Private Equity Redux: CompuCom Acquired For $628 Million

Court Square Capital Partners, a 30-year-old New York private equity firm that focuses on the midmarket, and its IIM Acquisition Corp. affiliate said they expect to close the deal for Dallas-based CompuCom Systems before the end of the year. For 2006, CompuCom reported annual revenue of $1.5 billion, down slightly from 2005. That $1.5 billion annual sales mark is the same as when the solution provider, which has moved aggressively from hardware sales into services, was acquired by Platinum Equity.

A source close to Court Square Capital Partners said the private equity player expects to make further solution provider acquisitions with CompuCom as an anchor tenant.

"Platinum made a shrewd investment," said one top VARBusiness 500 CEO executive, who did not want to be identified. "They got in at the right time and it looks like they are getting out at the right time. It's like any other investment. There is a price that anyone will sell at. They obviously got their price."

The VARBusiness 500 executive said he expects to see a continued high level of interest from private equity players in solution providers. "This is just the start," he exclaimed. "Private equity started big with CompuCom and CDW. But this is the beginning of a period of financial rollups in the channel. Private equity money has opened its eyes to the value of solution providers that have valuable businesses."

Another CEO of a large national solution provider, who did not want to be identified, said the deal is an indication that solution provider valuations are at an all time high. "This is a validation of the solution provider business model," said the executive. "Demand for IT companies is at an all time high right now."

CompuCom CEO Jim Dixon and CompuCom CFO Mike Simpson were unavailable for comment. But a CompuCom spokesperson said Dixon told the company's 7,400 employees that it is business as usual. Top CompuCom management will remain in place, the spokesperson said. She said CompuCom does not expect layoffs as result of the deal.

The spokesperson said Court Square actually approached Platinum Equity. "This is a compliment to us and our efforts," said the spokesperson. "The ultimate goal is to take CompuCom to the next level."

The CompuCom Systems transaction will be financed through a combination of equity contributed by investment funds managed by Court Square and certain members of management, and debt financing provided by Bear, StearnsCo. Inc.

Private equity transactions, which are financed by taking on debt, are taxed in the 10 percent to 15 percent range vs. what can be more than 30 percent for corporations.

In connection with the deal, CompuCom intends to make a tender offer to purchase for cash any and all of its outstanding 12 percent senior notes due 2014. Furthermore, CHR Intermedia Holding Corp., another subsidiary affiliated with Platinum affiliate CHR Holding Corp., intends to make a tender offer to purchase for cash any and all of its outstanding Senior Floating Rate Toggle Notes due 2013.

CompuCom was acquired by Platinum Equity in October 2004 for $254 million. One month later, CompuCom and Platinum acquired GE IT Solutions for an estimated $250 million.

Last year, of CompuCom's $1.5 billion total revenue, $735 million came from hardware and hardware-related configuration services. That was down slightly from 2005 due primarily to a decline in hardware revenues. Nevertheless, gross margins surged for the year.

Across the CompuCom business units in 2006, outsourcing service margins grew 19 percent year over year, application services jumped 16 percent, software grew 11 percent, professional services margins were up 3 percent and hardware increased .2 percent. While the increase in hardware margins was scant, the growth marked the end of a long slide.

Bear StearnsCo., Inc. acted as financial adviser and Dechert LLP is acting as legal advisor to Court Square. Bingham McCutchen is acting as legal adviser to CompuCom and Platinum Equity.