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Why M&A Deals Have Roared Back

North Texas mergers and acquisitions have gotten past a lengthy dry spell, thanks in part to cheap debt and an improving economy.
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Large Deals ($150 Million to $999 Million)


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Hostess Brands Inc.
Imagine you run a business with more than $2.5 billion in revenue, 18,500 employees, and iconic brands like Twinkies and Wonder Bread. How bad could things be, right?


In the case of Irving-based Hostess Brands Inc., the answer was: pretty darn bad.
Despite emerging from bankruptcy in 2009, Hostess was saddled with problems ranging from high pension fund costs to excessive debt, says Bob Medlin, senior managing director in Dallas for FTI Consulting, a Hostess adviser.


According to David Rush, senior managing director in Houston for FTI, that resulted in the company burning through $250 million in cash between 2009 and 2012. Hostess’ highly unionized employee base had hard-to-manage work rules that, for instance, prevented drivers from delivering Twinkies and Wonder Bread on the same truck, Rush says.


Things came to a head in November 2012, when a bakers’ union called a strike after talks on wage, benefit, and pension concessions fell through. Hostess shut down and re-entered bankruptcy, leaving the question: What would happen to the Twinkie?


Hostess and its advisors, including FTI Consulting, opted to auction the company in pieces, raising a total of nearly $1 billion, more than twice the highest bid that Hostess had received before re-entering bankruptcy.


The end result: After the asset sales closed, some plants re-opened within 30 days, and most cake and bread brands were back on the shelves within 60 days. (The business is now based in Kansas City, and operates under the name Hostess Brands LLC.)


“The company’s thriving,” Rush says. “They’re actually hitting a much larger customer base than ever before.” —J.B.



Mega Deals ($1 Billion-plus)


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AMR, US Airways Group
Having spent 29 years in the airline industry, Gary Kennedy was accustomed to challenges. As the senior vice president, general counsel, and chief compliance officer at Fort Worth-based AMR Corp., Kennedy had seen 9/11, fuel-price crises, and financing crises.


But even by that standard, this was bad.


AMR, the parent of American Airlines, was in Chapter 11 bankruptcy, a twisted mess of problems ranging from high labor costs to overcapacity on flights, all undercut by American’s relatively smooth-operating Dallas rival, Southwest Airlines.


AMR needed a merger partner—fast. And then the seemingly miraculous happened. AMR not only found a dance partner in Arizona-based US Airways Group, but also managed to persuade a seemingly endless series of parties that it was making a good deal. That included the bankruptcy judge, the U.S. Justice Department, state attorneys general, the U.S. Transportation Department, and various labor groups.


The $17 billion deal resulted in the world’s largest airline being based in Fort Worth. The new entity, American Airlines Group Inc., has more than 100,000 employees across the globe, including 24,000 in North Texas.


“It was touch and go at times,” admits Kennedy, who retired in December. “Of all the years I’ve practiced law [and worked in the airline industry], it was the single most challenging project I’ve worked on, and intellectually the most fascinating.” —J.B.



Baylor Health Care System, Scott + White Healthcare
Spurred by looming enactment of the Affordable Care Act, officials from Dallas-based Baylor Health Care System and Scott & White Healthcare in Temple began working two years ago to hammer out a merger agreement that would create a powerhouse that could thrive in the rapidly changing healthcare environment.


The two systems had worked together on various efforts including the Healthcare Coalition of Texas and the Texas Care Alliance. “Our CEOs jointly agreed that we have similar goals and values … and would be better positioned to achieve those goals together,” recalls LaVone Arthur, a vice president at Baylor Health Care System when the plans to cooperate began taking shape.


The merger that resulted from the CEOs’ agreement created the largest not-for-profit healthcare system in the state, with 43 hospitals, 500 patient care sites, 6,000 affiliated physicians, and 34,000 employees. The $8.6 billion organization was solidified last October, just months before certain provisions of the ACA went into effect in January.


