Canadian pensions funds to buy KCI
Kinetic Concepts Inc. (KCI-N), a maker of medical devices used in wound care, agreed to a $5 billion US cash buyout from two leading Canadian pension funds and private equity firm Apax Partners.
The transaction, announced Wednesday, is one of the largest in a new series of private equity-backed deals, which are up 42 percent from a year ago. Several sizable deals have come in the healthcare sector, where medical device companies are seen as ripe for consolidation.
Kinetic Concepts was a particularly strong target for private equity as it commands a stable cash flow but finds it hard to grow amid an influx of competitors.
At $68.50 a share, the buyout price represents a premium of 6 percent to Kinetic Concepts' closing price on Tuesday. That comes on top of the stock's 13 percent rise on July 6 amid media reports of a deal in the making.
"Investors should jump on it," said analyst Julie Stralow of Morningstar.
"As we look out, we think growth will be harder to come by," she said. "The stock has traded in the mid-$40s over the past year and it was in the $30s a year ago. We think this is a great deal."
Including assumed debt, the deal is worth $6.3 billion.
It is the largest healthcare acquisition for Apax, which teamed up with the Canada Pension Plan Investment Board and the Public Sector Pension Investment Board, which manages investments for pension funds of the Royal Canadian Mounted Police and other state employees.
Apax has shown a preference for working with large pension funds and sovereign wealth funds to secure acquisitions, rather than bringing in rival private equity firms.
The deal is expected to close by the end of this year. Kinetic has a 40-day "go-shop" period to solicit other bids.
"We see a very low probability of higher bids and don't expect interest from strategic buyers," analyst Michael Matson of Mizuho Securities wrote in a research note.
But analyst Tao Levy of Collins Stewart pegged the value of Kinetic at $73 to $76 per share and said a rival bid from another private equity consortium could emerge.
But investors were not betting on a higher bid Wednesday.
Jeff Jonas, an analyst with Gabelli & Co, said private equity-backed deals in healthcare are "definitely happening with increasing frequency, but I wouldn't call it a trend yet."
David Turkaly, an analyst with Susquehanna International Group, said likely future targets include dental device maker Align Technology Inc, imaging company Hologic Inc., and orthopedic device makers Mako Surgical Corp. and Wright Medical Group Inc.
Kinetic faces increased competition in its key business—products that use negative pressure technology, or a vacuum, to promote wound healing. The company also manufactures technology for tissue regeneration.
"Kinetic Concept's primary business has lost its monopoly," said Jason Wittes, medical technology analyst at Caris & Co. "They still dominate the vac (vacuum) market, but the expectation is that smaller players will continue to enter the market. That's what we've seen in the last two years."
Jonas said the increased competition and price pressure mean Kinetics got a fair offer from Apax at 8.5 times earnings before interest, tax, depreciation and amortization.
Kinetic founder James Leininger and other shareholders, who collectively hold about 11 percent of the company's shares, have agreed to vote in favor of the deal.
Kinetic was advised by JPMorgan Securities, while the Apax-led consortium was advised by Morgan Stanley. The consortium has secured committed debt financing from Morgan Stanley, BofA Merrill Lynch and Credit Suisse.
Recent private equity deals in the healthcare sector include TPG Capital's $2 billion buy of diagnostics firm Immucor, Carlyle's $1.73 billion deal with Australia's Healthscope, and KKR's $2.38 billion buyout of Pfizer's Capsugel unit.
Recent activity in the medical device field include Dentsply buying AstraZeneca's dental implants and medical devices unit for $1.8 billion, Thermo Fisher going after Swedish diagnostics firm Phadia, and Gen-Probe trying to sell itself.