Veritas Capital Loads BlackBerry Offer, Subway Accepts Roark Buyout, KSL to Acquire Luxury Hotel Operator

Insights

Chart of the Week: Similar to buyout activity, exit activity in North America has also skewed heavily toward Technology deals. The Technology sector accounted for 22% of all exits in North America last quarter, although this was down from 31% in Q2 2022. Industrials have also been strong for exits recently, accounting for 21% of all PE exits in North America last quarter. (Read More)

Recent Reports

• North America Private Equity Report: Q2 2023
• Private Equity Exits Report: Q2 2023
• Private Equity Buyouts Report: Q2 2023

Deal News

Roark Capital has agreed to acquire the U.S. sandwich chain Subway in a deal potentially valuing the company at $9.6 billion, contingent on Subway's financial performance. The acquisition concludes an extensive auction process initiated in February. The full deal price is contingent on Subway achieving specific financial milestones over two years or more post-closing; otherwise, the acquisition's value is $9.0 billion. Such earn-out structures are becoming increasingly popular in the M&A sector to bridge valuation gaps. This structure helped reconcile valuation differences between Roark and Subway's owning families, the DeLucas and Bucks. The families had hoped for a valuation above $10 billion, citing Subway's international growth, but private equity firms valued it lower due to its perceived saturation in the U.S. market. Roark successfully outbid TDR Capital and Sycamore Partners and agreed to a break-up fee if antitrust concerns halt the transaction. The deal also entails potential competition concerns since Roark owns rival chain Jimmy John's. Tax considerations played a role in Subway's decision to sell, especially after co-founder Peter Buck's passing in 2021 led to his 50% stake being donated to a philanthropic foundation, providing tax benefits. Subway, founded in 1965 and experiencing a recent sales growth surge, has been undergoing operational changes, with attempts to update its branding, menu, and move away from small franchisees. (Source)

Veritas Capital is considering a buyout offer for technology-maker BlackBerry Ltd. Following this news, BlackBerry's shares jumped 17%, last Friday reaching a market value of $3.1 billion. The specifics of the deal are not yet disclosed. BlackBerry, once known for its smartphones, now focuses on car software and cybersecurity. The company is also in discussions with other potential buyers and is looking to sell its legacy smartphone-related patents. Morgan Stanley and Perella Weinberg Partners are advising BlackBerry on a sale. (Source)

Private equity firm KSL is set to acquire Hersha Hospitality Trust, owner of 25 U.S. luxury and lifestyle hotels, for about $1.4 billion in cash, reflecting a 60% premium on Hersha’s recent stock price. The deal is anticipated to close by the year's end, subject to shareholder approval. Hersha's portfolio includes prominent hotels in urban locations, such as the Hyatt Union Square and The Ritz-Carlton Georgetown. This acquisition emphasizes the growing appeal of lifestyle hotels and the continued interest of private equity in the hotel sector, especially against the backdrop of changing post-pandemic commercial real estate dynamics. KSL has a history of investments in the travel and leisure sector, recently buying a stake in Asia-based Soneva Holdings. (Source)

Private equity firm PAI Partners is set to acquire pet food manufacturer Alphia Inc from J.H. Whitney Capital Partners in a deal reportedly valuing Alphia at around $1 billion, inclusive of debt. Alphia, based in Denver, Colorado, was established from the merger of C.J. Foods Inc and American Nutrition Inc in 2020. It also owns LANI, a milling solutions firm, and Veracity, a warehousing and logistics company. The pet food industry has seen robust acquisitions lately due to global pet food shortages and supply chain issues. PAI Partners, managing approximately $27.12 billion, has been expanding its presence in the U.S., with key hires like Maud Brown and Winston Song to lead efforts. The firm has a history in the food and beverage sector, recently acquiring brands like Tropicana from PepsiCo for $3.3 billion in 2021. Advisors for the deal included Goldman Sachs, Gibson, Dunn & Crutcher LLP, and Weil, Gotshal & Manges. (Source)

Australian Venue Co (AVC), which operates numerous hotels and bars in Australia, is set to be acquired by PAG Asia Capital for approximately $1.4 billion. The deal was initiated after a strategic review that started nearly a year ago. PAG managed to secure substantial support from various commercial and investment banks, borrowing $900 million. Despite the acquisition, AVC's current management team will remain intact, with the company projected to make $195 million in adjusted earnings this year. PAG has recently expanded its footprint in Australia's food sector, acquiring Patties Foods and Chargrill Charlie's. AVC, which operates 210 venues across Australia and New Zealand, was majority-owned by KKR since 2017. (Source)

IBM is set to sell its weather assets, including consumer platforms of The Weather Company, to private equity firm Francisco Partners. IBM will retain its sustainability software but will continue using The Weather Company's data for environmental insights within its Watsonx AI platform. This move aligns with IBM's ongoing transformation towards a hybrid cloud and AI focus. Previously, The Wall Street Journal suggested the deal could be worth over $1 billion. After a recent revenue dip, IBM is concentrating on its cloud services, highlighted by its $4.6 billion purchase of Apptio. The sale is anticipated to be finalized in early 2024, subject to regulatory approval. (Source)

Tiger Global has offloaded its remaining shares in Indian food delivery giant Zomato for $136 million. The firm sold 123.5 million shares to Morgan Stanley Asia Singapore, Kotak Mahindra Mutual Fund, Societe Generale, and BNP Paribas Arbitrage Fund, and others. Tiger Global's involvement with Zomato began in 2020 and grew when Zomato acquired the grocery-delivery startup Blinkit, granting Tiger Global additional shares. Notably, Tiger Global had reduced its Zomato holdings previously in August 2022. Zomato recently reported its inaugural profit, buoyed by tax benefits and robust demand in its food and grocery delivery segments. The company's stock, showing a 56% growth this year, rose by 1.5% on Monday. (Source)

Industry News

Buyout firm TPG has recruited Flavio Porciani from competitor Warburg Pincus to spearhead its technology investments in Europe under the TPG Capital buyout strategy. This move comes amidst growing investment opportunities in the region, especially in corporate carve-outs. London-based Porciani, who previously worked with Searchlight Capital Partners and Blackstone before joining Warburg Pincus in 2016, comes to TPG during an active period for the company. Among TPG's recent deals is the investment in legal-tech firm Elite, a carve-out from Thomson Reuters, valued at $2.45 billion. (TPG)

The U.S. Securities and Exchange Commission (SEC) is set to approve the Private Fund Advisers rule, significantly different from its initial version proposed 18 months ago, marking a win for private equity lobbyists. Initially aimed to be a groundbreaking regulation for the private equity sector, the rule's objective has now shifted. In essence, while the SEC intends to enhance investor protection, the private equity industry counters that its agreements already cater to informed investors. The rule mandates quarterly financial statements for investors, covering fees and annual audits. Changes have been made regarding GP-led secondaries and a "prohibited activities rule" has morphed into a "restricted activities rule." Most actions are now permissible with investor disclosure. Notably, the rule didn't amend the private fund liability rules, potentially making it challenging for limited partners to take legal action against general partners. (SEC)

Lexington Partners is aiming to raise $4 billion for its sixth co-investment fund, a 25% increase from its previous one. The Minnesota State Board of Investment has already committed $300 million. Lexington's earlier fund from 2021 accumulated $3.2 billion and has shown a 21% net internal rate of return as of March 2023. The firm oversees over $64 billion in assets. After being acquired by Franklin Templeton in 2022, this is Lexington's first co-investment fund initiative. The current market trend indicates a reduction in co-investment deals, with rising interest rates necessitating more equity for acquisitions. (WSJ)

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