financial district from BofA’s midtown headquarters, according to Birosak.

The move leaves a depleted team in BofA’s global principal in-vestments unit, which will continue to be run by James Forbes. Only three managing directors and two directors from the BofA team haven’t joined North Cove, according to the employees listed on North Cove’s new website. Forbes’ group still includes BAML Global Strategic Capital and BAML Real Estate Principal Invest-ments, which along with other investments account for more than $6.2 billion in assets on BofA’s balance sheet, according to its sup-plemental financial data. There are no plans to divest these units at this time, according to a BofA spokeswoman.

Bank holding companies such as BofA have been ostensibly shedding some of their private investment arms at least partly as a result of the Volcker Rule in the Dodd-Frank financial reform leg-islation, which restricts how banks can invest their capital. Some reasons are clear-cut legal moves, but others may just be a way to ease any potential regulatory headaches, as the implementation of the Volcker Rule has yet to be finalized by regulators.

In another recent example, Key Principal Partners, the private equity group primarily bankrolled by banking services company KeyCorp, announced Wednesday that its principals have resigned and formed a new firm, Cyprium Investment Partners LLC, assuming KPP’s responsibilities but being separate from Key-Corp. Before that, in April, three managing principals of PNC Eq-uity Partners, the PE firm anchored by PNC Financial Services Group, announced the formation of Incline Management Corp., a private equity firm independent of PNC and focused on invest-ments in lower-middle-market growth companies. The team is led by Jack Glover, Wali Bacdayan, and Justin Bertram.

The Volcker Rule, named for former Federal Reserve Board Chairman Paul Volcker, may make fundraising more difficult, as banks with buyout units—like most PE firms—often make large commitments to their in-house funds to align their interests with outside investors. Now, however, the amount of such private equity and hedge fund investments must be defined by rule and cannot exceed 3% of the banking entity’s Tier 1 capital.

BAML Capital Partners, as of last year, had close to $5 billion of equity invested in 24 portfolio companies, including car rental gi-ant Hertz Global Holdings Inc., hospital operator HCA Inc. and NPC International Inc., the largest Pizza Hut franchisee in the country, according to the investment descriptions and regulatory filings.

Cyprium, the Latin word for copper, is largely unchanged except for being independent of its anchor investor and free from regula-tory worries, according to the company.

“It takes all of the legislative and regulatory uncertainty out of the future for our investors and our portfolio companies,” said Cy-

Bank of America PE unit completes spinoff by max frumes

of available cash after other creditors were paid in full.

Preferred stockholders will receive a pro-rata share of any available cash. The debtor, however, believes preferred stock-holders would receive no distribution.

Other equity holders will be wiped out.Colonial filed for bankruptcy on Aug. 25,

2009, just 11 days after the Alabama Bank-ing Department appointed the FDIC as re-ceiver to the bank.

In schedules filed Oct. 6, 2009, the Mont-gomery, Ala., debtor listed $47 million in as-sets and $391.6 million in liabilities.

Along with Dobbs, Rufus T. Dorsey of Parker Hudson and W. Clark Watson of Balch & Bingham LLP are also debtor counsel.

Michael A. Fritz Sr. of Fritz Hughes & Hill LLC is counsel to the FDIC.

BB&T’s counsel is T. Parker Griffin Jr. of Bradley Arant Boult Cummings LLP. n

< PREVIOUS

CONTINUED >

13 ThE DAIlY DEAl M O N D AY J U N E 6 2 0 1 1

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PRIVATE EQUITY

Peterson Partners LP, one of JetBlue Airways Corp.’s original investors, has closed its sixth private equity fund with $50 million in commitments, said managing partner Dan Peterson.

“We’ll probably keep the fund open and cap it off at $60 million since we’re oversubscribed,” he added.

The Salt Lake City-based shop invests between $2 million and $10 million in equity per transaction, Peterson explained. He added that the firm targets companies with annual revenues in the $10 million to $50 million range and Ebitda of $2 million to $10 million. The firm takes both majority and minority stakes and often takes seats on portfolio companies’ boards.

“We back management teams and help by providing companies with growth capital,” the managing partner said.

Peterson said that the firm, which has more than $400 million in committed capital, does not focus on specific industries or geog-raphies. In fact, while most of the firm’s investments have been in companies in the U.S., it has also invested in companies based in Brazil and India.

This sixth fund is much smaller than the shop’s previous one, which closed with $120 million in May 2008. Peterson said that the

new fund is smaller because it only targeted individual investors. “We changed our approach. This time we wanted to limit the

fund to people who are successful entrepreneurs,” Peterson said. The previous fund’s investors included David Neeleman, founder of JetBlue; Dave Checketts, owner of the Real Salt Lake Major League Soccer team; the Romney Family Investment Fund; and the principals of the shop.

The previous fund has been mostly invested, Peterson said, add-ing that the shop is already eyeing exits for some portfolio compa-nies. “We have a number of exits scheduled for this year and next,” he said.

Peterson explained that he expects most exits to involve sales to strategics. However, he also said that the shop plans to exit one of its companies via an initial public offering.

Among the shop’s portfolio companies are Azul Linhas Aéreas Brasileiras SA, a Brazilian low-cost airline established by the founder of JetBlue; Provo, Utah-based Vivint Inc., a home secu-rity company that operates in 37 states, Canada and Puerto Rico; Coimbatore, India-based garment exporter K.P.R. Mill Ltd.; and Kansas City, Mo.-based technology protection services company Asurion. n

Peterson Partners closes $50M fundBy Taina Rosa

prium chairman John Sinnenberg. Like North Cove, Cyprium will continue

to manage the existing portfolio. However, third-party partnerships will be separate. The firm is investing from its $500 million third fund, half of which comes from Key-Corp. The other half is from outside inves-tors. The fund is 80% drawn, according to Sinnenberg, so the firm does not need to raise new money immediately.

