New Breed of PIPE Deals Emerges|
Matthew Sheahan &
Private Investments in Public Entities (PIPEs) might not be
skyrocketing, but they're certainly staying on level, if not getting a
little more play. Since the beginning of 2003, Warburg Pincus and Apax
Partners, have made big investments in the sector.
Warburg Pincus first demonstrated its faith in the public markets, by
agreeing to invest in Wellman Inc.'s (NYSE: WLM) $125.4 million PIPE deal.
Once Warburg Pincus' transaction into the polyester manufacturer is
complete, it will be the third largest PIPE deal so far in 2003.
The Wellman deal is expected to come in just behind the $200 million-plus
private investment in XM Satellite Radio Holdings and a $250 million
investment in clothing company Phillips-Van Heusen(NYSE: PVH).
In mid-January, BayStar Capital announced the closing of its second
investment in XM Satellite Radio, which provides radio broadcasts
transmitted by satellite. The transaction consisted of $200 million in new
capital from strategic and financial investors, including BayStar Capital,
and $250 million in payment deferrals and related credit facilities from
General Motors, which will install XM Radios in 44 (75%) of its 2004
models. The new funds component will be increased to $225 million by
virtue of the investment round.
PIPEs, which are usually between $10 million and $20 million, are more
increasingly becoming much larger, says to Lawrence Goldfarb, a general
partner with BayStar Capital and contributor to the upcoming book PIPEs, A
Guide to Private Investments in Public Equity. He adds that larger deals
are a new part of the PIPE landscape, but not because they are less-risky
investments, but because of their strategic value. "Strategic buyers
want to have a strategic relationship with the companies and that becomes
more important than a gain or loss," Goldfarb says, citing his firm's
participation in the XM Satellite Radio deal, which featured strategic
investor Hughes Electronics, in addition to General Motors.
In the largest PIPE deal done thus far this year, Apax Partners provided a
$250 million equity investment in Phillips-Van Heusen Corp. Lehman
Brothers acted as the broker-dealer. Apax Partners has also provided
financing of up to $125 million, pursuant to a two-year secured note.
Phillips-Van Heusen used the funding to acquire Calvin Klein Inc. for $430
million in cash and stock.
"The PIPE market is on pace to pretty much match the activity levels
of last year. Last year, the market slowed quite a bit from levels seen in
2001 and 2000," says Robert Kyle, executive vice president, PlacementTracker,
a company that tracks PIPE deals. Additionally, according to PlacementTracker
the total value of PIPE deals in 2002 slipped to $11.62 billion, down from
$13.9 billion and $21.46 billion in 2001 and 2000, respectively. So far
this year, 54 PIPE deals have closed, with an aggregate value of $1.1
Warburg Pincus has been one of the largest and most active PIPE investors
since 1995. Other most active PIPE investors this year to date include
BayStar Capital, Cornell Capital Partners, DMG Advisors, Domain
Associates, Kingsport Capital Partners and Staro Asset Management.
Michael Littenberg, an attorney with Schulte Rogh & Zabel who works
extensively with private equity transactions, sees PIPE deals becoming
increasingly popular in 2003. "My view is that this will be a good
year for PIPE deals given how difficult it is for companies to make money
through traditional offerings."
Venture capital firms flush with large funds are finding themselves drawn
to PIPE deals, which are generally more capital intensive than venture
capital rounds. "There has been a shift over the last year and a half
as investment opportunities for venture firms have started to dry up and
they have more capital to deploy," says Littenberg.
The early numbers for 2003 though, may be skewed by the large deals. Most
PIPE deals are between $10 million and $20 million. "The PIPE
universe as far as what deals look like varies greatly," says
Littenberg. "What really tends to be the determining factor is the
size of the fund and the stage of the investment."
He adds that hedge funds, general private equity firms and larger,
later-stage venture firms are more likely than early-stage VCs to invest
in PIPEs. "It's less risky than early-stage investments where they
may not be an exit strategy. Also, given the perceived lack of investment
opportunity in later stages, PIPE deals help to fill that void," says
PIPEs also present a lower level of risk for firms accustomed to the
high-risk stakes in venture capital. Because PIPEs are public companies,
there is a well-documented track record of company performance that an
investor can hedge its bets on. Also, PIPE investors receive stock that is
heavily discounted. Companies receiving PIPE funding benefit because
reporting the transaction is not required until after the transaction
closes. In a traditional secondary offering, the shares are reported
before they are sold, avoiding more expensive SEC filing fees.
"It seems to have become very popular these days," says Goldfarb.
"First and foremost, because the capital markets are pretty much shut
down even good companies need cash and there's no place to go to get it. A
lot of companies have hit the wall. Most companies went this route in the
beginning because they had no other choice. Now they understand them and
can get them done."