PE: which door is marked ‘exit’?

by Brenon Daly, Jason Schafer

After chalking up some 17 purchases under the ownership of a private equity (PE) consortium, ViaWest has been bought by another PE firm. Oak Hill Capital Partners will pick up the 11-year-old managed hosting provider, which currently operates 16 datacenters and counts 1,000 customers. Although financial details of the transaction were not disclosed, we estimate the purchase price at around $420m. That works out to about 4.2 times trailing revenue and about 10 times cash flow for ViaWest, according to our understanding. (My colleagues at Tier1 Research estimate that roughly 70% of ViaWest’s revenue comes from its colocation business, with the remaining 30% coming from managed services.)

The deal, which should be completed this quarter, caught our eye because it is yet another recent sponsor-to-sponsor transaction that we estimate is valued in the hundreds of millions of dollars. Almost exactly two months ago, Francisco Partners flipped RedPrairie to New Mountain Capital for what we understand was roughly the same price as ViaWest. The sale of the supply chain management vendor came even though it had filed a few months before that to go public.

While there’s certainly nothing wrong with buyout shops swapping assets, it’s hardly the sign of a healthy exit environment for PE firms. Of course, there is one gigantic counterpoint to that: NXP Semiconductors, owned by Bain Capital and KKR, filed last week to sell $1.15bn worth of shares on the NYSE. The buyout tandem picked up the chip maker in 2006, when it was spun off of Royal Philips Electronics. We’re certain that a lot of fellow financial buyers, which also took home chip companies during the LBO boom in 2006-07, will be following NXP’s offering very closely.