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|  | JULY 21, 2004
By Steve Rosenbush Blackstone's Vanguard Ambitions The private-equity firm is in talks to buy the hospital operator. The asking prices is said to be high, but health-care demand is booming As an aging population of baby boomers boosts demand for health care, big private investors are finding the sector increasingly attractive. Now it appears that Blackstone Group may be close to a significant acquisition in this market. The private-equity giant is in talks to buy Vanguard Health Systems, a $1.3 billion hospital company based in Nashville, from Morgan Stanley Capital Partners, BusinessWeek Online has learned. No deal is imminent, but Blackstone appears to be the leading contender in an auction run by Bank of America (BAC ), people familiar with the talks say. Blackstone and Morgan Stanley Capital Partners declined to discuss the matter, and Bank of America officials weren't immediately available for comment. It may be that few players are willing or able to afford Vanguard. Morgan Stanley is seeking about $1.8 billion for it, a rich price, says an industry executive. Rival private-equity giant KKR has been interested in the property and made an offer in the $1.5 billion to $1.6 billion range, and Thomas H. Lee Partners, another major private-equity firm, also took a look, people familiar with the matter say. GROWING MARKET. The payoff could be huge, though. JLL Partners, a private-equity firm in New York, has invested $450 million in the health-care sector, buying companies such as IASIS Healthcare and Advance PCS. JLL Partners has produced a return of $2 billion on that $450 million investment. Rising valuations in the health-care field reflect strong demand. As the population ages, more and more people will need drugs and acute care. Demand for those services is likely to remain robust even if the economy slows down or goes into recession. The government reported that the U.S. created only 112,000 jobs in June, less than half of what economists expected. While the number of manufacturing jobs declined, health care was among the few sectors where employment grew. Vanguard is well positioned to take advantage of the boom in health care. It operates 16 acute-care hospitals and other facilities in four growing markets: Arizona, Illinois, California, and Texas. It reported net income of $17 million in 2003, up from $10 million in 2002. That just might make it worth $1.8 billion to Blackstone, or some other bidder. CASH FLOW IS KEY. Blackstone has been looking to beef up its presence in the health-care market. In April, 2003, it launched Blackstone Healthcare Partners. The investment team includes Lodewijk J.R. de Vink, the former chief executive of Warner Lambert, Alexsander Erdeljan, the former chief executive of RP Scherer, and Doug Rogers, who was a health-care banker at Donaldson, Lufkin & Jenrette. Last month, British press reports said Blackstone was interested in acquiring the Four Seasons nursing home business in Britain. Private-equity rival Alchemy won the auction with a bid of 775 million pounds, though. Health care is a logical market for private-equity players such as Blackstone because it throws off a lot of cash. While stock investors are often concerned with growth, private-equity investors often focus on strong cash flow. The sector also is appealing because many people believe that it's ripe for cost cutting, an area where private-equity firms can bring their financial skills to bear. The only question is whether Blackstone can pry Vanguard away from a financially savvy operator like Morgan Stanley for the right price.  Rosenbush is a senior writer for BusinessWeek Online
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