Wednesday, April 3, 2013

Quintiles Update: Company Will Pay a $25 Million Termination Fee

Quintiles Update:  Company Will Pay a $25 Million Termination Fee

About six weeks ago, I wrote about the draft registration statement filed by Quintiles (“Quintiles Files to Go Public:  The Details Matter [February 20, 2013]”).  Quintiles just amended the document and is filling in some of the details.  Thanks to David Ranii, the fine business reporter for the Raleigh News & Observer, for alerting me.  His take on the new filing is on his blog.[1] In my first post on the company, I pointed out:

“[T]he company has paid out $15.7 million in consulting fees to its equity owners in the past three years, including an estimated $3.7 million to Dr. Gillings.  There’s a blank in the preliminary prospectus, because the owners are going to get a multi-million dollar slug for terminating this arrangement.   It’s a bit weird for Dr. Gillings to be getting consulting fees, while at the same time drawing a $1 million salary, plus bonuses, stock options, and all the other perquisites of a senior executive.”

We now know that it will cost Quintiles $25 million to terminate the consulting contract, and that the private equity sponsors, including Dr. Gillings, will share in this bonanza.  As David Ranii points out, this type of consulting arrangement is fairly standard in the world of private equity.   Just because it is typical or common industry practice doesn’t make it right.  What’s the purpose of the consulting fee and the termination payment?
Detail from Triple Falls -- Dupont State Forest (2013)
As to the consulting arrangement, you would have thought the 1.5% to 2.0% management fee charged by private equity sponsors to their limited partners would more than cover the expense of overseeing portfolio companies.   Of course, the limited partners can hardly complain since they signed off on both the management fee they pay and the consulting fee the portfolio company pays.  In some cases, a general partner will graciously credit part of the consulting fee against the management fee.  In the end, these consulting fees are pure windfall to the private equity sponsors like Bain Capital and TPG.  Moreover, I’m still astounded that Dr. Gillings gets to collect his salary, bonus and stock options, and then gets millions more for advising the company he runs.

The termination fee is even more egregious.  There’s no economic rationale for the company to paying $25 million.  This is money that would be better used to run Quintiles or help pay down debt.  The private equity sponsors and Dr. Gillings haven’t incurred any expenses that would be uncompensated if the consulting arrangement were simply terminated.  Frankly, the reason they charge a multi-million termination fee is because they can.

There’s more to come as Quintiles still has to reveal how much stock will be sold by private equity and Dr. Gillings, and how much of the offering will go to the company.


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