Kinetic Concepts accepts $5 billion buyout led by Apax

CHICAGO/BANGALORE Wed Jul 13, 2011 4:00pm EDT

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CHICAGO/BANGALORE (Reuters) - Kinetic Concepts Inc KCI.N, a maker of medical devices used in wound care, agreed to a $5 billion cash buyout from private equity firm Apax Partners APAX.UL and two leading Canadian pension funds.

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 multibillion-dollar deals have come in the healthcare sector, where medical device companies are seen as ripe for consolidation due to slower growth and pricing pressure from hospitals and insurance companies.

Kinetic Concepts was a particularly attractive target for private equity as it commands a stable cash flow but has had trouble growing. The bet is that demand for their surgical equipment will spring back.

"For many of these companies, growth has slowed and valuations have come down, and there's a belief that people have health issues that eventually need attention," said Tim Nelson, an analyst at Nuveen Asset Management.

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 that 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.

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. Kinetic shares were up 5.8 percent at $68.22 shortly before the close on Wednesday.

A NEW TREND?

Matson expects more private equity deals in healthcare and medical technology over the next six to 12 months.

David Turkaly, an analyst with Susquehanna International Group, said likely future targets include dental device maker Align Technology Inc (ALGN.O), imaging company Hologic Inc (HOLX.O), and orthopedic device makers Mako Surgical Corp MAKO.O and Wright Medical Group Inc (WMGI.O). Align shares rose 3.1 percent, while Mako gained 1.8 percent and Wright Medical jumped 3.5 percent.

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."

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.

CPPIB is one of the world's most active private equity dealmakers in recent years. It manages Canada's national pension fund and has taken a role in some of the largest leveraged buyouts of the past two years.

Recent private equity deals in the healthcare sector include TPG Capital's TPG.UL $2 billion buy of diagnostics firm Immucor BLUD.O, Carlyle's CYL.UL $1.73 billion deal with Australia's Healthscope, and KKR's (KKR.N) $2.38 billion buyout of Pfizer's (PFE.N) Capsugel unit.

(Additional reporting by John McCrank in Toronto and Simon Meads in London. Editing by Michele Gershberg, John Wallace and Richard Chang)

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