$6B Deal to Take KCI Private

That’s one whopper of a buyout, eh?

Two leading Canadian pension funds and London, England-based private equity firm Apax Capital have joined forces to acquire Kinetic Concepts Inc. (KCI), putting to rest rumors that began swirling last week.

At $68.50 a share, the buyout price is a premium of 6 percent to Kinetic Concepts’ closing price on Tuesday, July 12 before the deal was announced. That comes on top of the stock’s 13 percent rise on July 6 following reports that a deal was brewing.

KCI is a San Antonio, Texas-based medical device company focused on the wound care, tissue regeneration and therapeutic support system markets. The company’s products address a range of patient needs and are used by healthcare professionals in diverse care settings, such as acute care hospitals, long-term care and skilled nursing facilities, home health agencies and wound care clinics.

The deal is valued at approximately $6.3 billion, including outstanding debt. In 2010, KCI reported revenues of $2 billion. It is the largest healthcare acquisition for Apax, which teamed up with the Canada Pension Plan Investment Board (CPPIB) 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, experts noted.

According to analysts, KCI was an attractive buy for private equity because it has stable cash flow but has had trouble growing. The bet is that demand for their surgical equipment will spring back.

The deal is expected to close by the end of this year, but the game could still change. KCI still has time to solicit other bids—a period of 40 days. 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.
“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.

Other analysts, including Tao Levy of Collins Stewart predicted another bit from a private equity consortium still could come forward and valued the deal at between $73 to $76 per. Matson expects more private equity deals in healthcare and medical technology over the next six to 12 months.

“We are highly impressed by the culture of innovation at KCI and are excited to work with a business that produces solutions that dramatically improve the lives of many people around the world,” said Buddy Gumina, partner and co-head of the healthcare team at Apax. “Over the years, we have reviewed multiple investments in the medical devices and products industry, having originally identified it as a key growth sector within our overall healthcare investment practice.

Andre Bourbonnais, senior vice president for Private Investments for CPPIB said KCI has more growth potential outside of its core U.S. market.
“KCI’s business is well positioned for growth based on global trends such as demographics, including longevity and an aging population,” he said.

Other such deals could play out before year’s end. David Turkaly, an analyst with Susquehanna International Group, said likely future medical device targets include dental device maker Align Technology Inc., imaging company Hologic Inc., and orthopedic device makers Mako Surgical Corp. and Wright Medical Technology Inc.