Talking Deal Prices: CD&R sells PharMEDium for 20x EBITDA, high-yield credit shows strain


  • CD&R chalks up lucrative exit price
  • AmeriSourceBergen pays up for growth
  • Debt markets for deals become less generous


It’s no wonder buyout pros continue to shy away from many deals as cash-rich strategic players pay up for growth.

In one high-profile example of a frothy price, drug wholesaler AmerisourceBergen earlier this month agreed to pay about $2.6 billion, including debt, for Clayton Dubilier & Rice’s PharMEDium Healthcare Holding Inc.

The drug compounding company is selling for about 20x its annualized adjusted EBITDA of $110 million for the $2.2 billion equity payment in the deal.

The purchase price multiple ranks well above the average U.S. sponsor buyout of 10.8x EBITDA in the third quarter, which was about steady with the year-ago level, according to the latest estimates from S&P Capital IQ.

CD&R made an estimated 5x return from PharMEDium in less than two years, a source told Buyouts.

For AmerisourceBergen, the deal makes sense. PharMEDium offers access to growing demand in the business of compounding drugs to provide dosages to hospitals and other healthcare providers that aren’t commercially available.

From 2012 through 2014, Lake Forest, Illinois-based PharMEDium notched a compounded annual growth rate of 55 percent in adjusted EBITDA, with margin improvements driven by changes in product mix, enhancements in its manufacturing efficiency and fixed-cost leverage.

With a projected $30 million in synergies embedded in the deal, AmerisourceBergen expects to boost its earnings by 22 to 26 cents a share in 2016, or an extra 20 percent over its 2014 profit of $1.21 a share.

The exit comes as CD&R sharpens its focus on healthcare as a way to woo LPs, according to a source.

In March, Ravi Sachdev joined the firm as a partner after working as managing director for healthcare coverage at J.P. Morgan. CD&R also added health industry veteran John Dineen about a year ago as an operating advisor. Dineen worked at General Electric Co for 28 years, including as CEO of GE Healthcare, an $18 billion unit at the conglomerate. Another big name on CD&R’s healthcare roster, John Ballbach, joined as an operating advisor in 2014 after serving as CEO of VWR International, a CD&R portfolio company.

“We believe the disruptive structural changes affecting healthcare will yield exceptional investment opportunities over the next decade or more,” Rick Schnall, CD&R partner, said in prepared statement in March.

In addition to PharMEDium, CD&R marked another lucrative healthcare exit in March with the $1.8 billion stock offering by Envision Healthcare. The offering price of $36.25 a share was well above the Envision’s 2013 IPO price of $23 a share.

Credit markets less hospitable to high-yield debt

While private equity pros continue to lament high purchase prices, some cracks may be forming in the ability of some debt deals to get done. This could lead to less frothy prices.

A deal-maker in the leveraged loan space said the market has been bifurcated since August. The deal-maker has seen price weakness in broadly syndicated loans, but said new issuance continues trading within expected ranges.

Market participants are reporting some concern that issuance of collateralized loan obligations (CLOs) may slow due to rising liability prices, but new paper continues to flow.

By contrast, the high-yield debt market in August and September “was a bloodbath,” particularly for hedge funds, the source said. It was “definitely the worst period for credit-oriented hedge funds in many years,” the source said.

The disruption in high-yield debt came around the same time as woes about China’s economy and uncertainty around interest rates caused the worst drops in equity prices in several years.

Low prices won’t guarantee a deal

While companies such as PharMEDium continue to command strong prices, it’s not impossible to find cheap deals. But nobody may want to own them.

Consider SFX Entertainment, the electronic music culture events company headed up by Robert Sillerman. The company faced an October 14 deadline on buyout proposals after Sillerman withdrew his take-private bid of $5.25 a share over the summer. At last check, the stock traded at 94 cents a share, giving the company a market cap of $92 million.

No word yet if buyout firms are looking at a deal for part or all of SFX, although Golden Tree Asset Management holds some of the company’s debt. With widening losses of $48 million in its fiscal quarter ended June 30, compared to a year-ago loss of $35.3 million, SFX doesn’t appear to be drawing much interest.

Action Item: See SFX Entertainment’s latest financials here: