UPDATE 1-CVC hires UBS to sell unit of Australia's I-Med

(Adds details, background, analyst quotes, bylines)

By Sharon Klyne and Michael Flaherty

MELBOURNE/HONG KONG, Feb 20 (Reuters) - Private equity firm CVC Capital Partners has hired UBS to sell the specialist care unit of Australian medical imaging company I-Med, banking sources said, in a deal that could fetch about A$200 million ($128 million). CVC is selling the oncology and cardiology diagnostic business within I-Med, which will help the firm pay down debt. I-Med offers medical imaging services including general X-ray, mammography, ultrasound and magnetic resonance imaging (MRI).

The unit for sale is a small part of the overall company and has cash flows of about A$30 million, one source says.

CVC and UBS declined to comment.

CVC's investment in the company has seen some rough patches, with local media reporting a walkout of radiologists. The company is also dependent on the medical rebates from the Australian government, as well as payments from private health care insurers.

Still, Brent Mitchell of Shaw Stockbroking said he didn't see that dependence as a major issue. "We see continued growth in medical rebates of around 5 percent, although growth in private radiology may be impacted by private health care coverage."

"However, we see the problem in extracting margin growth following major increases in compensation levels and work conditions for radiologists," he added.

Assuming a multiple of about 6 to 7 times cash flow, it could sell between A$180million and A$210 million, he said.

CVC paid A$2.7 billion for I-Med's parent DCA Group Ltd at the end of 2006 as credit markets were booming.

The sale of the specialist care unit is likely to attract both private equity firms and trade players, although analysts say the economic climate presents some hurdles for buyers.

Possible bidders could include firms such as Ironbridge Capital, Pacific Equity Partners and Gresham Private Equity, according to sources. The firms either declined to comment or could not immediately be reached.

Ironbridge could aim to expand further into the sector following its acquisition of in-vitro fertilisation specialist Repromed last year, according to leverage finance bankers who did not want to be named because they were not authorised to speak on the record about the deal.

Leading diagnostic provider Sonic Healthcare is unlikely to bid due to competitive reasons, as most of the I-Med diagnostic clinics are located in Sonics' home markets of New South Wales and Victoria, sources say.

The Sydney Morning Herald reported that the contract for Pittwater Radiology, which was part of DCA, was terminated by Pittwater partners and officially ended last November.

The original DCA buyout was backed by a A$1.435 billion senior leveraged loan arranged by Goldman Sachs (GS.N) JBWere, ANZ, Barclays Capital, BOS International Australia and Royal Bank of Scotland (RBS.L).

The loan was paid down to about A$1 billion, according to other banking sources, after the sale of DCAs aged care assets to British United Provident Associated Ltd (BUPA) in 2007 for A$1.225 billion.

Despite the challenges faced by CVC in managing I-Med, the company has not breached any of its banking covenants, said another banking source who is familiar with the deal.

CVC has its hands full with the firm's Australia portfolio at the moment. CVC had to recapitalise PBL Media [PBLML.UL] with a A$325 million cash injection in December. It also owns at least a 65 percent stake in travel company Stella Group, with MFS Limited owning the rest at the time of the deal last year. MFS changed its name to Octaviar Ltd and is now in the hands of administrators, as the economic downturn has taken its toll on hotel and travel sectors. (Reporting by Sharon Klyne and Michael Flaherty, Editing by Ken Wills)