By Slash Lane

Published: 10:00 AM EST

Smartphone maker Palm, Inc. said this week it plans to sell a 25 percent stake to private equity firm Elevation Partners for $325 million, a deal which will also bring former Apple executives to its Board of Directors.

The move follows months of speculation that handheld maker, best known for its Treo mobile phone, was considering a full-blown sale to potential buyers such as Motorola or Nokia.

As part of the deal announced Monday, the Sunnyvale-based company set forth a recapitalization plan where shareholders will receive a $9 per share cash distribution. Elevation will invest $325 million in Palm, and the handheld maker will utilize those proceeds along with existing cash and $400 million of new debt to finance the cash distribution.

Upon closing of the transaction, Plam said Jon Rubinstein, former senior vice president of hardware engineering and head of the iPod division at Apple, will join the company as executive chairman of the board.

Meanwhile, former Apple chief financial officer Fred Anderson and Roger McNamee, currently the managing directors and co-founders of Elevation, will also join the board. Rubinstein, Anderson, and McNamee will replace Eric Benhamou and D. Scott Mercer, who will resign their director positions at that time. The total number of directors on the board will be increased from eight to nine in connection with the transaction.

"As a result of this transaction, we will strengthen the Palm leadership team and create a more effective capital structure, which puts us in a great position to attract new talent, significantly strengthen our execution capabilities, and deliver long-term shareholder value," said Ed Colligan, Palm president and chief executive officer.

Colligan added: "Jon Rubinstein is one of the top engineering executives in Silicon Valley, and he will lead our product-development efforts. As a significant new investor, Elevation brings onboard unique partners and relationships, plus a long investment horizon. For shareholders, the recapitalization provides an immediate return on their investments and our shareholders will retain their ability to participate in the company's success and future growth."

Under the terms of the recapitalization plan, Elevation will purchase $325 million of a new series of convertible preferred stock. The conversion price will be $8.50 per share, which represents a premium of approximately 16 percent to the implied post-distribution price over the 10 trading days ended June 1, 2007, excluding the $9 per share cash distribution. Upon completion of the transaction, Elevation will own approximately 25 percent of Palm's outstanding common stock on an as-converted and diluted basis, based on the number of shares of common stock outstanding as of March 30, 2007.

The company has secured commitments for $400 million of new debt and a $40 million revolving credit facility which is not expected to be drawn at closing. JPMorgan and Morgan Stanley will be joint bookrunners for these facilities.

Palm intends to use the proceeds from the sale of the preferred stock, existing cash and the proceeds from the $400 million of new debt to fund the cash distribution. The amount of total proceeds to be distributed to shareholders is estimated to be approximately $940 million.

The distribution represents more than one-half of Palm's current market capitalization and enables existing equity holders to retain nearly three-quarters of the post-transaction equity on a fully diluted basis. The company expects to have more than $300 million of cash on the balance sheet after the distribution.

The recapitalization is expected to close in the third quarter of the calendar year and is subject to shareholder approval, customary regulatory approvals including clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and other customary closing conditions. A definitive purchase agreement has been executed. The board of directors of Palm has unanimously approved the purchase agreement.

Morgan Stanley is serving as financial advisor to Palm; Houlihan Lokey Howard & Zukin Advisory Services, Inc. has provided a fairness opinion to Palm; and JPMorgan is acting as financial advisor to Elevation. Wilson Sonsini Goodrich & Rosati, Professional Corporation, is serving as outside counsel to Palm; and Simpson Thacher & Bartlett LLP is acting as legal advisor to Elevation.