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Term Sheet — Friday, March 4

When Private Equity Came to Alabama

Around 250 people lost their livelihoods last week, when a 20 year-old Alabama blood-testing company called Atherotech suddenly shut its doors. No warning. No severance. No real job placement assistance.

And now there is plenty of blame to go around.

Atherotech has been owned since late 2010 by Behrman Capital, a New York private equity firm that currently is investing out of a $1 billion fund. Not too many people outside of Birmingham paid attention to the original buyout ― which was financed by Chicago-based Madison Capital Funding and local lender Regions Bank ― likely because the company had just around $30 million in revenue and was eking out just $4 million in profit.

Behrman, however, had plans to significantly grow Atherotech, which held license to a proprietary direct measurement test for cholesterol. Within a few years, the company was experiencing 40% annual growth, with revenue hitting $120 million and profitability up to $14 million.

It was at this point, however, when Behrman made what now looks like a terrible mistake. The private equity firm executed a dividend recap, which basically means that it took cash out of the company by adding new debt. Again, both Madison Capital Partners and Regions Bank participated.

Behrman was betting that the company’s rapid growth would continue, or at least remain between 20% and 25%. And, even if things slowed a bit, the new leverage only put the company’s debt-to-EBITDA ratio at around 3.5x. Not as light as it would have been without the dividend recap, but still fairly conservative by private equity standards.

What Behrman’s model didn’t allow for, however, were a series of external industry events that severely ate into Atherotech’s bottom line. Nor that Atherotech would play an unwitting role in those events.

Sometime in 2013 or 2014, sources say that Atherotech was among several whistleblowers who brought concerns to the U.S. Department of Justice about a Virginia-based blood testing company called Health Diagnostics Laboratories Inc. Those alerts ultimately triggered an investigation that found HDL had basically been paying kickbacks to physicians in order to send blood tests to HDL. It became a full-blown scandal that resulted in HDL CEO Tonya Mallory’s resignation and a giant settlement with DoJ that resulted in HDL filing for bankruptcy protection.

While all of that should have theoretically benefited a rival like Atherotech, it instead caused federal regulators to begin paying much more attention to the overall industry (including to Atherotech in particular, although I’ve been unable to find any record of charges or settlements). Former company employees say that the number of regulatory notices began increasing substantially, costing countless employee hours and millions of dollars for legal and regulatory compliance.

“There was just this massive ripple effect throughout the entire industry and, unless you were a giant like LabCorp (LH), it took a major toll,” one source explained.

At the same time, insurers began lowering reimbursements for VAP tests, thus putting pressure on margins, and Atherotech experienced higher salesforce turnover than it had anticipated (in part due to what Behrman later determined was a poorly-structured compensation model).

By the middle of 2015, Atherotech was losing money. Behrman opted to invest $7 million of extra capital into the business, as part of a restructuring that also saw the introduction of a new CEO, Jim McClintic, who had led a previous Behrman portfolio company in the lab space (which later sold to LabCorp for $150 million). Madison Capital Funding extended an additional $3 million line of credit, but Regions Bank declined to increase its own exposure.

McClintic initiated several rounds of layoffs at Atherotech, which at its height had employed more than 300 people ― stripping out around 35% of costs. He also pushed forward on development with a pair of new tests that, if successful, could have lessened the company’s margin pressure. By Q4, however, the company remained unprofitable and in violation of its bank covenants. It hired Lincoln International to initiate a sale (the lenders were represented by Alvarez & Marsal), with around 50 potential suitors contacted. No acceptable bids emerged in November or December and, by January, Behrman itself offered to recapitalize the company with another $7 million in new equity.

Multiple sources say that Madison Capital Funding accepted Behrman’s proposal, but again Regions Bank ― which was responsible for around 45% of the existing $40 million credit facility ― declined. According to one source, Regions told Behrman and Madison that it would prefer a liquidation to the restructuring offer.

“Behrman and Madison arrogantly just assumed that Regions would do what they demanded,” says a former Atherotech executive. “And then Regions responded by acting like a petulant child, not seeming to care about all of the jobs that were at stake… Regions also put someone in Charlotte [Doug Smith] in charge of the negotiations, even though Regions is actually based in Birmingham. At the end some Birmingham people tried getting involved, but by then it was really too late.”

The same executive added that the debt burden, placed on Atherotech by the 2013 recap, “almost made the company like quicksand ― the more you struggle, the more it pulls you in.”

Two weeks ago, Atherotech held an all-hands meeting in which its CEO told employees that numbers were improving, but acknowledged the existential threat. One week after that, everyone received an email saying that it was over. Full-time employees with benefits were paid through last Thursday (including accrued PTO), but there was no money left for severance. Several employees were given contact information for employment agencies that the company had previously utilized, for the purposes of future job placement.

By close of business last Friday, Behrman resigned its board seats and turned the company over to its lenders. Papers were drawn up for a Chapter 7 liquidation but, as of yesterday afternoon, they had not yet been filed. My understanding is that it’s just a matter of time.

What’s particularly strange about Region’s push for liquidation, however, is that Atherotech’s primary asset cannot actually be sold. That would be its central technology, which actually was licensed from The University of Alabama. In a Chapter 7 proceeding, it goes back to the University. Outside of that the only remaining value is in receivables and an owed tax refund.

None of the three financial players agreed to comment on the record for this story. I asked Regions Bank repeatedly to speak with Doug Smith, but was rebuffed.

“A couple weeks ago I thought the company could be saved, that Behrman and Madison would be able to keep the doors open,” says a laid-off employee. “Now I’ve got a job interview on Monday and am keeping my fingers crossed.”