“The changing healthcare environment, including the ACA, was a driver in the recognition that we need to be a leader in healthcare reform,” says Arthur, who’s now chief integration officer for Baylor Scott & White Health. “The capabilities of Baylor and Scott & White together position us to be that leader.”


Officials say the Baylor Scott & White Health combination will serve as a new model for healthcare delivery against the backdrop of healthcare reform. —T.R.



Pioneer Natural Resources Co., Sinochem Petroleum USA LLC
A rule of thumb in business is that joint ventures are inherently flawed. If a project is so great for a company to do, this thinking goes, why not just do the work itself, rather than bringing in a partner? For the counter-argument, look at a JV that Irving-based Pioneer Natural Resources Co. completed last year with Sinochem Petroleum USA LLC, a U.S. unit of China’s Sinochem Group.


Pioneer, a leading independent exploration and production firm, sold a 40 percent stake in its interest in 207,000 acres in the Wolfcamp Shale play in West Texas’ Permian Basin to Sinochem for about $1.7 billion. The Wall Street Journal said the deal was the third-largest single investment in the U.S. oil patch by a Chinese company.


Sinochem paid Pioneer $500 million up front, and will pay the other $1.2 billion by taking on 85 percent of the drilling and production costs in the Wolfcamp play, until the $1.2 billion number is reached, according to Mark Kleinman, who is Pioneer’s senior vice president, general counsel, and corporate secretary.


Having Sinochem focus on developing acreage in the southern part of the play frees up capital for Pioneer to do similar appraisal and development work in the play’s northern acreage, Kleinman says. Pioneer has a number of leases in the southern part that will expire relatively soon, meaning it needs to get work done in that region relatively quickly, he says.


All told, he adds, the joint venture will allow for faster development of Pioneer’s piece of the Wolfcamp play. Pioneer estimates that its piece of the Wolfcamp will yield roughly 2 billion barrels of recoverable oil over a 15- or 20-year period. “We might need 6,000 wells over that period,” Kleinman says. “It’s a large project … The work will go on over several decades.” —J.B.



Tenet Healthcare, Vanguard Health Systems Inc.
Thanks to a $4.3 billion buyout that was finalized in October, North Texas is now home to the headquarters of the second-largest for-profit hospital company in the country. Tenet Healthcare Corp.’s purchase of Nashville-based Vanguard Health Systems Inc. pushed Dallas-based Tenet’s annual revenue to nearly $15 billion and added 40,000 new employees to the company’s payroll, giving it more than 100,000 workers nationwide.


The all-cash transaction, in which Tenet assumed roughly $2.5 billion of net Vanguard debt, should add to Tenet’s profitability as quickly as the first year after the deal’s conclusion. Tenet has said it expects to wring between $100 million and $200 million in annual costs out of the combined organization.


“The two organizations have similar values,” says Dan Cancelmi, Tenet’s chief financial officer. “We knew many of the management leaders with the Vanguard organization [before the deal]. Their values, priorities, culture of ethics and compliance, and focus on improving quality of care … are all similar to ours.”


Including the Vanguard deal, Tenet, as of Dec. 31, operated 77 hospitals, 183 outpatient centers, six health plans, and six accountable care networks. The latter are groups of doctors, hospitals, and other healthcare providers that jointly care for Medicare patients.


Tenet also controls Frisco-based Conifer Health Solutions LLC, which helps healthcare organizations operate more efficiently. The Vanguard transaction helped push Conifer’s 2013 net operating revenue to roughly $919 million, up from about $488 million in fiscal 2012. —J.B.



Intermediary Dealmaker of the Year


Taylor Curtis, MHT MidSpan
Last year, Taylor Curtis learned a curious lesson about North Texas: Just when you think you’ve met everybody you need to know here, someone significant pops out of the woodwork and leaves you thinking, “How have I not heard of this person?”


Curtis, director of the Dallas office of the middle-market investment bank MHT MidSpan, was representing a company from outside Dallas-Fort Worth that was trying to raise money. The business, whose name is private, is in the data center/software/hardware industry.


