The Health Care M&A Monthly: Private Equity In The Middle Market-

Private Equity Firms Continue To Find Good Deals
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Financial entities, such as REITS and private equity firms, continue to
make their mark in the health care M&A market. During April, financial concerns were involved in 11 transactions, either as buyers or sellers. This represents 16% of the month’s deal volume. The total value of these 11 deals is $3.5 billion, which represents 14% of all dollars committed to M&A activity during April. However, if we eliminate the $15.2 billion dollar acquisition of MedImmune by AstraZeneca, that figure rises to 38%.
This acquisition activity is split unevenly between health care services, with seven deals, and health care technology, with the remaining four. The financial split between the two segments is even more lopsided, with services accounting for $3.0 billion, or 86% of all dollars committed in such deals.
While these deals run the gamut from $2.0 billion to $3.0 million, most are situated in the middle market which seems to harbor much untapped value that financial buyers are eager to unlock. And, each deal illustrates in its own way that old chestnut: buy low, sell high.
In the largest of these deals, one in the Laboratory, MRI & Dialysis sector, the well-known private equity firm of Welsh Carson Anderson & Stowe (WCAS) is selling AmeriPath, a leading laboratory services company, to Quest Diagnostics (NYSE: DGX) for $2.0 billion in cash ($1.23 billion) and assumed debt ($770.0 million). The deal, valued at 2.7x revenue, helps establish DGX as a force to be reckoned with in cancer diagnostics, specializing in dermatopathology, anatomic pathology and molecular testing. WCAS privatized AmeriPath in late 2002 for $839.4 million, or 1.8x revenue, at a time when the company was completing its transformation from a physician practice management firm to a laboratory services business. At that time, we wrote that this deal “…gives [AmeriPath] the stability to compete with larger lab companies such as Quest…” As we now see, AmeriPath has become part of Quest, and WCAS has turned a very healthy return on its investment.
A smaller Laboratory deal has HealthSouth Corp. (NYSE: HLS) selling its diagnostics division to The Gores Group, LLC, a private equity firm based in Los Angeles. The division consists of 54 freestanding diagnostic imaging centers in 19 states; in 2006, it generated revenue of $186.9 million, EBITDA of $14.3 million and a loss of $26.6 million. The purchase price is $47.5 million, or just 0.25x revenue, lower than many pundits had anticipated. However, as it attempts to transition to a pure-play post-acute health care provider, HLS is happy to have this deal behind it and the proceeds to pay down debt.
A consortium is selling Universal Hospital Services (UHSI) to Bear Stearns Merchant Banking (BSMB) for $712.0 million, or 3.2x revenue. The sellers include two private equity firms, L.W. Childs Associates, The Halifax Group, as well as UHSI management. Based in Edina, Minnesota, UHSI provides medical equipment lifecycle services to such health care providers as hospitals. For 2006, it generated revenue of $225.1 million, a gross margin of $94.2 million, EBITDA of $32.3 million and net income of $52,000. The resources of BSMB, an institutional private equity firm focused on making equity investments in middle-market companies, will help the company transition from an equipment rental business to a full equipment lifecycle service business, and hopefully improve margins.
Crestview Partners, a private equity firm set up by former partners at Goldman Sachs, is paying $637.0 million, or 2.1x revenue and 7.8x EBITDA, to privatize Nashville’s Symbion (NASDAQ: SMBI), a company that owns and operates 59 short-stay surgical facilities in 23 states, including ambulatory surgery centers and surgical hospitals. On a trailing 12-month basis, SMBI generated revenue of $301.5 million, EBITDA of $81.7 million and net income of $19.4 million. Crestview’s bid to privatize Symbion offers shareholders a 17.4% premium to the stock’s prior-day price. Northwestern Mutual Life Insurance Company is a co-investor in this transaction. Merrill Lynch & Co. is acting as financial advisor to Crestview Partners while Bear, Stearns & Co. is serving as financial advisor to SMBI’s special committee.
