Carlyle Group CYL.UL and Hellman & Friedman agreed to buy contract research company Pharmaceutical Product Development Inc PPDI.O for $3.9 billion in cash, in one of the largest leveraged buyouts of the year.
The purchase, announced Monday, is a rare win for private equity firms at a time when the European debt crisis and worries about the U.S. economy have made deal financing tough to come by, drying up private equity deal flow.
Carlyle and Hellman & Friedman got around financing problems by structuring a deal that spreads out the risk between them as well as the four banks providing debt financing, according to a source familiar with the situation.
Credit Suisse CSGN.VX, JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N) and UBS AG UBSN.VX(UBS.N) are financing the deal.
Still, private equity firms have been active in healthcare this year, as they bet on rising use of services by aging populations in the United States, Europe and elsewhere.
Big pharmaceutical companies are also rethinking their business models and selling off unwanted assets.
In early August, the Blackstone Group (BX.N) agreed to take healthcare IT provider Emdeon Inc EM.N private for $3 billion -- a bet that reimbursement cuts from Medicare and Medicaid will force hospitals and other healthcare providers to upgrade information technology to reduce costs.
In April, Pfizer Inc (PFE.N) agreed to sell its Capsugel unit, the world's largest maker of hard capsules, to KKR & Co (KKR.N) for nearly $2.38 billion.
Contract research organizations like PPD provide drug research services to pharmaceutical and biotechnology companies.
A looming patent cliff on many big-selling drugs has prompted big pharmaceutical companies like Pfizer to cut their spending on in-house research and seek cheaper alternatives like PPD.
PPD's shares were up 25.8 percent at $32.28 on the Nasdaq on Monday.
Carlyle and Hellman's offer price of $33.25 per PPD share is nearly 30 percent higher than the stock's Friday close, but it is lower than analysts' expectations, another symptom of a tough financing market.
Industry analysts were predicting an offer in the range of $35-$37 a share, after a media report in July first said the company was looking to sell itself.
In August, sources told Reuters that Carlyle was in talks to buy the company.
"The price is satisfactory but it obviously was impacted by the challenging market conditions -- comes at the low end of the range that was discussed in the news earlier in the quarter," Jefferies analyst David Windley said.
Private equity deal volume fell 23 percent in the third quarter from the same period last year, according to Thomson Reuters data, as financing became more expensive and availability dried up for riskier credits.
Although PPD has 30 days to solicit a better offer from someone else, Windley and other analysts did not expect that bidder would emerge.
Analysts cited the limited number of large contract research firms with the resources to mount a counterbid, as well as the lack of meaningful savings from a potential combination.
PPD's stock was trading at a multiple of 16 times forward earnings as of Friday, compared with the wider Life Sciences Tools and Services sector average of 30, according to Thomson Reuters data.
Bigger rival and industry bellwether Covance CVD.N and peer Charles River Laboratories International (CRL.N) have also been trading at similar multiples.
The PPD deal is expected to close in the fourth quarter and the company said it will not host a conference call to discuss financial results for the third quarter of 2011.
Morgan Stanley (MS.N) advised PPD on the deal, while Credit Suisse advised Carlyle and Hellman & Friedman.
(Reporting by Esha Dey in Bangalore and Jessica Hall in New York; Editing by Anthony Kurian, Viraj Nair and Steve Orlofsky)