Under the group’s interpretation of the Volcker Rule, for a PE firm to be part of a bank holding company, its outside investors must be clients of the bank. Because all Cy-prium’s main investors outside of KeyCorp are not clients of the bank, it was in the firm’s best interest to spin off, Sinnenberg said.

“I never wanted to have one source of capital,” he said. “With Dodd-Frank we couldn’t carry through the existing inves-tors,” which include corporate pension funds, European fund-of-funds and wealthy families, he added.

Key Principal’s Fund II raised $500 mil-lion and is still active, while Fund I raised

$125 million and completely liquefied. “Generally, I think people are looking to

simplify their operations and simplify their regulatory relations as well,” said Jones Day attorney Chip MacDonald. The idea is to have “less activities that are the focus of Dodd-Frank and forthcoming regulations,” he said.

BAML Capital Partners is the second large private equity operation to spin out of BofA in the past year. Last August, former Banc of America Capital Investors execu-tives left the company to form Ridgemont Equity Partners, taking about one-quarter of Bank of America’s private equity portfo-lio, including in Harrah’s Entertainment Inc.

North Cove’s formation dovetails with the launch of another new PE effort led by Merrill Lynch alumni, all of whom have worked together. On May 23, BlackRock Inc. said it would move into direct private equity investing with the other half of the team from Merrill Lynch’s former private equity arm. Nathan Thorne, George Bitar and Mandy Puri are the managing direc-tors of a platform called BlackRock Global Private Equity.

Thorne, Bitar and Puri began working together at Merrill Lynch in 1990. Four years later they co-founded Merrill Lynch’s private equity business, where they re-mained until 2009, when BofA acquired the investment bank. Indeed, they worked alongside Birosak, Gorczynski and Morales on several high-profile deals, including Hertz and HCA. North Cove continues to manage these investments and others on behalf of BofA.

While BofA, KeyBanc and PNC have tak-en these steps, other bank holding compa-nies—specifically the former bulge-bracket banks that became bank holding companies for more government support during the fi-nancial crisis—have not all taken action.

While Morgan Stanley took several steps to rein in risk, including shuttering some proprietary trading desks and rais-ing deposits, Goldman, Sachs & Co. has done relatively little restructuring. And J.P. Morgan Chase & Co. has not hinted at shedding its $8 billion private arm, One Equity Partners.

“If the goal of the [Volcker] Rule was to get banks out of this business, it didn’t really do that,” said Sinnenberg. n

< PREVIOUS

14 ThE dAIlY dEAl M O n d AY J U n E 6 2 0 1 1

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REGULATION

European Union Commissioner Michel Barnier warned Friday against attempts by some U.S. lawmakers to delay new regula-tions on derivatives and banking.

“It’s time for [financial regulators] to deliver on our promises,” Barnier said in a speech at the Brookings Institution.

Barnier, who as internal market and services commissioner oversees the EU’s revamping of its financial industry regula-tions, said attempts to delay some Dodd-Frank Act rulemakings are a big mistake. House Republicans have offered legislation that would postpone some limits on deriva-tives until after the 2012 election. There also have been other calls from both Democrats and Republicans to prevent any rules from taking effect until other countries have ad-opted similar curbs and it’s clear U.S. limits won’t motivate traders to move their opera-tions overseas.

Barnier readily agreed that common rules are needed. “Incoherence and incon-sistency between our rules will have nega-tive consequences for our markets,” he said. “The financial system is by nature global. Differences could lead to global arbitrage. This would put us all at risk.”

However he suggested it is the U.S., not the EU, that is in danger of falling behind. He said that the EU is in “the final stages” of implementing its new rules while the U.S. is still formally adopting rules.

“I have heard calls in the United States that the Dodd-Frank implementation should be delayed or weakened,” said Barnier. “De-lay is not the answer. Europe is committed. We will deliver. And I call on the United States to do the same.

“We need common rules to ensure mar-ket safety, soundness and access. Not diver-gence that will cause confusion and con-flict.”

Barnier also called for the U.S. to do more to implement the Basel III capital standards for U.S. banks. He said while the EU is im-plementing the standard for all 8,232 Euro-

pean banks, regardless of their size, so far the U.S. has been directing its attention to just 20 large banks.

“We will stick closely to what has been agreed to in Basel,” he said. “I call on other jurisdictions to do the same. It is the right thing to do. We must have a global playing field.”

Barnier also suggested the U.S. should examine some of the limits on bankers’ compensation being adopted in the EU.

“We in Europe are the only ones that have put binding rules on bonuses in place. I hope this situation will change so that pay structures stop encouraging excessive risk-taking. Certain remuneration packages and bonuses are simply beyond our citizens’ comprehension and mine too!” he said.

He conceded that the EU has lagged be-hind in other areas.

For instance, he said he will unveil a bank resolution and crisis management proposal in September that would give EU regulators some of the same bank resolution tools the

Federal Deposit Insurance Corp. has in the U.S.

“Recourse to taxpayers’ money is simply no longer an option,” he said. “Banks of ev-ery size must be allowed to fail. But without the whole financial system with them.”

Barnier also rejected a suggestion from one questioner that the result of the regula-tion was to prompt bankers to avoid risk. He suggested that stance implied there was no need for additional regulation.

“Don’t count on me to say it is business as usual. It is not possible. It may be bankers’ wish. But it’s no longer possible,” he said.

“We are not here to prevent risk-taking. We are here to prevent excessive risk-tak-ing. The bankers are not the ones who are taking excessive risks. It’s the taxpayers. Everybody has to assume responsibility. I think we should take risks, but they should be well known and [the bankers] should ac-cept responsibility,” he said. n

by ira teinowitz in washington

EU’s financial reform chief calls on U.S. to stay courseDelay would threaten common rules for derivatives, banking

EU cOmmISSIONER mIcHEL BARNIER

15 THE dAILy dEAL m O N d Ay J U N E 6 2 0 1 1

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MIDDLE MARKEThealthcare industrials tmt energy all middle market auctiOns ytdmore at the deal PiPeline >

Tutor Perini Corp. has made two acquisi-tions in the Midwest.

