Apax’s $6.3B LBO No Trendsetter, Pros Say

Target: Kinetic Concepts Inc.

Price: $6.3 billion

Sponsor: Apax Partners, Canada Pension Plan Investment Board, Public Sector Pension Investment Board

Seller: Kinetic Concepts Inc.

Financial Adviser: Sponsor: Morgan Stanley & Co.

Legal Adviser: Sponsor: Simpson Thacher & Bartlett LLP, Torys LLP, Weil Gotshal & Manges LLP

Apax Partners‘s announcement that it was leading a $6.3 billion buyout of a medical device company rippled through the buyout market July 13, suggesting more large buyouts could finally be in the offing.

But a small sample of two bankers and two buyout pros were unanimously skeptical that the deal portends a new wave of large market buyouts, citing macro economic concerns such as the European debt crisis and unemployment in the U.S., and a relatively healthy equity market that demands sponsors pay a strong premium to take companies private.

“There is no doubt that the large private equity funds are wanting to do deals like this and put our more cash,” Rob Brown, a managing director at Lincoln International LLC, told Buyouts. “However, valuations remain high and the leverage markets are still spotty for these mega-LBOs.”

The premium Apax is offering isn’t all that all high, all things considered. The firm said it was offering shareholders of Kinetic Concepts Inc., a San Antonio-based company, $68.50 per share, a 6 percent increase over the company’s closing stock price the day before. Joining Apax on the deal are two of its investors, the Canada Pension Plan Investment Board and the Public Sector Pension Investment Board.

After Kohlberg Kravis Roberts & Co. led the $5.3 billion buyout of Del Monte in the first quarter, there was a feeling that larger deals were coming back, with some suggesting that banks could support a $10 billion deal. But since Del Monte, the largest deal had been Clayton Dubilier & Rice‘s buyout of Emergency Medical Services Corp. for $2.9 billion, a deal size that would have scarcely attracted any attention in the heady days of 2007.

Buyout firms are still smarting from the lessons learned in that wild year, when sponsors closed on more than 1,500 deals with a disclosed deal value of more than $630 billion, according to Thomson Reuters.

“We learned hard lessons by buying companies at peak multiples off peak earnings and maxing leverage,” said Charles Ayres, global chairman of Trilantic Capital Partners, referring to buyout shops in general. “We’ve seen that movie and we’re loath to get into that when we don’t have a real view on the economy coming back.”

Buddy Gumina, the Apax partner who helping to lead the Kinetic deal, declined to speculate on the deal’s significance for the wider buyout market. Instead, he said the firm expects more deal opportunities in health care as that industry scrambles to produce better and more efficient care for an aging population here in the U.S. and more people seeking quality health care in emerging markets such as Brazil.

“As I look down the path in the next five years, the complexity in the health care sector is getting higher,” Gumina said. “I think many companies are thinking about what types of partnerships would help them take advantage of opportunities they see in a changing market.”