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• Old Normal: Last summer, First Round Capital took the highly unusual step of publishing its quarterly letter to limited partners. At issue was the tech bubble, and if it would soon burst. It didn’t take a frmal position, but did argue that too few VC firms are considering how increased entry prices must be accompanied by similarly increased exit prices, or else returns will suffer.

Today, First Round again is publishing quarterly LP letter. This time it argues that the recent funding and valuation pullback is not a “temporary blip.” It argues that this is a correction of public vs. private market dislocation, which last year was analogous to minor league players refusing call-ups because they’d make less money in the big leagues. In short, a return to the ‘old normal.’

Read the entire letter by going here.

• Have a great weekend…

THE BIG DEAL

• H.I.G. Capital has agreed to acquire the Quicken personal finance software business from Intuit (Nasdaq: INTU). No financial terms were disclosed. Read more.

VENTURE CAPITAL DEALS

• Snapchat has raised $175 million in new funding from existing investor Fidelity, according to the WSJ. Read more.

• Mapillary, a Sweden-based photomapping platform, has raised $8 million in Series A funding. Atomico led the round, and was joined by Sequoia Capital, LDV Capital and Playfair. www.mapillary.com

• Comparably, a platform that provides compensation data for public and private companies, has raised $6.5 million in funding led by Crosslink Capital. Read more.

• LTG Exam Platform, a Boston-based developer of mobile apps for standardized test preparation, has raised $5.325 million in Series A funding led by Square Peg Capital. www.ltgexam.com

• Exo, a New York-based startup that is “developing insects as an alternative protein source,” has raised $4 million in Series A funding. AccelFoods led the round, and was joined by Collaborative Fund and individual angels like Tim Ferriss and Nas. www.exoprotein.com

• Phenom People, a Philadelphia-based provider of talent relationship marketing, has raised $2.7 million in new Series A funding led by Sigma Prime. The round total is now $7.6 million, including a prior tranche led by Sierra Ventures. www.phenompeople.com

• OrthoFi Inc., a Wayne, Penn-based provider of practice financial management software for orthodontists, has secured an undisclosed amount of funding from Boathouse Capital. www.orthofi.com

PRIVATE EQUITY DEALS

• Ankura Consulting Group, a Dallas-based business advisory and expert services firm, has secured a $100 million growth equity commitment from Madison Dearborn Partners. www.ankuraconsultinggroup.com

• Inmark Packaging, an Austell, Ga.-based distributor of rigid container and life sciences packaging, has raised an undisclosed amount of private equity funding from Quad-C Management. www.inmarkpackaging.com

• Investcorp has acquired a majority equity stake in The Wrench Group, a provider of home maintenance and repair services. No financial terms were disclosed. Sellers include Alpine Investors, Skylight Capital and company management. www.thewrenchgroup.com

• Vista Equity Partners has completed its previously-announced take-private acquisition of Solera Holdings, a Westlake, Texas-based provider of risk management software to insurers, for approximately $6.5 billion (including assumed debt). The $55.85 per share deal represented a 53% premium over Solera’s closing price on August 3, which is when public talk of a deal first surfaced. www.solerainc.com

IPOs

• Line Corp., a South Korean messaging app provider, is prepping a $3 billion dual flotation in New York and Tokyo, according to IFR. The company had scrapped plans for an earlier IPO last year. Read more.

EXITS

• The Carlyle Group has hired Credit Suisse to find a buyer for Zodiac Pool Solutions, a Vista, Calif.-based maker of swimming pool and spa equipment, according to Reuters. A sale could be valued at around $800 million, including debt. Read more.

• Perseus Books Group, a New York-based book publisher owned by Centre Lane Partners, has agreed to sell its client services business to Nashville, Tenn.-based Ingram Content Group. No financial terms were disclosed. Earlier this week, Perseus announced plans to sell its publishing arm to Hachette Book Group. www.perseusbooksgroup.com

OTHER DEALS

• AMC Entertainment (NYSE: AMC) has agreed to acquire Carmike Cinemas (Nasdaq: CKEC), a Columbus, Ga.-based movie theater chain, for $737 million in cash (or $1.1 billion, including assumed debt). The $30 per share deal represents a 19% premium over Carmike’s closing stock price on Thursday. .

• Docker, a San Francisco-based open-source data platform, has acquired stealthy orchestration startup Conductant. No financial terms were disclosed. Docker has raised over $180 million in VC funding, most recently at a $1.1 billion valuation. Read more.

Virtusa Corp. (Nasdaq: VRTU) of Massachusetts has acquired the outstanding shares of Polaris Consulting & Services Ltd., an India-based consultancy focused on the global financial services sector. The deal is valued at nearly $166 million. www.virtusa.com

FIRMS & FUNDS

• Hummer Winblad Venture Partners is raising up to $125 million for its seventh fund ― its first not to feature co-founders John Hummer or Ann Winblad among the general partners. Instead, Hummer and Winblad are now referred to on the firm’s website as “founding partners,” while the SEC document lists Lars Leckie, Mirtchell Kertzman and Steve Kishi as partners. www.hwvp.com

MOVING IN, ON & UP

• Goldman Sachs plans to lay off more than 5% of the traders and salespeople in its fixed income unit, according to Bloomberg. Meanwhile, the same story reports that BofA Merrill Lynch next week plans to lay off around 150 traders and investment bankers. Read more.

• Jean Michel has joined Caisse de dépôt et placement du Québec as an executive vice president. He previously was president of Air Canada Pension Investments. www.cdpq.com

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