TORONTO – The Canada Pension Plan Investment Board is part of an investor group spending US$6.3 billion on a company that specializes in wound care, in hopes of cashing in on what could be a growing industry.
Texas-based Kinetic Concepts Inc. said Wednesday the transaction is worth $68.50 per share, which values the company at $4.98 billion. The rest of the amount includes debt.
The CPPIB declined to say how much it has committed to the transaction, but said it is considered a “significant minority” interest.
Other investors include London-headquartered Apax Partners and the Public Sector Pension Investment Board, a Canadian Crown corporation that manages pensions for federal government employees. It is unclear who will own the largest stake.
Kinetic Concepts (NYSE:KCI) designs, manufactures and markets products to speed wound healing, including vacuum technology and biomaterials. It also makes therapeutic beds. It holds an 80 per cent market share in its vacuum treatment business.
The group of investors said it plans to expand the company’s core business, and Andre Bourbonnais, CPPIB’s senior vice-president of private investments said the board should see a return on investment in between five and seven years.
In an interview, Bourbonnais said the investment board likes to purchase companies that are market leaders and added that there is potential for the company to grow as trauma incidents increase with population growth.
“But also, it serves to treat wounds related to two diseases – obesity and diabetes – that unfortunately are growing at a much faster pace than the population growth,” he said.
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“We clearly like the profile and the upside potential of that company as well as the fact that it’s in a space where we believe there’s inherent downside protection to our investment.”
But Jason Wittes, managing director of Healthcare Equity Research at Caris & Company, said there is little room for Kinetic to grow further as it faces major competition.
He said it is the potential cash that can come out of the deal that makes the company attractive to the buyers. According to documents on the Kinetic website, the company produced $275 million in cash flow last year.
“It’s a business they can manage for cash, so they can lever it up significantly, use that cash to pay off the debt, and hopefully get a decent return off it without necessarily seeing significant growth in the revenue line,” he said.
Julie Stralow, a healthcare industry analyst for Morningstar, valued Kinetic Concepts at $45 per share, and said the buyers paid more than the company is worth. She said Kinetic will have trouble growing as new players enter the market, but she said scarce details make it hard to judge whether the buyers can make it work.
“From my perspective I thought it was a great deal for KCI investors, rather than the buyers,” she said.
Bourbonnais said the CPPIB has done its due diligence, and performed analysis on the downsides and upsides of the transaction.
Kinetic said its board has approved the sale and recommended stockholders tender their shares to the agreement.
Founder and chairman emeritus James Leininger is supporting the deal and will vote his shares in favour, the company said. Leininger has an 11 per cent stake in the company when factoring in shareholders related or affiliated with him.
Speculation over a buyout has driven up the company’s stock in the past week, with shares rising 12.6 per cent on July 6. The offer comes at a premium of 16.5 per cent to the price of Kinetic Concepts on July 5, and the company said it is getting a premium of 52 per cent based on its average closing price over the 12 months ended July 5.
Kinetic shares closed ahead 5.6 per cent, or $3.61, to $68.10 Wednesday on the New York Stock Exchange.
The company has a 40-day period to shop around for competing offers, but Wittes said he doubts another offer will materialize.
“Because of lack of growth potential, and given the size (of the deal), it seems it would not be that easy for even a private equity group to jump in with a higher bid,” he said.
In a research note, Mizuho Securities analyst Michael Matson wrote that there is a “very small chance” of a rival takeover bid.
“We think that private equity is becoming more active in healthcare and med tech,”
he said, citing another deal announced last week, and speculation about others.
The agreement faces typical regulatory and other approvals, but is expected to close in the second half of this year.
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