Arcapita Makes 2.5x Return On TLC Healthcare

Target: TLC Health Care Services

Price: $395 million

Seller: Arcapita

Buyer: Amedisys

Financial Advisor: Sponsor: Navigant Capital Advisors

Legal Adviser: Sponsor: King & Spalding

After three years of control, buyout firm Arcapita netted a 2.5x return on its sale of hospice and home nursing service provider TLC Health Care Services. The return translates to a 30 percent gross IRR. Through a direct approach, the firm sold TLC Health Care to its largest publicly traded competitor, Amedisys, for $325 million in February.

Arcapita, the Atlanta-based firm funded by investors from the Arabian Gulf region, bought TLC Health Care out of bankruptcy in 2004. TLC Health Care’s unprofitable parent carved it out as a separate Chapter 11 filing, expecting the move to generate a better sale price for the division.

Arcapita beat a frothy bidding pool for the company, paying $175 million. The firm bolstered the New York-based company’s regional offerings by tacking on Medicare provider AccuMed for $67 million, and Chicago-based Northwestern Memorial Home Health Care for $6 million in 2005. In all, Arcapita spent $248 million buying and building TLC Health Care.

During Arcapita’s hold period, the home health care industry grew at an 8 percent annual clip, but TLC Health Care outpaced the average, growing by 12 percent to 13 percent, said director Jack Draughon. The business “had an upside-down balance sheet” when Arcapita bought it, meaning its operations were disorganized, he said. While the firm doesn’t specialize in distressed investing, it has experience with lighter-weight turnarounds such as TLC Health Care that require the firm to make substantial fixes to cost structures and business operations, Draughon said.

Arcapita doesn’t function like a typical LBO shop. Instead of raising institutional funds, the firm’s buyout arm uses its balance sheet to finance equity investments. The firm then places the equity directly with a group of wealthy investors in the Middle East, primarily in Bahrain. With arms specializing in venture capital, real estate and infrastructure, Arcapita’s business model is similar to Bahrain’s most well-known alternative investment firm, Investcorp, Draughon said.

But that may change because Arcapita is considering raising a traditional LBO fund backed by investors based in the United States, although Draughon stressed that the firm hasn’t made a decision. Such a vehicle would expand Arcapita’s deal-making capacity beyond its current $100 million to $1 billion range. Likewise, the firm would benefit from a more diverse investor base, he said.

Arcapita’s investments in the US began in 1997 under the name First Islamic Investment Bank B.S.C., with its buyout arm known as Crescent Capital Investments Inc. The company changed its name it Arcapita Bank B.S.C. in 2005 as part of a global branding strategy. In addition to Bahrain and Atlanta, the firm has offices in London and Singapore. Its buyout arm focuses on the consumer, health care, energy, technology and manufacturing sectors.—E.G.