MTS Health Investors, LLC is selling its portfolio company, Alere Medical, to Boston-based TA Associates for $175.0 million. Alere Medical specializes in disease management services for congestive heart failure, coronary artery disease, respiratory disease and diabetes. Alere covers more than 20 million commercially insured and 2 million Medicare insured individuals in 47 states. This sale allows MTS Health Investors to cash out on its investment; the inbound investment by TA Associates provides Alere with further resources for growth.
Ventas (NYSE: VTR), the well-known seniors housing REIT, is selling 22 facilities, including 21 skilled nursing facilities in 14 states and one LTAC in Detroit, to Kindred Healthcare Services (NYSE: KND) for $171.5 million. These facilities, currently operated by Kindred, have 2,634 licensed nursing beds and 220 licensed hospital beds. They generated pre-tax losses of $10 million in 2006, a large part of which was due to $10.3 million in annual lease payments. Kindred intends to resell them by the end of 2007, probably in lots rather than as a single portfolio. KND expects to generate between $80 million and $90 million in proceeds from the sale of the facilities and the related operations.
Portfolio Logic, a Washington, DC-based private equity firm formed in 2004, is paying $121.9 million for the remaining 85.1% in Pediatric Services of America (NASDAQ: PSAI), a company that provides home health care and related services to infants and children through 59 branches in 18 states. Portfolio Logic first acquired a 10.8% position in PSAI in the summer of 2004 for $7.50 per share, with subsequent increments. In paying $16.25 per share, the current deal offers PSAI shareholders a 19% premium over the stock’s closing price of $13.70.
The largest of the four technology deals involves the sale of foreign royalty rights for Enbrel by Massachusetts General Hospital to Drug Royalty Corporation (DRC) for $284.0 million. Enbrel is an injectable drug for treating rheumatoid arthritis and was developed at the Hospital. This transaction follows the settlement of a patent suit last year between Massachusetts General and Enbrel’s maker, Amgen (NASDAQ: AMGN). As part of the settlement, the hospital relinquished rights to royalties on Enbrel sales in the United States to the tune of $248.0 million.
While the hospital could have expected to receive continued royalty payments, Enbrel faces competition from Abbott Lab’s (NYSE: ABT) Humira and Centocor’s Remicade. As a biologic that has to be injected, Enbrel can easily be displaced by a small-molecule drug that is ingested as a pill. Mass General ultimately decided that this is AMGN’s fight to wage, not its own, and that as an acute-care hospital, cash in hand was more valuable than a future—and potentially threatened—royalty stream.
Battery Ventures, a Waltham, Massachusetts-based venture capital firm, is buying e-Health company Quovadx (NASDAQ: QVDX) for $3.20 per share, or $139.1 million. This deal, valued at 2.0x revenue, offers a 25% premium to QVDX’s prior-day price. Just before this privatization, however, QVDX sold CareScience, its clinical data-mining unit, to Premier, the California-based group purchasing organization, for $34.9 million, or 2.3x revenue. QVDX had been exploring strategic alternatives since last August.
The remaining deals, in the Pharmaceutical and Biotechnology sectors, are small. Bioniche Teoranta, a portfolio company of RoundTable Healthcare Partners, is paying $3.7 million to Nabi Pharmaceuticals (NASDAQ: NABI) for Aloprim for injection, a drug used to manage patients with leukemia, lymphoma and solid-tumor malignancies. NABI originally acquired Aloprim from DSM Pharmaceuticals for $1.8 million in 2004.
Finally, GEM Global Yield Fund is paying $3.0 million to buy AION Diagnostics from pSivida (NASDAQ: PSDV). AION holds an exclusive license for the nonelectronic imaging diagnostic application of PSDV’s BioSilicon technology. This sale frees PSDV to concentrate on its core drug delivery business. GEM proposes further developing AION’s promise by shepherding the company through an IPO on the Frankfurt Stock Exchange.
 
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