Where's the Debt?

April 15, 2008

At first glance, the announcement of Norwest Equity Partners’ acquisition of Shock Doctor last week looked like a run-of-the-mill transaction. However, upon closer inspection, I discovered the Norwest/Shock Doctor deal was anything but routine. The deal was financed exclusively through Norwest’s working capital line, Norwest’s equity and through Shock Doctor’s management team, which means no term or mezzanine funding was involved. In a recent interview with Avram Davis, a writer for MergersUnleashed, Norwest Principal Todd Solow explained, “We wanted to be able to provide certainty to close to the client, and this was the best way to do it.”

To be sure, the Norwest acquisition isn’t the first deal of its kind, and the market has seen some larger players get creative with their financing and deal terms, including the recent WL Ross deal to purchase H&R Block unit Option One Mortgage Corp. for about $1.1 billion outright. The transaction is expected to close by May 30. However, Norwest’s Shock Doctor deals is one of the few deals in the middle market that I have seen close without financing terms. As credit markets continue to remain tight, I suspect we will see more and more of these deals taking place.

Closing deals with little to no financing definitely changes the landscape. Private equity firms now have to make certain they are buying companies with strong but achievable growth projections, which will mean certain sectors will come into favor while others fall out of favor. Also, without financing terms there is little to no room for error. That said, with financing tight and PE firms still having to put cash to work, you can expect to see more of these deals.