Elevation sees small profit on Palm sale

The proposed acquisition of Palm by computer giant HP will spell a slightly profitable exit for Elevation Partners, the private equity firm that backed the smartphone maker through a series of PIPE deals.

Elevation Partners invested a total of $460 million in Palm and, if today’s announced acquisition is consummated, will receive back $485 million, according to a source familiar with the situation. Today HP said it would pay a total of $1.2 billion for Palm, or $5.70 per share.

Elevation’s investment in Palm began in June 2007 with an agreed deal to buy $325 million in convertible preferred stock. The firm subsequently agreed to structured investments in Palm totaling an additional $135 million.

Bono

Palm, the maker of the Treo and other handheld devices, was once a dominant company in the space but in recent years has lost ground against competitive devices from Apple, RIM and Google. Following Elevation’s initial recapitalisation of Palm, when Palm shares were trading above $15, the company’s public value has been volatile, with shares recently falling under the $5 threshold.

However Elevation’s initial deal structure with Palm will allow the firm to be made whole on the $325 million segment of its investment. That agreement gave Elevation an aggregate liquidation preference, allowing it to receive priority on its $325 million position in the event of a sale valued beneath an $8.50 conversion price.

A subsequent PIPE deal granted Elevation a $3.25 conversion price, and so HP’s $5.70 per share offer will return to the private equity sponsor a premium to this smaller follow-on investment.

Elevation has issued no official statement about the sale of Palm. When the initial recapitalisation closed in October 2007, Elevation co-founder Roger McNamee said in a statement: “We are confident that Palm can and will drive the future of mobile computing with its integrated software solutions, history of innovation and loyal customer base.”

Elevation Partners, founded in 2004, is currently investing from a $1.9 billion debut fund. The firm’s partners include former Silver Lake partners McNamee and Marc Bodnick, and former Apple chief operating officer Fred Anderson. Notably, the firm also counts as a partner Bono, the lead singer from rock band U2.