The Sylmar, Calif., construction services business signed a letter of intent to acquire civil construction company Lunda Con-struction Co. of Black River Falls, Wis., for $153.5 million. It also bought Evansville, Ind.-based tunnel builder Frontier-Kem-per Constructors Inc. for $61 million in cash.

The two acquisitions, announced June 2, are together worth $214.5 million in cash. Tutor Perini will also assume about $52 mil-lion of Frontier-Kemper’s debt, with plans to pay off about $35 million of the debt. It fi-nanced the transaction with proceeds from a $300 million senior note offering that closed in October.

Despite a widespread cash crunch af-flicting many municipalities across the na-tion, “we’re going to see more spending on large infrastructure projects, and [Tutor] can take advantage of that by being a large-scale provider,” D.A. Davidson & Co. ana-lyst John B. Rogers said Friday.

The most prominent example, perhaps, is the Obama administration’s push for a high-speed interstate railroad system. In Febru-ary Vice President Joe Biden proposed a six-year, $53 billion plan to create a national high-speed rail network. The administra-tion began in 2009 by allocating $8 billion in stimulus funding to rail projects, and fol-lowed with $2.5 billion in 2010.

The deal for Lunda, a major contractor that builds, fixes and maintains bridges, railroads, dams and other civil structures in the Midwest, consists of a $131.8 million cash payment at closing and a $21.7 million note payable in five years. The deal also in-cludes an unspecified structured earnout based upon profitability targets for three years following the closing date.

“Lunda Construction is one of the most successful civil contractors in the United States and represents our expansion into the Midwestern markets,” Tutor chief ex-

ecutive Ronald N. Tutor said in a statement. “They have a résumé of experience which complements our operations.”

Lunda, which generates about $400 mil-lion in annual revenue, has three operating divisions in six offices in Wisconsin and Minnesota and employs about 600 people. The target, founded in 1938, has done work in about 30 states total. It has a current backlog of about $400 million.

The company was involved in develop-ing the Interstate Highway System, starting in 1956 with the signing of the Federal-Aid Highway Act by Dwight D. Eisenhower, and this seminal public works project was responsible for much of the company’s growth.

The deal should close July 1. The final payment price is subject to an adjustment based on Lunda’s tangible net worth on that day.

Lunda will retain its name and manage-ment team, with Larry Lunda remaining CEO and president.

Frontier-Kemper was founded in 1901 and builds tunnels for highways, railroads, subways and rapid transit systems. It also constructs tunnels, shafts and other facili-ties for water transport and develops and equips mines with hoisting, elevator and vertical conveyance systems. It has of-fices in Pelham, N.Y., and Seattle as well as Evansville.

Frontier-Kemper, which has about 600 employes, generated $148 million in rev-enue for fiscal 2010. It carries $300 million in backlog. Its management team will also stay in place, led by chief executive W.D. Rogstad.

The Frontier-Kemper deal will help Tu-tor Perini expand into Canada and into min-ing markets, Rogers wrote in a research note Thursday.

Tutor Perini has a market value of about $935 million. Its shares closed up 37 cents, or 1.91%, to $19.79, on Friday.

Tutor Perini, Lunda and Frontier-Kem-per didn’t return calls Friday. n

Tutor Perini bulks two buildersby Thomas Zadvydas

Air medical transportation company Air Methods Corp. said Thursday that it agreed to acquire OF Air Holdings Corp., the parent company of Omni-flight Helicopters Inc., from Wind Point Partners for $200 million in cash.

Englewood, Colo.-based Air Meth-ods will fund the acquisition through a new credit facility. The deal has been ap-proved by both boards of directors and is expected to close in July. Omniflight is not allowed to solicit other bids under the deal agreement.

Air Methods chief executive Aaron Todd said in a statement the transaction will form a competitive cost structure as a result of greater economies of scale.

“The geographical service areas of both entities are very complementary and improve the combined entity’s abil-ity to maintain important resources closer to our customers and their com-munities,” Todd said.

Wind Point acquired Omniflight through a secondary buyout from Texas Growth Fund for undisclosed terms in November 2005.

At the time, Omniflight was the third-largest air medical transportation company in the U.S., with a fleet of 61 helicopters and aircraft. Since then, the Addison, Texas-based target’s fleet has grown to more than 100 helicopters and aircraft operating out of 75 bases in 18 states. Air Methods’ fleet consists of 306 helicopters and aircraft at 237 bases in 43 states.

Omniflight generated about $172 mil-lion in revenue for the trailing 12 months ended March 31. Under Wind Point’s ownership, Omniflight has made at least two add-on acquisitions. In 2008 it ac-quired rivals LifeStarOne of Savannah, Ga., and Idaho Falls, Idaho-based Air-link Inc., both for undisclosed terms. n

Air Methods buys Omniflight parent

by demiTri diakanTonis

16 ThE DAILy DEAL M O n D Ay J u n E 6 2 0 1 1

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COMPANY INDEX

A-i

Ahlers and Cooney PC . . . . . . . . . . . . . . . . . . 10

Air Methods Corp . . . . . . . . . . . . . . . . . . . . . . 16

Apollo Global Management LLC . . . . . . . . . 9

Asurion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Azul Linhas Aéreas Brasileiras SA . . . . . . 14

Balch & Bingham LLP . . . . . . . . . . . . . . . . . . 13

Bank of America Corp . . . . . . . . 6, 9, 10, 11, 13

Barclays Capital . . . . . . . . . . . . . . . . . . . . . . . . . 8

BlackRock Inc . . . . . . . . . . . . . . . . . . . . . . . . . . 14

BNP Paribas SA . . . . . . . . . . . . . . . . . . . . . . . . . 9

Borden Chemical Inc . . . . . . . . . . . . . . . . . . . . 9

Bradley Arant Boult Cummings LLP . . . . 13

Branch Banking & Trust Co . . . . . . . . . . . . . 12

Bryan Cave LLP . . . . . . . . . . . . . . . . . . . . . . . . . 9

Casey’s General Stores Inc . . . . . . . . . . . . . . 10

Cephalon Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Citigroup Inc . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 9

