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A party dubbed "sponsor 1" that's believed to be a private equity firm surfaces in the deal prospectus as putting two different offers forward for Polycom.

by Chris Nolter

Shares of Polycom Inc. and Mitel Networks Corp. gained Tuesday, May 24, on news that an unnamed private equity firm is attempting to thwart the $2 billion merger of the business communications companies.

Video conferencing and communications company Polycom said late Monday that a party dubbed "sponsor 1" in the prospectus for the Mitel merger came forward with two offers for the company. The revised bid injects more drama into a lengthy process that has featured agitation by activist Elliott Management Corp.

Shares of Polycom gained 72 cents, or 6.5%, to close at $11.81 on Tuesday.

Potentially spurned suitor Mitel rose 48 cents, or 7.7%, to finish at $6.71. ShoreTel Inc., another communications company that arguably would fit neatly with Mitel, gained 4 cents, or 0.6%, to $6.44. The stock had been as high as $6.51.

Polycom and Mitel provide unified communications services, a bundle of offerings that include digital voice, messaging, video conferencing and other services. Polycom is strong in video applications, while Mitel has a fuller suite of services.

While Polycom didn't name the PE suitor, Bloomberg reported in May that the firm is Siris Capital Group LLC. New York-based Siris on Monday agreed to buy digital communications company Xura Inc. (MESG) for $643 million. Siris officials didn't respond to queries Tuesday.

Stephens Inc. analyst Barry McCarver said handicapping the bids has challenges.

"At first glance, the sponsor was offering something potentially more attractive than Mitel was offering," he said, "but I don't think it is."

One of the bids is an $11.50-per-share privatization proposal that would pay up to $3 per share in earnouts to shareholders if Polycom hits targets. That could translate to a total package of $14.50 per share if all goes well.

But McCarver said the extra payout is not a gimme.

"The way Polycom revenue is eroding, that seems like a little bit of a less attractive deal," he said.

Mitel's bid of $3.12 in cash and 1.31 shares of its stock would pay Polycom shareholders $11.76 per share, a bit more than the guaranteed part of the new private equity bid. The offer was worth $13.68 per share when the parties announced the deal in April, but declines in Mitel's stock price reduced the value.

The PE firm offered another option that would allow Polycom shareholders to keep some equity.

The financial sponsor would buy $650 million in convertible preferred stock that would give the sponsor a 56% position if converted. Polycom shareholders would receive a dividend of $11 per share in cash, or they could swap the dividend for a stake in convertible preferred stock.

"They maintain some ownership, but the leverage would be close to 4 times," McCarver said.

The Mitel proxy shows that Polycom's board rejected an earlier offer from Sponsor 1 after considering the savings and other benefits of combining with Mitel; the firm's ability to raise equity and debt financing; and tax implications of repatriating cash to fund the deal.

Elliott, which owns stakes in both Polycom and Mitel, began lobbying for a merger in September. The activist firm didn't respond to a query regarding the new private equity bid.

"What Polycom needs if it's going to stay a standalone company is some guidance on how to direct the business and develop a more complete unified communications solution," McCarver said.

Polycom's video and conferencing services for large groups would strengthen Mitel, he asserted, but Mitel already has a full offering of services.

"From a Mitel shareholder perspective, if they don't get the Polycom deal done they move on to the next deal, which may be ShoreTel," he said. "They are sitting in a good spot either way."