Bloomberg News

Kinetic Concepts Said to Be in Talks on Leveraged Buyout

July 06, 2011

(Updates with Blackstone in second paragraph, analyst’s comment starting in third paragraph.)

July 6 (Bloomberg) -- Kinetic Concepts Inc., a maker of wound-care products and hospital beds, is in exclusive talks to go private in a leveraged buyout, according to people with knowledge of the matter.

Kinetic is discussing a sale with a group of at least two private-equity firms that may value the company at more than $5 billion excluding debt, said two of the people, who declined to be identified because the situation is private. Blackstone Group LP is looking at the company, one person said. Kinetic’s market value was $4.3 billion as of yesterday’s close. The transaction has become more difficult to pull off in recent weeks because of tightening debt markets, the people said.

The shares jumped 13 percent to $66.20 today in New York Stock Exchange trading. Private-equity firms may be attracted to Kinetic’s steady cash flow and potential to restructure the business by divesting its hospital bed unit, according to Spencer Nam, a Boston-based analyst at Madison Williams & Co. who has a $70 share-price forecast for Kinetic.

“They do have a lot of fat they can cut out,” Nam said. Going private would allow the company to restructure without pressure from public investors, he said. He estimates a buyout would require $3.5 billion to $4 billion in debt financing, posing a potential hurdle to completing a deal.

A takeover of Kinetic may surpass Del Monte Foods Co. as the biggest private-equity buyout since the collapse of Lehman Brothers Holdings Inc. in 2008 prompted banks to shun financing for leveraged transactions. A group led by KKR & Co. agreed to buy Del Monte for about $4 billion, plus $1.3 billion in debt, in November 2010.

Kevin Belgrade, a spokesman for San Antonio-based Kinetic, declined to comment. Talks could still break down and there is no guarantee a deal will be reached. The Wall Street Journal reported earlier today that Blackstone is in talks with Kinetic.

Kinetic Shares

Since September 2008, three of the 10 biggest leveraged buyouts have involved health-care companies, according to data compiled by Bloomberg. Yesterday Immucor Inc., the leading maker of tests to screen blood before transfusions, announced an agreement to sell itself to TPG Capital for $1.97 billion.

Investor concerns about a slowing U.S. economy and Greece’s debt have led to declines in U.S. leveraged loan issuance, making it more difficult for private-equity firms to execute buyouts. While offerings this year are the most since 2007, second-quarter loan sales fell to $116.4 billion from $141.2 billion in the three-month period ended March 31, according to Standard & Poor’s Leveraged Commentary and Data.

Kinetic had gained 40 percent this year before today as the company increased sales for its products using vacuums and skin grafts to treat wounds. While the company leads the global market for negative-pressure therapy using vacuums to aid healing, Kinetic has lost ground to lower-priced competitors, said Michael Matson, a Mizuho Securities analyst in New York, in a June 16 note to clients.

New Products

To regain business, Kinetic has introduced new products such as the disposable wound-care system V.A.C.Via, and expanded into new geographic areas including Japan and Brazil, Tao Levy, an analyst with Collins Stewart in New York, said in a telephone interview today. That could lead to annual revenue growth of as much as 7 percent over time, up from an estimated 3 percent growth in revenue this year, he said.

Investors had yet to embrace the strategy, leaving Kinetic’s stock to trade at about a 30 percent discount to peers before today’s jump, Levy said. Kinetic traded at about 12 times estimated 2011 earnings, compared with about 17 times for companies such as CareFusion Corp. and C.R. Bard Inc.

“There were some challenges that could potentially be overcome easily, but the markets weren’t giving them credit,” Levy said. “You’ve got a lot of these companies getting larger and seeing their growth profile slow down, but yet they generate a substantial amount of cash.”

Higher Forecast

Chief Executive Officer Catherine Burzik raised Kinetic’s full-year earnings forecast in April. Profit for 2011 will rise to $4.96 to $5.08 a share, Kinetic said in a statement.

The company, founded in 1976 by emergency-room physician Jim Leininger, generated $1.41 billion, or 70 percent of its revenue, from negative-pressure devices last year. Tissue- regeneration products that use skin grafts in hernia and breast reconstruction surgeries rose to $341.4 million, while sales of beds and other hospital equipment fell to $270.2 million.

Kinetic holds about 81 percent of the worldwide market for negative-pressure products, followed by London-based Smith & Nephew Plc, with about 5 percent, said Matson, the Mizuho analyst. The two companies have been battling over patents for the technology, with Kinetic winning lawsuits in the U.S. and U.K. in the last two years.

Smith & Nephew gained as much as 4.1 percent today on investor speculation that Kinetic’s competitors may also become takeover targets. Medical products companies are also attractive to drugmakers that are looking to stem revenue losses from expiring patents on their medicines, according to Suraj Kalia, an analyst with Rodman & Renshaw in New York.

“It fits perfectly for a number of pharmaceutical companies with drying pipelines,” Kalia said.

Medical Deals

There were 540 announced acquisitions of medical products and equipment companies in the last 5 years through yesterday, according to data compiled by Bloomberg. The average premium for a takeover was 51 percent. The largest was Johnson & Johnson’s $21.3 billion purchase of Synthes Inc., announced in April.

Private-equity firms haven’t been able to pull off the same kind of multibillion-dollar deals they brokered before the credit crisis took hold. Disk-drive maker Seagate Technology Plc ended talks to be taken private for about $7.55 billion in November last year after talks with TPG Capital collapsed, a person with knowledge of the matter said at the time. A takeover of Fidelity National Financial Inc. met a similar fate earlier in 2010 when the company ended talks with a private-equity group that had offered $15 billion.

--With assistance from Meg Tirrell in New York. Editors: Jennifer Sondag, Elizabeth Wollman

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Cristina Alesci in New York at calesci@bloomberg.net; Meg Tirrell in New York at mtirrell@bloomberg.net.

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Reg Gale at rgale5@bloomberg.net.


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