Colgate-Palmolive Co . . . . . . . . . . . . . . . . . . . . 9

Colonial BancGroup Inc . . . . . . . . . . . . . . . . 12

Compass Minerals International Inc . . . . . 9

Cooley LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Credit Suisse Group . . . . . . . . . . . . . . . . . . . . . 9

CVC Capital Partners Group . . . . . . . . . . . . 10

Cyprium Investment Partners LLC . . . . . 13

D .A . Davidson & Co . . . . . . . . . . . . . . . . . . . . . 16

Del Monte Foods Co . . . . . . . . . . . . . . . . . . . . . 8

Deutsche Bank Securities Inc . . . . . . . . . . . .11

Exxon Mobil Corp . . . . . . . . . . . . . . . . . . . . . . . 9

FBR Capital Markets . . . . . . . . . . . . . . . . . . . . 9

Fenwick & West LLP . . . . . . . . . . . . . . . . . . . . 9

Fritz Hughes & Hill LLC . . . . . . . . . . . . . . . 13

Frontier-Kemper Constructors Inc . . . . . . 16

Fulbright & Jaworski LLP . . . . . . . . . . . . . . . 9

General Atlantic LLC . . . . . . . . . . . . . . . . . . . . 9

Goldman Sachs & Co . . . . . . . . . . . . . . . . . . . . 14

Greenhill & Co . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Harrah’s Entertainment Inc . . . . . . . . . . . . 14

HCA Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Hertz Global Holdings Inc . . . . . . . . . . . . . . 13

Icelandic Group plc . . . . . . . . . . . . . . . . . . . . . 10

Incline Management Corp . . . . . . . . . . . . . . 13

j-z

J .P . King Auction Co . . . . . . . . . . . . . . . . . . . . . 5

J .P . Morgan Chase & Co . . . . . . . . . . . . . . . 8, 14

JetBlue Airways Corp . . . . . . . . . . . . . . . . . . . 14

K .P .R . Mill Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . 14

KeyCorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Kilpatrick Townsend & Stockton . . . . . . . . 9

Kindred Healthcare Inc . . . . . . . . . . . . . . . . . . 8

Kum & Go LC . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Lenhart Obenshain PC . . . . . . . . . . . . . . . . . . 6

Lunda Construction Co . . . . . . . . . . . . . . . . . 16

Morgan Stanley . . . . . . . . . . . . . . . . . . . . 8, 9, 14

Morgan, Lewis & Bockius LLP . . . . . . . . . . 9

Nomura Holdings Inc . . . . . . . . . . . . . . . . . . . . 9

NPC International Inc . . . . . . . . . . . . . . . . . . 13

OF Air Holdings Corp . . . . . . . . . . . . . . . . . . . 16

Orient Securities Co . Ltd . . . . . . . . . . . . . . . . . 9

Pacific Andes

International Holdings Ltd . . . . . . . . . . . . 10

Parker, Hudson, Rainer & Dobbs LLP . . . 12

Peterson Partners LP . . . . . . . . . . . . . . . . . . . 14

PNC Financial Services Group . . . . . . . . . . 13

PricewaterhouseCoopers LLP . . . . . . . . . . . 9

RBC Capital Markets . . . . . . . . . . . . . . . . . . . . 8

Real Salt Lake . . . . . . . . . . . . . . . . . . . . . . . . . . 14

RehabCare Group Inc . . . . . . . . . . . . . . . . . . . . 8

Ridgemont Equity Partners . . . . . . . . . . . . . 14

Robert W . Baird & Co . . . . . . . . . . . . . . . . . . . . 9

Romney Family Investment Fund . . . . . . . 14

Rothschild . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Royal Bank of Scotland Group plc . . . . . . . 10

Samsonite International SA . . . . . . . . . . . . 10

SNR Denton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Société Générale SA . . . . . . . . . . . . . . . . . . . . . 9

Southern National

Bancorp of Virginia Inc . . . . . . . . . . . . . . . . . 6

Standard Chartered . . . . . . . . . . . . . . . . . . . . . 9

Sullivan & Cromwell LLP . . . . . . . . . . . . . . . . 9

Sutherland Asbill & Brennan LLP . . . . . . . . 9

Teva Pharmaceutical Industries Ltd . . . . . .11

Texas Growth Fund . . . . . . . . . . . . . . . . . . . . 16

Trump Organization . . . . . . . . . . . . . . . . . . . . 5

Tutor Perini Corp . . . . . . . . . . . . . . . . . . . . . . . 16

UBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Valeant Pharmaceuticals

International Inc . . . . . . . . . . . . . . . . . . . . . . .11

Vivint Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Willkie Farr & Gallagher LLP . . . . . . . . . . . 9

Wind Point Partners . . . . . . . . . . . . . . . . . . . 16

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AUCTION BLOCK™ IS PUBLISHED EacH MonDay aS a fEatUrE In tHE DaILy DEaL, a SErvIcE of tHE DEaL PIPELInE. for DEMonStratIon anD SUBScrIPtIon InforMatIon, PLEaSE caLL 888-257-6082.

jUNe 6 - 12, 2011 VOLUMe 6 NUMBeR 17

The fULL deAL: vISIt PIPELInE.tHEDEaL.coM for coMPLEtE UP-to-DatE Info on BUSInESSES UP for aUctIon

The entries below feature extended information on companies that are new on the block and just off the block, along with the latest updates on auctions that continue to run. For more details, go to pipeline.thedeal.com.

Auction Blocktm

OFF the blOck

Texalta Petroleum Ltd. on May 31 announced that its shareholders have approved the previously announced business combination between PetroFrontier Corp. and Texalta. The terms have been approved by shareholders and the Court of Queen’s Bench of Alberta.

