A brand name CEO on the hunt for a big deal, an investment bank in need of new ways to generate fees and a private equity giant with an over-leveraged industrial company searching for new equity capital to tamp down its leverage. Welcome to Goldman Sachs’s new leveraged buyout foray.
On Tuesday morning, Goldman Sachs Acquisition Corp., a publicly traded vehicle the investment bank created alongside former Honeywell CEO David Cote unveiled a deal to take control of Vertiv, an industrial specialist that cools data centers, from billionaire Tom Gores’ private equity firm Platinum Equity Partners. The so-called special purpose acquisition company is the first in Goldman’s history, and after getting Cote on board as executive chairman, the vehicle raised $690 million from public investors in June 2018 with the goal of striking a major acquisition. A phalanx of Goldman dealmakers led by former investment banking head John Waldron then helped Cote study some 500 companies, meeting weekly in search of the right company to buy. Supporting the effort was a commitment from Goldman to raise additional capital from its high-net-worth and institutional clients in order to complete a compelling deal.
As Goldman and Cote combed through targets across the industrial sector, private equity firm Platinum Equity Partners was stuck in its 2016 deal to carve Vertiv out of Emerson Electric for $4 billion. The PE firm had loaded Vertiv with billions in debt, some of which was used to pay a $400 million-plus dividend to itself and to roll up competitors. By mid-2019 it’s debt pile was $3.6 billion, its bonds were trading at below 95-cents on the dollar and owned ratings deep in junk category at Caa2 due to leverage of 7.5-times EBITDA. Credit analysts expected free cash flow would be negative through 2020.
Goldman’s bankers decided their SPAC, led by Cote, one of the industrial sector’s top-performing CEOs during his 15-year reign atop Honeywell, offered a solution. This summer, Goldman’s bankers and Cote flew to Platinum’s Equity’s ornate headquarters in a Beverly Hills mansion with the goal of buying Vertiv from the private equity firm, according to two sources. Months later, the deal, dubbed “Project Crew,” came to fruition.
Tuesday’s combination is a watershed for Goldman and Cote. The SPAC they created will use its $690 million to buy 20% of Vertiv from Platinum. A further $1.2 billion raised by way of public investment in private equity Goldman assembled with its clients will own 37% of the company. Platinum Equity will receive over $400 million in cash and roll 75% of its existing equity into the new company, owning 38% of it. Cote and Goldman will further own 5% of the company with a one-year lockup, and the kicker for the investment bank is it will earn a $50 million fee for getting the deal done. Vertiv will also be will be listed on the New York Stock Exchange.
Vertiv sells condensers, chillers, IT racks and power distributors, and monitoring control software and analytics to data centers, principally to keep them cool enough to keep running. Despite its leverage, Vertiv is a giant in the growing industry, operating in 130 countries and generating $4.3 billion in sales from customers such as Amazon, Google, Equinix, AT&T, Verizon Tencent, Vodafone and China Telecom. Thus Cote will oversee a compelling canvas from which he hopes to consolidate the sector, as he did with Honeywell. During his 15-year tenure, Cote oversaw hundreds of generally niche deals that transformed Honeywell from a $20 billion company to one with a market cap exceeding $100 billion.
Cote tells Forbes Tuesday’s acquisition fits his strategy to a tee. He targets businesses with secular tailwinds, such as data centers that are enjoying 20%-plus annualized traffic growth but that have some operational wood to chop. In the case of Vertiv, debt-funded dividends and lukewarm execution of a rollup strategy put the balance sheet in need of repair. The deal is expected to help Vertiv cut leverage nearly in half, repairing its credit. The company’s bonds skyrocketed above par as reports of the deal leaked in December.
Cote also believes Vertiv is operating below its potential. “This company is like two-to-three years along the 15-year path that Honeywell was on,” he says. “The foundational work is done, and there is a lot of upside possible if you can get the operations right.” Areas of focus for Cote will be price increases, wrenching out better performance from Vertiv’s salesforce, and a focus on growing high-margin software and digital services through investment or acquisitions.
About Tuesday’s deal, Platinum Equity billionaire Tom Gores said in a statement: “David Cote will bolster an already strong leadership team and with this transaction Vertiv is well-positioned to execute on the many opportunities ahead.”
The SPAC is also meaningful to Goldman beyond the hefty one-time fees it will generate.
When Cote and Goldman formed the partnership, Forbes argued it would be a good test of how the investment bank could link its deep relationships with corporate chieftains and important sources of capital like its high-net-worth clients to create unique businesses and make money. The $1.2 billion PIPE Goldman arranged is one of the biggest ever raised, indicating there was high demand for concept the investment bank had assembled. Goldman’s PIPE and SPAC clientele now own a scaled business in a favorable industry tied to trends such as big data, digital commerce and cloud computing. Well-regarded Cote is executive chairman, a brand-name buyout firm is heavily invested, and the deleveraging is almost instant.
The deal also comes at an interesting time. So called SPACs are being raised at a frenetic pace not seen since before the financial crisis, the Wall Street Journal recently reported. However, SPACs from that era did poorly, and the asset class is notorious for separating investors from their hard-earned money. SPACs have also historically come to the market with little comparative advantage, generally sourcing deals at auctions where the winning bidder must outpay corporate buyers and leveraged investors like private equity firms.
Goldman and Cote are hoping the SPAC will differentiate itself.
Instead of outsourcing work to investment bankers and fighting off PE buyers at auction, they’ve made the dealmaking proprietary and their offering of new equity capital may be well timed. Public stock markets are fickle and traditional IPOs have been a tough slog recently, with only fast-growing and cash generating e-commerce companies and software firms with gargantuan margins and recurring sales standing out. But PE shops have never been more loaded with highly leveraged companies in need of an exit. Duds like ADT’s IPO flop and Albertsons pulled public offering are numerous. Thus the new vintage of SPACs, loaded with cash and already listed on public markets, may be appropriate for a time when throngs of private equity deals are in need of equity and a public currency. At least that’s what Goldman and Cote hope.
“For me, this is one of these deals that totally changes the image of what a SPAC is and what it can become,” says Cote. “I think this is going to be one of those defining deals.”