Silver Lake's sharp elbows risk being dislocated

Reuters

03-04-2025

NEW YORK, April 3 (Reuters Breakingviews) - Egon Durban is used to getting the better end of a deal. The co-CEO of private-equity shop Silver Lake has guided U.S. technology and media titans like $790 billion Broadcom (AVGO.O), opens new tab and $66 billion Dell Technologies (DELL.N), opens new tab through canny buy-and-build sprees. At key moments, though, he has reached into a toolbox that includes finely crafted structures conferring an advantage on insiders, angering rabble-rousers like Carl Icahn. A tiny deal for Oregon-based vacation rental outfit Vacasa (VCSA.O), opens new tab, though, is stretching Durban's playbook to the limit.
At first glance, it looks like a simple bidding war. On one side is rival property-management site Casago, which has agreed, opens new tab to buy Vacasa for $5.30 per share, or roughly $120 million in total. That bid has the support of Vacasa's biggest investor Silver Lake, which along with two other allied shareholders has, opens new tab about half of the stock. On the other side is Davidson Kempner, which owns 10% and is offering, opens new tab $5.83 apiece for the rest of the equity. The hedge fund is no stranger to the dark arts, having made a name for itself by lending to overstretched companies to secure a prime spot in a debt restructuring. Examples include clothing chain J. Crew, Quorum Health, MGM Studios and Neiman Marcus.
The standoff brings together three key strands of the modern financial world that may increasingly overlap: buyout barons coming down from pandemic-era giddy highs, distressed debt investors hoping for an arguably overdue pickup in defaults, and the decline of once-frothy special purpose acquisition companies. The website for renting out vacation homes went public through a blank-check merger in 2021 at a $4.5 billion valuation. It's down 97% since. That smarts for Durban and Silver Lake, which led a $319 million funding round in 2019 and returned for more in 2020. According to regulatory filings, opens new tab, Vacasa began seeking a lifeline from potential suitors in 2023, a year in which net losses ballooned to $528 million, up from $92 million in 2020. Management foresaw cash running dry in 2025.
That explains how Davidson Kempner got involved. The hedge fund bought $30 million of convertible bonds from liquidity-starved Vacasa last August. If converted, those notes would give it 42% of the company, diluting other investors, but only 20% of the voting rights. Davidson Kempner's support for the M&A negotiations with Casago, which would see Silver Lake and others continue to hold stakes in the combined entity, was at one point an open question. But the hedge fund wanted to stay on as a lender rather than having its credit cashed out – a disagreement which prompted the rancorous tussle for control.
Both sides accuse the other of foul play – with some justification. Filings reveal that an independent committee of Vacasa's board, for example, was mindful that Davidson Kempner has 'different economic interests' than regular shareholders since it is a creditor. The implication is that it could pursue a 'loan to own' strategy of running out the clock to force a bankruptcy, in which it could secure a rich slice of the equity. The hedge fund has tried to quell concerns by tweaking its bid multiple times, even throwing in a $10 million termination fee if the offer fails.
All of this is irrelevant, however, unless Davidson Kempner gets a shot to compete. Here, a structural quirk resulting from the SPAC merger gives Silver Lake and its partners an advantage. When Vacasa went public, it granted insiders rights under a tax receivable agreement (TRA), entitling holders to proceeds of certain tax savings. If another company buys Vacasa, TRA owners can extract a one-off $80 million-plus payment, potentially destroying the logic of a deal. Filings imply, opens new tab that Silver Lake and two other Vacasa investors own 31% of the TRA rights.
Perhaps unsurprisingly, the Casago bid favored by Silver Lake and its allies has secured a waiver from the payout, while Davidson Kempner has not. Hence the hedge fund's accusation that insider investors are 'effectively controlling' the company. Vacasa told Breakingviews that it strongly denies Davidson Kempner's accusations and that a special board committee is carefully evaluating its proposal.
The saga echoes Durban's sharp-elbowed dealmaking elsewhere. Silver Lake, for instance, helped Michael Dell take his eponymous company private in 2013. In its time off the market, the computing giant issued so-called tracking stock to help fund a $67 billion purchase of EMC. The securities were meant to trade in line with public shares in EMC's crown jewel subsidiary VMware. In fact, they labored under a yawning discount. Dell subsequently went public again by merging, opens new tab into the cheap tracking stock, effectively giving itself and fellow backers like Silver Lake an outsized chunk of the resulting public company. Activist Carl Icahn and others fought a fierce campaign against both the original buyout and the public-market return, forcing extra payouts, though the deal nonetheless worked well for Silver Lake.
Another example is entertainment group Endeavor, led by Hollywood mogul Ari Emanuel and backed by the buyout shop since 2012. The grab bag of Tinseltown talent agencies and sports interests owns a controlling interest in $30 billion TKO (TKO.N), opens new tab, which includes the Ultimate Fighting Championship and soap-opera-meets-bodyslam purveyor World Wrestling Entertainment. The parent group's valuation never really reflected the value of that holding, and nor did Silver Lake's recently completed $25 billion take-private of Endeavor. The discrepancy has become even more conspicuous after a surge in TKO's share price. Hedge funds are heading to Delaware for a court challenge, Bloomberg reported, opens new tab.
Silver Lake's tactics are great for its underlying fund backers, who expect Durban and his team to multiply their money. And, over the long term, these are not just exercises in financial chicanery: since returning to the market, Dell's shares have skyrocketed nearly eight-fold. The buyout shop helped create the predecessor to Broadcom through a roughly $3 billion deal way back in 2005. But when the moment is right, Silver Lake plays its hand aggressively.
Mixing in the dark alleys of capital markets means bumping into savvy brawlers. And Davidson Kempner may have a weapon up its sleeve. The hedge fund reckons a TRA waiver for Casago would disproportionately and illegitimately benefit insiders like Silver Lake. It is working with Eric Breon, Vacasa's former CEO and a holder of TRA rights, who could have legal standing to sue. That could set up a financial time bomb for Casago. Davidson Kempner's strategy seems clear: force Silver Lake and the other major TRA holders to the table, with the aim of extracting a waiver of its own. In effect, that would allow the two bids to compete on price – unlike with the status quo, where independent Vacasa investors are being offered more money by Davidson Kempner but aren't necessarily able to get it.
Whatever the outcome, the hedge fund is wielding more potent tools than Durban's group has faced in the past. And Silver Lake's reputation for can't-lose dealmaking is on the line. It's a unique selling point for the firm among its potential deal partners in the technology and entertainment world, like Dell and Emanuel. Vacasa may be small, but the stakes for Durban and his partners are anything but.