Canadian minerals explorer Brandenburg Metals Corp. on May 25 announced that it has signed a joint venture letter of intent with Houston-based Holloman Energy Corp. where Brandenburg can earn an undivided 44% working interest in its South Australian Cooper Basin leases. Previously, on May 13, Holloman announced that it signed a letter of intent with an undisclosed party that would defray funding of approximately $17 million to $19 million in exploration and development expenditures.

Clayton, Dubilier & Rice LLC teamed with France’s AXA Private Equity

and Canadian pension fund manager Caisse de dépôt et placement du Québec to acquire Spie SA for ¤2.1 billion ($3 billion). The deal, an-nounced May 31, concludes a two-month auction for the French engi-neering group.

New York Metropolitan Baseball Club Inc. has found a bandage to ad-dress its bleeding cash—temporarily, at least—in the form of hedge fund magnate David Einhorn. The Major League Baseball franchise announced on May 26 that it has entered into exclusive negotiations with Einhorn, the co-founder of New York hedge fund Greenlight Capi-tal Inc., to sell an undisclosed “minority, non-operating” stake in the team for $200 million. The two sides expect to reach a deal agreement by the end of June. Einhorn reportedly beat out bidders including SAC Capital Advisors LP’s Steven Cohen, Tampa Bay Rays co-owner Randy Frankel, former Mets manager Bobby Valentine and Donald Trump.

New ON the blOck

Sources said on June 1 that NYSE Euronext is teaming up with New York-based Markit Group Ltd. to bid for London-based clearinghouse LCH.Clearnet Group Ltd. Sources confirmed media reports that Nasdaq OMX Group Inc. is also in talks with LCH. Market reports suggest that London Stock Exchange plc is also in discussion with the clearing-house, while some analysts expect to see IntercontinentalExchange Inc. join the bidding fray, if it hasn’t already. NYSE and Markit jointly approached LCH.Clearnet over the past two weeks, but have yet to make a formal offer.

Discount retail chain Syms Corp. announced on May 26 that it has hired Rothschild as its exclusive financial adviser to explore strate-gic alternatives, including a possible sale. The Secaucus, N.J.-based company has reportedly been under pressure to enhance value for its shareholders. No additional details regarding the process have been disclosed.

Blackstone Group LP, in partnership with Canadian real estate investor Slate Properties Inc., is running a dual-track process for a portfolio of office buildings worth C$900 million ($921.4 million), a source with direct knowledge of the matter said May 25. Blackstone has hired CIBC World Markets Inc. to explore either a sale or an initial public offering involving a portfolio of 29 properties in Toronto; Calgary and Edmon-ton, Alberta; and Ottawa, said two sources familiar with the dealings. The process could take a couple of months, one source said.

China’s Fushi Copperweld Inc. on May 26 announced that it will evalu-ate strategic alternatives after receiving a buyout offer from its co-chief executive officer and a private equity firm. In November co-CEO Li Fu and buyout shop Abax Global Capital (Hong Kong) Ltd. offered to take the company private, valuing Copperweld at $430 million. The bidders have set up a special committee with Fushi to conduct due dili-gence as the company weighs other opportunities.

Using search funds to find and operate businesses is a risky game. Industry veterans provide a peek into their playbook for success.FEATURE INSIDE A PLAYBOOK TO SEARCH BY SEE PAGE 21

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Editor-In-Chief: Robert Teitelman Compiled by: Matthew V. Haas Editor, Newsletters and Databases: Anthony Baldo

UPDATES FROM ThE blOck bANkRUPTcY blOck

Specialty chemicals maker Momentive Per-formance Materials Holdings Inc. completed the sale of its North American composites and coating resins business on June 1, enabling it to now turn its attention to di-vesting its wood resins and acrylics units. Columbus, Ohio-based Momentive, which is 89.5%-owned by New York private equity firm Apollo Global Management LLC, is jet-tisoning assets to become more of a pure-play chemicals manufacturer when it goes public, which it filed for on April 21. GE Capi-tal Corp. owns an 8.9% stake in Momentive. Terms of the sale of the North American composites and coating resins business to Investindustrial Holdings Ltd. subsidiary PCCR USA Inc. weren’t disclosed.

A retail banker on June 1 suggested Sun Capital Partners Inc. would be a good suitor for Charlotte, N.C.-based Salsaritas Inc., saying, “add Mexican to [Sun Capital’s] Ital-ian (Fazoli’s Restaurants), seafood (Captain D’s Seafood Kitchen), ice cream (Friendly Ice Cream Corp.) and other food [portfolio companies] and it makes sense.” However, the banker noted “[Roark Capital principals] Stephen Aronson and Erik Morris love this kind of [restaurant] deal.”

Marketing and branding company Chero-kee Inc. is interested in being acquired by a private equity firm that could provide it with capital to fund acquisitions, said its presi-dent and chief operating officer, Howard Siegel. Siegel made the comments recently during an interview at the 12th Annual B. Riley & Co. Investor Conference in Santa Monica, Calif. An acquisition wouldn’t be the first time Sunland, Calif.-based Cherokee has flirted with private equity. The company hired investment banks in 2005 and 2008 to explore strategic alternatives, though nei-ther process ended in a sale.

Malayan Banking Bhd. announced on May 31 that it received the approval of the coun-try’s central bank, Bank Negara Malaysia, to commence preliminary negotiations with RHB Capital Bhd. and its shareholders for a possible merger of the businesses of the

two banking groups. Maybank said the central bank’s approval would expire in three months.

Indian real estate development company DLF Ltd. announced on May 24 during an annual conference call and investor presentation that it would divest noncore assets such as its previously scrapped wind power assets. DLF also said it would appoint financial ad-visers to advise on the disposition of its ho-tel division. The announcement was part of DLF’s long-term strategy to reduce debt over a two- to three-year term.

