San Diego, CA - January 28, 2008

Bainbridge Featured in Financial Week Article

By Matthew Quinn

With the crash of the credit markets, all expectations turned from buyout shops to strategic corporate buyers to make deals. However, armed with a stable of portfolio companies, private equity firms can also play the part of strategic buyer, a role they are increasingly expected to embrace.

Earlier this month, buyout behemoth Blackstone Group, along with Wellspring Capital Management, agreed to acquire Performance Food Group for $1.3 billion, one of the larger take-privates in recent months. The price of $34.50 for each share of Performance stock represented a more than 40% premium to the closing share price the day before the deal was announced. Such a hefty price was likely more palatable because Performance will be combined with Vistar Corp., a food service distributor, which Blackstone bought a 67% stake in from Wellspring in September in a deal valued at $420 million.

There is only so much a company can be improved through increased operational efficiencies, and only so much a private equity firm can milk from added leverage (though that can be quite a lot). Companies need to grow to add value, and opportunistic acquisitions can achieve that for portfolio companies just as well as they can for others.

"It's always been an objective of ours when we can to turn ourselves from a financial buyer into a strategic buyer by making acquisitions by a portfolio company," said Peter Gottsegen, a managing partner with private equity firm CAI Managers.

Private equity firms sometimes make acquisitions with the explicit purpose of using them as a platform for add-on deals. For example, in December, buyout shop Oak Hill Capital agreed to buy eight TV stations from News Corp. for $1.1 billion. Those stations will be put under the Local TV holding company that Oak Hill formed last January to acquire nine TV stations from the New York Times Co. for $575 million. Also in December, Local TV inked a deal to manage 23 stations owned by Tribune Co. Voilà. Instant broadcast company with 40 stations in its stable.

Portfolio companies were faced with the same hurdles as other corporate buyers amid the record-setting M&A activity of the past two years, where sellers fetched historically high valuations thanks to easy credit terms for leveraged buyouts.

Even so, private equity pros said that add-on acquisition activity, which is difficult to track, has been steady if not strong in recent years, but more deals could be on the way as larger deals become harder to get done, forcing firms to look for opportunities to build their businesses in the meantime. And with the advantage at the bargaining table shifting toward the buyer, deals are starting to look even more enticing.

"I expect to see more bolt-on acquisitions that were not possible before mainly because of the valuations, not the availability of credit," said Nick Chini, managing principal at boutique M&A advisory firm Bainbridge. "In the small-cap sector, credit is out there."

Mr. Chini said that a few sectors could see a significant pickup in add-on acquisitions, including health care, food and beverage, commodity-backed products and the industrial sector.

Add-on deals, in a difficult lending environment, are simply easier to swing. "If you've got an existing portfolio company that already has financing doing smaller add-ons, where you put in some equity and just borrow more on your existing credit facilities, that's easier than going out and finding new financing," said Christopher Hagan, a partner in law firm Goodwin Procter's private equity group.

Credit tightening has had a profound impact on some firms' exit strategies, adding to the momentum for add-on deals. Mr. Hagan said that he has one client that was looking to unload one of its portfolio companies, but pulled out of the sales process because of market conditions. In turn, knowing that it was now facing a longer hold period, the company shifted gears and instead started doing some add-on acquisitions.

"They just felt they weren't going to get the right price right now, but have found some very attractive growth opportunities," he said. FW

This article can be found online at: http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080128/REG/987994761/1036