The company shunned venture capital, as the owners wanted to avoid squabbles about control of the business. A close friend of Curtis’ made an introduction to Dallas entrepreneur Brandon Freeman, who invested in the client through a convertible note. Curtis was surprised that he had never met Freeman, who has had high-level involvement at North Texas companies like LayerOne Holdings Inc. and Architel. “The eye of the needle was tight,” Curtis said. “But we found the investor.”


Maybe so, but it doesn’t hurt that Curtis has a wide range of experience in the M&A world, helping him relate better to clients no matter what situation their companies are in.  He has worked for the big boys, helping arrange deals for the likes of Electronic Data Systems Corp., and done the entrepreneurial bit, helping raise $157 million for a would-be investment fund that aimed to buy failed banks. “This business is all about the people,” he says. “It’s not rocket science.” —J.B.



Terry Fick, Corporate Finance Associates 
As a Dallas-based managing partner at Corporate Finance Associates LLC, Terry Fick’s job is investment banking. But those like Fick who serve middle-market companies know that sometimes an intermediary must wear other hats. So last year, Fick became an executive recruiter. 


This was for a Bossier City, La.-based land surveying business called Landpoint Inc. The company was trying to arrange financing for a couple of acquisitions. Neither Landpoint nor the two businesses it was acquiring had chief financial officers to help streamline the process. So Fick helped find Landpoint a CFO— Orlando Sala, who happened to be commuting weekly from Shreveport to Dallas for another job.


Sala had experience with these types of lenders and with private equity, Fick says: “He knew what we had to do.” 


Although Fick will play recruiter when a deal needs doing, his primary job is shepherding owners through what he calls the “arduous” process of selling their businesses. That means looking at the company he’s trying to sell through the eyes of a buyer, and educating clients not just on issues they’ll need to address with their companies, but also on what information the buyer will seek—all before the other side’s questions start flying.


One way Fick distinguishes Corporate Finance Associates is in its ability to find that needle in the haystack-type buyer that will fit his client’s needs. Although the firm uses fancy databases and such to locate prospective buyers, it also relies on the collective knowledge and experience of the firm’s partners.“This is a technical term: We kick it around,” Fick says. “I may have a conference call with 10 other partners to discuss what types of companies might be interested. It never fails to surprise me that they will bring up two or three companies I hadn’t thought about.” —J.B.



Hatch Smith, Commerce Street Capital LLC
After closing on a complex banking deal that was three years in the making, Hatch Cummings Smith Jr. may go down in the Commerce Street Capital history books. 


Some of the older Commerce Capital partners who worked with Smith on the bankruptcy of North Texas Bancshares and the subsequent sale of its operating unit, Park Cities Bank, say it was one of the hardest and most complex deals that has ever come through the investment banking firm’s doors.


“It was very frustrating, and there were times of quiet where we just didn’t know what to do,” says Smith, vice president and head of institutional sales. “There were so many deals that came close but just didn’t get to the finish line.” Smith said he spent about 85 percent of his time last year working on the deal, which called for Commerce Street to pursue options that included selling distressed assets to strategic buyers, an outright sale of the bank, and raising money to recapitalize and reposition the bank.


The eventual outcome was to put North Texas Bancshares into Chapter 11 bankruptcy, which allowed for an auction sale to Olney Bancshares of Texas for $11.4 million. With the successful resolution, Smith says he will return to focusing on capital-raising and bringing new deals into the pipeline. —T.R.



Adviser Dealmaker of the Year


Janice V. Sharry, Haynes and Boone LLP
Jan Sharry calls it “getting to yes.” A partner in the corporate transactions group at Haynes and Boone, Sharry believes the key to getting mergers and acquisitions deals done is a deep understanding of what her clients are seeking in transactions.


“I spend a lot of my time learning about what they really want, the rationale for doing the deal, and making sure what I do is aligned with their goals,” she says. “I do a lot of homework on past deals that are similar, pulling up as many forms and as many deal transaction guidelines as I can.”