Mining services group Orica Ltd. and fellow-Australian manufacturer OneSteel Ltd. are among likely bidders for Belgian industrial grinding materials supplier Magotteaux SA, put up for sale by private equity firm IK In-vestment Partners. Media reports in Austra-lia and Belgium said a sale could value the company at about $630 million and would likely attract other strategic buyers, such as carbon materials group Koppers Holdings Inc., of Pittsburgh; steelmaker ArcelorMit-tal SA; and Chilean mining and steel group CAP SA. London- and Stockholm-based IK, which bought about 75% of Magotteaux in late 2006, has reportedly brought in Morgan Stanley to examine exit options. According to a May 25 report in Belgian financial news-paper De Tijd, the bank was due to send out information memoranda imminently.

Obrascón Huarte Lain SA board member José María del Cuvillo Pemán wrote a letter to shareholders in response to media reports about the sale process for Inima Servicios Europeos de Medio Ambiente SA. Pemán said that the company has commenced an “open sale process” in which there are currently “around 40 interested parties in the acqui-sition of the asset.” OHL chairman Juan-Miguel Villar Mir on May 23 told reporters in Spain that he expects to divest the unit before year’s end, even though the process is still in initial phases. The construction firm’s asking price for Inima remains at ¤200 million ($280 million), though that could change as negotiations continue.

Green Hunt Wedlake Inc., in its capacity as court-appointed receiver of Scanwood Cana-da Ltd., on June 1 invited offers for the bank-rupt furniture maker’s manufacturing facility in Dartmouth, Nova Scotia. The facility in-cludes land, building and machinery. Offers can be submitted en bloc or for individual parcels. Deadline for tender submissions is July 22.

Competing bids for New Jersey Motorsports Park LLC are due by June 29. An auction will be held on July 6 if any bids are re-ceived. A hearing to approve the sale is set for July 14.

Insolvency administrators at British home improvements chain Focus (DIY) Ltd. on May 25 said that they have appointed Gor-don Brothers Group LLC to start liquidating stock after failing to find a buyer for the private equity-backed business. “U.K. retail-ers are facing one of the most challenging retail environments in recent times, and the DIY sector has become highly competitive, with only the strongest players being able to thrive and survive,” said Simon Allport, joint administrator at Ernst & Young LLP, in a statement. “We have been working hard to sell the business as a going concern and to maximize value for creditors. While we have been successful in securing up to 900 jobs from the sale of 55 stores in three separate deals, finding a buyer for the whole of the business has not been possible.”

Biodiesel producer and distributor Biofuel Industries Group LLC is looking to pump about $2 million into its operations through a debtor-in-possession loan and a sale to LQM Ventures LLC. The Farmington Hills, Mich., fuel company, which does business as Next-Diesel, filed for Chapter 11 on May 23 in the U.S. Bankruptcy Court in the Eastern District of Michigan in Detroit with a stalking-horse offer from LQM, which also agreed to provide a $60,000 DIP to fund NextDiesel’s bank-ruptcy proceedings. NextDiesel requested a June 22 auction. LQM is the stalking-horse bidder with an offer of $2 million plus the as-sumption of certain liabilities. n

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F o r F i na nc i a l p r o F e s s i o na l s b i t t e n by the entrepreneurial bug, the search fund pro-vides an alternate but potentially bumpy road to-ward business leadership.

search funds, or small pools of capital that seek to acquire and manage lower-middle-market com-panies, are little-known investment vehicles that allow an executive with ownership aspirations to buy his or her way into the ceo chair. it provides the opportunity to take the helm of a small, often anonymous, business in a relatively short period of time, bypassing the arduous process of climbing through the ranks of a large corporate organiza-tion over several decades.

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a playbook to search byAUCTION BLOCK FEATURE

search fund veterans provide 10 commandments to live by when buying and running companies

by Thomas Zadvydas

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1 Establish crEdibility

The first major challenge searcher CEOs face is transitioning the business from the previous operator and having the new executive established as the new leader.

“That’s a big challenge,” says Carver. “Typically, you’re going to buy into a busi-ness where you don’t have years of expe-rience. You’ve got to learn the business quickly. [Your] new employees, the first day you walk in, they’re looking at you, wondering who you are, what you’re go-ing to do with the company. They may be worried that you’re going to do something crazy.”

Carver says that this process takes a lot of focus and needs to be done correctly from the get-go if a searcher is to succeed. He explains that he takes all new CEOs he’s backing through a checklist.

“It has items like meeting with all the employees during the transition [and] in-corporating the owner in the announce-ment,” Carver notes. “We want to make people as comfortable as possible. We don’t want to disrupt the business any more than necessary. The same issue ex-ists with customers. We make sure to in-dicate that we have every interest in con-tinuing the business relationship.”

Carver adds that frequent reacquain-

tancing via conference calls and in-person meetings, especially in the first year, are integral to making sure that the CEO stays on a steady course toward strengthening his reputation. “Early on, we’ll go very methodically,” Carver says.

2 don’t buy into a

dEclining industry

A cardinal rule espoused by many in the search fund realm is to buy a business that’s floating on a rising tide. Searcher and U.K. native Christian Lawrence learned this the hard way.

“It was like pulling teeth,” he says of ef-forts to improve San Francisco e-discovery and legal data compiling firm SFL Data, which was more of a hard-copy document preparation business when he and Irish partner Ciarán Power acquired the com-pany in December 2004 for roughly $6 million. “We basically bought a basement full of photocopiers. Frankly, it was not a good business. It was local. It wasn’t scal-able. The tide was not rising. Paper was be-coming less important.”

The business had about $6 million in sales when the pair purchased it. “It was all copier revenue. This whole kind of paper scanning [and] copying, it was low mar-gin,” Lawrence remembers. “We thought

it was going to be slow-growth cash gen-eration, and it just wasn’t, [so] we had to migrate to this data business.”

Compounding the problems, he adds, were ineffective managers who couldn’t properly relay instructions and keep peo-ple focused and motivated, with the result that excessive amounts of work landed on his and Power’s shoulders.

“We were literally doing everything, so it was extremely draining, hugely long days,” Lawrence says. “It took us a long time to get a good management team to-gether. We were seriously in the weeds hauling boxes all around the city.”

