Dealmaker of the Week: Michael Aiello of Weil, Gotshal & Manges

CORRECTION, 6/10/12, 4:45 p.m. EDT: This article originally included incorrect information about Aiello’s past work with THL. The article has been updated in the twelfth paragraph. We regret the error.

DEALMAKER

Michael Aiello, 43, chairman of Weil, Gotshal & Manges‘s corporate department and a partner in the firm’s New York office.

THE CLIENT

Boston-based private equity firm Thomas H. Lee Partners (THL), which own stakes in such companies as Dunkin’ Brands Inc. and Clear Channel Communications.

THE DEAL

THL said Tuesday that it will pay $2.69 billion to take a majority stake in Elmsford, New Jersey–based party supplies chain Party City.

THE DETAILS

THL won control of Party City through an auction process with a $2.69 billion recapitalization bid submitted to the company’s ownership group, which includes private equity investors Advent International, Berkshire Partners, and Weston Presidio.

Details of the size of the stake being purchased by THL were not released by the parties involved. But a press release announcing the deal states that the current ownership group will roll a portion of their equity interest into the recapitalized company and will continue to hold “significant minority stakes.” Bloomberg, citing a source familiar with the matter, estimates that the Party City stake acquired by THL could be as big as two-thirds of the company.

THE BIG PICTURE

In announcing the deal, THL touted Party City’s status as a leader in the $10 billion industry for retail party goods. Founded in 1947, the party supplier operates roughly 825 permanent locations worldwide (along with 400 temporary stores that open during the Halloween season), and sells its products in more than 40,000 locations around the world.

Prior to the competitive auction—in which THL reportedly faced off against such private equity rivals as BC Partners, Leonard Green & Partners, and TPG Capital—Party City had been weighing an initial public offering. The company first announced plans to launch a $350 million IPO in April, but ultimately opted to remain privately owned.

By staying private, Party City’s owners are following a trend that has sprung up against the backdrop of Europe’s sovereign debt crisis and its effect on initial public offerings. Private equity managers have increasingly avoided the sagging IPO market by looking to fellow investment firms for a return on their investments, Bloomberg says, citing U.K. researcher Preqin Ltd. According to Preqin, 25 percent of divestitures in 2012′s first quarter have been secondary sales, where private equity investors sell investment stakes to an alternative fund.

THE BACKSTORY

Weil’s relationship with THL dates to the latter’s earliest days, with the firm helping founder Tom Lee establish the private equity shop—one of the oldest in the United States—in 1974. Lee left his namesake fund in 2006 to launch Lee Equity Partners, another Weil client. The firm has nonetheless maintained strong ties to THL.

Compared with the firm as a whole, Aiello’s relationship with THL is in its nascent stages. He was introduced to the private equity firm as a client by James Westra, the former cohead of Weil’s private equity practice who handled a fair share of THL work before becoming managing director of private equity firm Advent International Corp. last year.

Aiello first worked for THL about two years ago on a transaction that he says was never consummated, and that he is therefore unable to discuss.