The Health Care M&A Monthly: Private Equity Bounces Back
Captures 21 Percent Of M&A Dollars In Q4:09
Private equity groups have felt the pain of the Credit Crunch just as keenly as other businesses, if not more so. When they undertook leveraged buyouts in the past, they would often pony up a modest amount of their own capital, sometimes as little as 10%, then go to banks or other lenders to borrow the rest. The drastic decrease in lending over the past two years has consequently led to an acute decrease in LBOs during that period. Recently though, we have seen noteworthy increases both in the number of financial buyers in the health care M&A market and in the volume of investment dollars that they were committing to fund their acquisition activity.
During the fourth quarter of 2009, financial buyers announced a combined total of 22 deals in the health care M&A market, representing 8% of the total deal volume of the 266 transactions. Ten of the buyers were PEGs while the remaining 12 were real estate investment trusts. These buyers targeted a variety of sectors. Virtually all the REITs targeted businesses in the Long-Term Care sector while the PEGs targeted companies in the e-Health (3), Laboratory (2), Hospital (1), Medical Device (1), Pharmaceutical (1), Rehabilitation (1) and Specialty Pharmacy (1) sectors. A total of $8.0 billion was spent to finance the 22 deals in Q4:09, representing 21% of the $38.3 billion total spent on M&A during the quarter. The 10 PEGs accounted for $6.7 billion of the $8.0 billion figure; the REITs, $1.3 billion. This is the highest dollar volume reached since Q2:08 when financial buyers spent a combined total of $8.2 billion, or 10% of that quarter’s total, on 13 deals.
The table on page 3 shows that after Q2:08, the proportion of M&A dollars made by financial buyers fell precipitously to less than 1% of the quarterly totals, and there it remained for four quarters. During this period, strategic buyers dominated the health care M&A market, generally funding deals from their own cash flows. It was only in the third quarter of 2009 that the proportion of M&A dollars committed by financial buyers began to rise again. Some of this recent activity involved the year-end rebalancing of portfolios by REITs, but PEG-sponsored LBOs also made a strong comeback. Further, the number of buyers in the market reached its highest level over the past two years during Q4:09. And that quarter also produced the fourth largest deal by any financial buyer in the past decade: TPG Capital’s $5.2 billion leveraged buyout of IMS Health, featured in our December 2009 issue.
Robust as recent activity has been, financial buyers still have some distance to go before reaching the heady levels of the 2006–2007 markets. It was during that two-year period of financial froth and euphoria that seven of the 10 largest private equity deals of the 2000–2009 decade were announced; they are listed in the table on page 7. During 2006, in the largest private equity deal ever made in the health care industry, a consortium of private equity firms bought hospital giant HCA, Inc. for $33.0 billion. The investors include Kohlberg Kravis Roberts & Co., Bain Capital Partners and Merrill Lynch Global Private Equity, along with HCA co-founders, the Frist family. They invested about $5.5 billion in cash, financing the rest with borrowed money. With the onset of The Great Recession, their exit was likely delayed longer than they had originally planned. So to repay its investors’ patience while they wait on an IPO, HCA has decided to pay out a $1.75 billion dividend after reporting its 2009 financial results. When the LBO first closed in 2006, HCA’s leverage stood at 6.4x EBITDA; at the end of 2009, thanks to improved financial performance, that ratio had fallen to 4.7x. (When the dividend is paid out, the figure will bob back up to 5.0x.) The dividend is to be paid out of credit facilities and cash on hand. As a result, the investors have earned themselves a plump 32% dividend (don’t call it a “bonus”) on their original investment. HCA isn’t the only hospital operator to pay dividends to its private equity investors; Vanguard Health Systems recently issued debt in part to fund a $300.0 million payment to The Blackstone Group. Some analysts see the HCA dividend payment as a prelude to an IPO for the company during the next 12 months. They reason that, after all, if the company has the financial strength (and the cash flow) to deleverage and to pay investors a handsome dividend, then it should be attractive to other investors. With demand having been pent up in the IPO market and capital waiting on the sidelines to find new opportunities, new investors may well embrace HCA’s return to the public markets. All in all, the return of PEGs, LBOs and REITs to the health care M&A market is another good sign that the financial markets have begun to function again.