Over a 2-1/2-year period, the two men waged a Herculean effort to grow SFL as a paper-focused operation, managing to bump up revenue to about $8 million in that time. But it wasn’t until they made a transition to an electronically focused ser-vice that they began to reap some serious gains. Now the business has about $16 mil-lion in annual revenue and 130 employees.

“Once we switched in 2008, our growth and profitability [skyrocketed],” says Law-rence. “In the last two years, we’ve been growing at 40% a year. But we could be a $40 million, $50 million company had we done it faster.”

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“It seemed like a really great approach, and I was really im-pressed with the guys [we’ve worked with],” says Dave Carver, co-founder and principal of Search Fund Partners, a private equity fund that invests in small LBOs and sources 95% of its deals through the search fund model. “They could have done a lot of things, but to go off and spend a couple of years of their life at a middle-market salary trying to find a company seemed like a really great concept.”

Founded in 2004, Carver’s firm has raised about $35 million in capital since inception and now operates like a fund-of-funds, in-vesting in other search pools that are looking for companies.

In a typical search fund, one or two prospective entrepreneurs round up between $250,000 and $750,000 from outside investors to finance the hunt for an attractive business, a process that usually takes between a year and 18 months. The funds usually solicit capi-tal from high-net-worth individuals, and might also tap family and

friends for cash in $30,000 or $40,000 chunks. If the search fund principals, known as searchers, manage to broker a deal with a tar-get’s owners, they then seek a second round of financing from their investor base to buy the company. Search funds typically buy compa-nies for between $5 million and $15 million. Investors accept equity stakes in the target while the search fund principals try to expand the business, generate returns and eventually sell it for a profit.

But such an entrepreneurial path is fraught with challenges and risks. Mistakes are inevitable. “The idea [is] that you are essentially selling an option on your future [when raising a fund],” says Jamie Turner, co-founder of Denver for-profit post-secondary-education company Alta College Inc. and one of the people credited with raising the first search fund back in 1984.

How do you minimize these risks? Some searchers suggest a list of 10 commandments to follow:

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3 prioritize

Every company, no matter the size, has a hierarchy of needs. One of the toughest things for a new first-time CEO is setting priorities, according to Jim Southern of Pacific Lake Partners, a small private equity fund founded in 2009 with $35 million in committed capital to invest in search pools.

Southern has played on both sides in the search fund game: he’s invested in search pools and run companies acquired by them. One of these was Uniform Printing and Supply, an insurance form printer which he ran from 1984 to 1994. The business had about $43 million in sales. As Southern ex-plains, every business has multiple require-ments that must be fulfilled for a smooth-running operation. Sometimes this chain of requirements, and thus a CEO’s time, is hijacked by a sudden shock or disclosure—something that Southern experienced when trying to reconcile Uniform Print-ing’s accounting records shortly after he bought the company.

A vital piece of information was discov-ered that skewed the due diligence results. Southern says Uniform Printing’s accounts payable manager had died three or four months before he had bought the busi-ness, and $700,000 worth of expenses were found in invoices in the individual’s desk that were never booked properly. The dis-covery roiled Uniform’s valuation figures and closing documents. Southern says this new batch of expenses led to a $2.8 million overstatement of Ebitda and made him and his colleagues realize that they acquired Uniform as a turnaround situation, not as a profitable business.

Salvaging the situation required a sud-den move to California and a four-month stay there as Southern struggled to fig-ure out how to get Uniform on its feet by getting as much information as he could from folks on the ground in troubled di-visions. Southern says maintaining a list but staying focused on three or four key tasks that make large contributions to Ebitda is important.

4 understand how the

customer base is reached

A searcher CEO has to understand play-

ing the field without tripping over his own feet.

“One of the first [challenges] for any searcher that becomes a CEO [is] not go-ing too fast,” says Chris Hendriksen of Franklin, Ohio, healthcare monitoring equipment maker VRI Inc. “You get into a business and you’re excited about the op-portunities and excited about the poten-tial, and you really want to grow the busi-ness. You end up focusing on sales and growth before you focus on how things work, how processes happen.”

He and partner Andy Schoonover bought the company for between $15 mil-lion and $30 million in October 2007 af-ter a 13-month search, using a $500,000 fund with 20 backers. The pair attribute their early struggles at VRI to a lack of understanding of how to properly market the company’s services, which mostly are targeted to seniors and people with dis-abilities or chronic medical conditions. Founded in Cincinnati in 1989, VRI has about 50,000 customers but spends less than 1% of its revenue on advertising. In-stead, the company built its customer base mainly through word of mouth over the past two decades.

“When you see zero dollars for adver-tising, you say, ‘Oh well, there’s an obvious channel for us to grow,’ ” explains Schoon-over. “You [need] to be able to understand the market well enough to deliver your message the way you need it to be deliv-ered to be successful.”

The two men say that they lacked the relevant marketing experience to sell their brands effectively, and in the first year stumbled with advertising. They at-tempted to market via Google AdWords, but say the initiative just wasn’t very ef-fective.

“That’s something that we probably failed at early on, but fortunately it didn’t cost us too [many] dollars,” says Schoon-over. “We learned from it quick.”

5 combat

logistical issues

Many searchers come from finance backgrounds—such as private equity or investment banking—and describe run-ning a company as a totally different ani-mal, requiring a contrasting set of skills. Grasping the microeconomics of the op-

eration, such as the logistics involved in shipping raw materials for product, can be tricky.

Luke Tashie, CEO of Yoforia LLC, learned this lesson when he acquired the frozen yogurt chain last year. Tashie closed a $455,000 fund (seeded by both Search Fund Partners and Pacific Lake) in July and purchased Yoforia in Novem-ber (he declines to disclose the price). The company makes all its products with organically grown materials.

“We put the clamps on our franchise program within about two months of starting because we saw that the logisti-cal issues were going to be too much and we wouldn’t be able to have fresh prod-uct like we want if we’re scattered across the country,” says Tashie.