Like many top deal advisers, Sharry had a busy 2013. Among other things, she represented Fort Worth’s American Airlines in hammering out what’s known as a “capacity purchase agreement” with Indianapolis-based Republic Airways Holdings Inc. The 12-year deal called for Republic Airlines, a unit of Republic Airways, to operate 53 aircraft on behalf of the Fort Worth company under the American Eagle brand. Sharry also had helped negotiate a similar arrangement on behalf of AMR (the former name of what is now American Airlines Group Inc.) with Sky West Airlines Inc. in September 2012.


Sharry’s 2013 also included everything from oil and gas deals to one in organic foods. “There were challenging new industries and a lot of complexities in the deals that I saw,” she says. —J.B.



Tom Harris, Haynes and Boone LLP
Over the years, Tom Harris has handled some big deals. The head of the mergers and acquisitions group at Haynes and Boone, Harris has represented North Texas luminaries like the Dallas Stars, RadioShack Corp., and what is now known as the AT&T Performing Arts Center in initiatives such as public-private partnerships, joint ventures, and M&A deals.


But ask Harris to rattle off some of his biggest accomplishments of 2013, and he’ll name some organizations that many have never heard of. Organizations like the Dallas-based private equity firm Wingate Partners, or the Plano sales and marketing services concern Crossmark. “We handle deals of all sizes, with primary concentration in the middle market,” he says.


Which meant a fairly busy 2013 for Harris. Like virtually all M&A lawyers, he was hit with a lull to begin last year, owing to a deal-making frenzy at the end of 2012 driven by concerns over changes to capital gains tax rates. That dealmaking frenzy to close in ’12 also resulted in a number of sellers being taken off the market, which in turn led to a bunch of buyout money chasing too few good deals. But after that, thankfully, things turned up. —J.B.



Glenn West, Weil, Gotshal & Manges LLP
A number of attorneys and other advisors had busy years in 2013 helping make mergers and acquisitions happen. And then there was Glenn West.


Managing partner of the Dallas office of Weil, Gotshal & Manges LLP, West was the lead M&A counsel for Fort Worth-based AMR Corp. in a $17 billion merger with US Airways Group Inc. that created the world’s largest airline.


But there’s more. West also served as lead M&A counsel for Dallas’ HM Capital Partners in a secondary sale of its food and consumer products companies (valued at more than $600 million) to an affiliate of a new Dallas private equity concern, Kainos Capital Partners.


The list goes on, but you get the idea. When big, hard-to-do deals need to happen, people call West. “One of the things lawyers fall into is saying, ‘On the one hand, on the other hand.’ They want to describe the problem for the client, rather than identify a solution to the problem,” West says. “My philosophy is to identify a problem and then propose a solution at the same time. … That works to eliminate a lot of needless time that goes into people wringing their hands and wondering what the possible solutions are, when [the solutions] are available.”


But even for a problem-solver like West, the AMR transaction stood out as challenging: “If you’re in this business, to do something like that is a once-in-a-lifetime experience.” —J.B.



Eric Williams, Haynes and Boone LLP
An old principle of serving as an attorney’s client is that when your lawyer starts fighting with the other side’s legal representation, your bill will go up rapidly.


Eric Williams realizes this. A partner in Haynes and Boone’s mergers and acquisitions practice group, Williams is cognizant that his clients don’t really care about inter-legal battles. “They want their deal done,” he says.


That’s a major reason Williams tries to play nice when handling M&A transactions. “Sometimes you must adapt your style depending on opposing counsel” and similar factors, he says. “But I find the collaborative approach is the most effective and efficient on a deal.”


That approach was tested a bit during talks on one provision of a deal that Williams handled last year on behalf of the Plano sales and marketing company Crossmark, which was in the process of buying a Chicago sales business called Marketing Werks. At issue was an “earn-out” provision—a part of the sale price based on the future financial performance of the business that’s being acquired.


“This had one of the more complicated earn-out structures that I’ve dealt with,” Williams says. “Both parties had to make concessions and work together. It took time, a lot of negotiation, and give and take on both sides. But ultimately, we were able to strike a deal that both parties were happy with.” —J.B.  

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