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By Nick Wakeman

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Nick Wakeman

Inside the courtship of PAE to take it public

When it comes to major mergers and acquisitions, the finer details of how those deals come together are almost always hidden: the-back-and-forth, who approached whom and when negotiations started.

But every now and then, regulatory filings to the Securities and Exchange Commission lift the veil and give us a front row seat.

A case in point is the $1.55 billion deal involving the acquisition of PAE by Gores Holdings III Inc. announced on Nov. 1.

Gores Holdings is a publicly-traded special purpose acquisition company, or SPAC. SPACs go public and issue shares with the promise of acquiring another company to back them.

The deal expected to close in the first quarter of 2020 and most importantly will make PAE a publicly-traded company, but not through a initial public offering.

A SEC filing by Gores Holdings describes how their path to the PAE deal began over a year ago. But first, it is important to note that Gores Holdings is backed by the Gores Group, led by Alec Gores. PAE is owned by Platinum Equity, led by Alec’s brother Tom.

The filings indicate that the brothers were not directly involved in the negotiations.

Gores Holdings first approached Platinum Equity on Oct. 5, 2018 to see if any companies in the private equity group’s portfolio fit Gores Holdings' acquisition criteria: more than $1.5 billion in enterprise value, the potential to be a successful public company, a strong management team, being positioned for growth and generating significant cash flow.

That approach to Platinum came after Gores Holdings looked at more than 30 companies and entered into some level of negotiations with six.

Gores Holdings reached out again to Platinum on Jan. 30 and March 12 of this year. During the second conversation, Platinum Equity partner Louis Samson told Gores Holdings CEO Mark Stone that one portfolio company was ready to pursue sale and that it would be in touch.

On April 12, PAE’s financial advisers in JP Morgan contacted Gores Holdings and offered up PAE. JP Morgan then gave Gores Holdings some initial information about PAE and a letter to outline how a sale process could work.

Then on May 1, Stone met with PAE CEO John Heller and Chief Financial Officer Charlie Peiffer to discuss the government services contractor's business. This was a get-to-know you meeting, during which Heller and Peiffer gave an overview of the company’s operations and finances. There also were discussions of how a deal could be structured.

Stone must have liked what he heard because that same day, he contacted Deutsche Bank: an underwriter of Gores Holdings’ initial public offering.

On June 3, Gores Holdings submitted a “preliminary non-binding indication of interest” to PAE. Think of this a pre-engagement ring.

This closed the first round of the sale process. On June 12, round two began with the creation of PAE’s virtual data room to securely view more detailed financial and operational data. More meetings and calls followed through June.

On July 9, Gores Holdings asked PAE to enter into exclusive negotiations.

Throughout the summer, negotiations intensified on how to financial structure the deal. On Aug. 6, Platinum Equity delivered a non-binding term sheet describing the deal to Gores Holdings. By Aug. 20, PAE and Gores Holdings had agreement in place.

But there was still work to be done regarding how PAE and Gores Holdings would come together. There also were meetings with potential investors in what will be a publicly-traded PAE. Those discussions took place through September and into October.

The boards of directors for Gores Holdings and PAE were involved now. Part of the discussions involved what stake Platinum Equity would retain in PAE. The final agreement sees Platinum Equity and other investors holding a 28 percent stake in the entity.

By late October, the banks were on board and the final merger agreement was signed Nov. 1. Then the deal was announced.

Two things stand out from reading this story of how the deal came to be.

First, the fact that Gores Holdings looked at more than 30 companies. Negotiations with at least one weren’t called off until October, just before the final deal with PAE was announced.

Gores Holdings also was looking at a wide range of companies -- special rental, media and entertainment, transportation and logistics, and technology services.

For PAE, its owner Platinum wanted to make a deal and this is probably the best one. PAE will not be absorbed into a larger entity and can continue to pursue the strategy it has carried out in recent years, including more acquisitions.

The filing indicates that one of Gores Holdings' acquisition criteria was a company that will be a platform for more acquisitions. With PAE’s track record of deals, the expectation is that they will continue to be an acquirer. This is one of the reasons PAE and its owners were attracted to a deal with a SPAC.

Gore Holdings' presentation filed to the SEC indicates PAE has at least $8.9 billion in cumulative revenue from potential targets in its current acquisition pipeline.

Given that Gores Holdings isn’t an operating company, PAE will not need to take a pause to go through an integration process.

Before there are more deals, PAE has one divestiture to make of its ISR business unit that builds the Resolute Eagle unmanned aircraft system. The company has signed a letter of intent to sell the business with an definitive agreement expected to be signed before the end of the year.

But after that, more acquisitions are likely on the way.

Posted by Nick Wakeman on Nov 26, 2019 at 10:39 AM


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