Yoforia had three stores in Charlotte, N.C., around the time Tashie had ac-quired it. “I started peeling back the lay-ers, and the unit economics were really interesting,” he says.

Today the company generates about $10 million in revenue and has 170 em-ployees. As of June, it will have 18 stores spread across the Southeast. But the speed of growth has brought struggles related to sourcing fresh fruit and dairy products.

“We started an initiative with local strawberry farmers, as the season starts right now,” Tashie explains. “We’re work-ing with Stonyfield Farm, and we’re try-ing to work with Organic Valley on the milk side. They’ll pack the stuff up and send it to us, [but] trying to manage that is difficult.”

6 maintain good financial

controls and monitoring

Knowing what’s going on from a statisti-cal standpoint in a company is also vital for CEO success, says Troy Augustine, president and CEO of West Chester, Ohio, online tech community operator and Web-centric tech trade and event publisher iNET Interactive.

“There’s an old saying that one of my board members [uses]: ‘Is the business running you, or are you running the business?’” he says. “For every search funder, [on] day one, the business is

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running them. It’s just a question of how quickly you can flip that around.”

To do that, a CEO obviously has to know the amount of money that’s com-ing in and out at all times. Technology can help here. “In the short run, we put in place some rudimentary systems, Ex-cel-based, but it got the job done,” Au-gustine notes. “Over time, we automated many of those reporting systems so that we had a good set of dashboards.”

Augustine acquired iNET in October 2005 with a roughly $350,000 fund that closed in April 2004. While he wouldn’t disclose the size of the acquisition, Au-gustine says it was “a bit on the smaller side for a search fund deal.”

As a new executive, it’s fundamental to keep your eye on the accounting ball, Augustine says. “It’s a matter for me of determining what’s important and then putting some systems in place to keep an eye on those metrics.”

7 build a relationship

with the previous owner

Where the former owner fits in the com-pany picture, both during a searcher ac-quisition and when a new CEO takes the reins, can be a sore point at best and a fire to extinguish at worst.

“Set expectations early about what the relationship’s going to be like,” says VRI’s Hendriksen. “Have a backup plan if things go bad for what you’re going to do and how you’re going to exit that re-lationship. That’s something that’s true in this whole ‘change to a new CEO’ thing. It’s still a lot more about people skills and style and communication than it is about your M.B.A. skills of analytics and statistical analysis.”

Hendriksen and Schoonover explain that when they acquired VRI from the company’s founder, the former owner retained a stake in the operation and a spot on the payroll as well.

“There’s inevitably issues with de-cisions made that this person doesn’t agree with,” Hendriksen says. “There’s going to be issues where the seller says, ‘I don’t agree with you, and I’m going to make sure the employees know it.’ ”

He and Schoonover say that a partic-ularly awkward part of their negotiation

occurred when they were hammering out the acquisition terms. “Our selling CEO works for us and he’s our partner, so the conversation to have a work-ing capital adjustment with him was pretty challenging,” Hendriksen recalls. “There was a conversation to tell him he owed us dollars to shore up the deal and then it kind of followed that afternoon with a talk about how he thought we should work with a new customer.”

8 understand key

relationships

Businesses, even small ones, are in a sense machines with myriad compo-nents. The interpersonal relationships both within an operation and outside of it are important. First, a CEO must make an effort to meet and greet all employ-ees, or at least make some kind of visible appearance. Then, according to Pacific Lake’s Southern, the CEO has to estab-lish a good working relationship—and to the extent possible—a personal relation-ship with the two or three most critical people in a company.

Often, these are employees who don’t report directly to him. A top-producing sales representative or a delivery man-ager who commands a fleet of truck drivers who shuttle goods to and fro are two examples. Connections from the past, meanwhile, might come back to haunt a business.

Lawrence provides an example of the latter when buying SFL. “Six months before we bought the company, the guy we bought it from had split from his business partner, and there was no non-compete agreement. And so we tried to assess during our due-diligence phase how big of an issue this would be,” he remembers. “I think we just underesti-mated it.”

A fierce rivalry eventually surfaced as the old renegade owner managed to poach staff and sway customers from SFL. The drama culminated in a lawsuit filed in the middle of 2005 concerning an alleged unscrupulous use of a cus-tomer list. The suit was settled about nine months later. “They were con-stantly e-mailing, calling, sort of sowing seeds of doubt in the customers,” Law-rence says.

9 leave your ego

at the door

Search Fund Partners’ Carver says he’s seen some CEOs become reluctant to ad-mit they’ve run into problems running their new company.

“These are bright people, and they’re used to doing things kind of indepen-dently and on their own,” he says.

Carver says a CEO must have the judgment to recognize when he needs to reach out for help. “They’re not big enough where they can last through ma-jor mistakes,” he says of searcher compa-nies. “These companies generally have lots of cash but can get into trouble pretty quickly. You have to manage them very closely,” Carver notes.

He says most of the search fund fail-ures he has seen are the result of too much CEO ambitiousness, with the lead-er biting off more than he can chew or informing his backers too late after great damage has been done.

10 be persistent

Search CEOs often feel pressure to bail out of the endeavor and cut their losses. Lawrence recalls that when he and his partner were struggling to grow SFL Data, one backer was pushing them to quit.

“In 2006, 2007, we even had one of our investors say to us, ‘Guys, hang it up. Do you really want to do this?’ ” he recalls. “We know we’ve got quite a bit of money in this thing, but you’re young guys and it’s the prime of your life. You’re in your 30s.’”

But the two men maintained their fo-cus and willpower. “It actually feels real-ly good to look back to those early days,” Lawrence says. “People were ... wonder-ing if we were here for just a short haul. When the chips were down, we just dug in.”

Yoforia’s Tashie says leading a compa-ny is transformative, forcing a person to grow. “You have to mature really quickly,” he says. “There’s a lot of situations that you’re not going to want to deal with, but you have to. There’s nobody else for it to fall to. You’re CEO and chairman of a board.” n

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