Healthcare LBOs Make a Comeback –

Biotech companies may keep tapping the public markets to fund further research and drug development projects. But healthcare services, including hospitals and outpatient treatment centers, are rushing to go private by entering into leveraged buyout deals. The transactions are a windfall for Wall Street, which is providing debt refinancing as well as mergers and acquisitions advice.

“There is a lot of interest in hospital assets right now,” said one private equity executive who has been involved in the recent transactions. Private equity firms flush with cash are seeking promising investments and finding them in healthcare. “A lot of private equity firms are looking for good companies with strong management teams,” he said.

Also, the new Medicare prescription drug bill has removed uncertainty about reimbursement and that helps get deals underway, even if the government proves less generous than healthcare administrators would like. Good or bad, “at least you know,” added Curtis Lane, founder of private equity firm MTS Health Partners.

Nor is the business going only to commercial/investment bank hybrids like Citigroup, which traditionally award credit more readily than stand-alone Wall Street firms. “Everybody is expected to participate top to bottom in these deals,” said Patrick McMullan, co-head of healthcare at Bear Stearns.

Banks aren’t the only ones expected to go the extra mile to participate in these deals. In their eagerness to buy these companies, investors are tolerating heavier debt loads. In many of the deals, McMullan said, companies are shouldering senior debt of three to 3.5x EBITDA and subordinated debt of 2.5 to three times EBITDA. “More leverage can be placed than ever before,” said Jim Forbes, head of healthcare at Merrill Lynch & Co.

The last time bankers saw a spate of healthcare LBOs was in the late 1980s and early 1990s, Forbes said, another period when relatively low valuations for healthcare services companies coincided with a strong high-yield market.

Last month, U.S. Oncology completed a $1.7 billion sale to buyout shop Welsh, Carson, Anderson & Stowe, which had owned a minority stake in the company. The $15.05 per share offer was an 18.5% premium over the company’s $12.70 closing price on March 22, the day the two entities announced the merger. That day investors bid up U.S. Oncology shares 19.2%, to $15.33. U.S. Oncology provides cancer-care services to physicians and operates dozens of cancer treatment centers around the country. Bankers said the sale, for around 7.5 x EBITDA, means multiples are reasonably attractive for private equity firms. Merrill Lynch advised U.S. Oncology.

U.S. Oncology’s LBO typifies the kinds of deals that have recently been completed or are presently under consideration, bankers say. In February, German pharmaceutical giant Merck KGaA sold its West Chester, Pa.-based laboratory distribution business, VWR International, in a $1.68 billion deal with Clayton, Dubilier & Rice. Bear Stearns advised VWR.

And in one deal that bankers expect to close shortly, private equity shop JLL Partners Inc. will sell its Franklin, Tenn.-based Iasis Healthcare Corp. for around $1.4 billion to Texas Pacific Group. Iasis runs acute care hospitals and ambulatory surgery centers in Florida and the Southwestern states.

JLL, which is reaping twice its initial investment value via the Iasis sale, created the company in 1999 by acquiring 10 hospitals from Paracelsus Healthcare Corp. and four from Tenet Healthcare Corp. Before deciding on Texas Pacific as a buyer, JLL weighed a possible initial public offering. But the problem with the IPO strategy, as several people involved in the deal explained, is that public offerings do not guarantee an exit from the investment. An IPO provides per-share valuation, not necessarily liquidity. “In an IPO, you can take out maybe 50 percent. A private equity deal is 100%,” one person said.