3i Group Share News (III)

By Marietta Cauchi Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Private equity firms are piling into auctions for health-care companies, betting that their defensive qualities and steady cash flows will bring in the returns being demanded by investors after two lackluster years. Over the past few weeks alone, the U.K.'s Priory Group and French Medi-Partenaires have been put on the block with price tags of GBP1 billion and EUR1 billion, respectively. The two private hospital operators are expected to attract a significant amount of interest from buyout funds. Private equity firms like health-care companies because they are non-cyclical, which means that they can be resilient during downturns. "M&A interest in the health-care sector tends to be pretty constant because it's very defensive and non-discretionary," said Dominic Hollamby, global head of health care at Rothschild. Hollamby referred to the austerity budget unveiled this week by U.K. Chancellor of the Exchequer George Osborne. Although the U.K.'s new coalition government is under severe pressure to reduce the deficit by tightening public spending, outlays on the country's health-care system haven't been cut. At the same time, an aging population is increasing the cost of health-care and related services, and governments worldwide are looking to the private sector to step in, especially with the expensive, high-end spends such as home care. This coupled with the outsourcing of diagnostic, testing and other laboratory services from the public sector and primary care organizations is boosting the need for private capital--and the opportunities for buyout firms. In the first quarter of this year, the value of buyouts in the health-care sector in Europe alone was almost $3 billion, compared with just $760 million for the same period last year. Taking the U.S. into account boosts the figures to $4.8 billion, compared with $1.4 billion a year earlier, according to Dealogic. The top-ranked deal in Europe was the sale by London-based private-equity firm 3i Group PLC (III.LN) of Nordic health-care services provider Ambea to Triton Partners for EUR850 million ($1.16 billion), closely followed by Cinven Group's acquisition of oncology-focused diagnostic company Sebia from Montagu Private Equity for around EUR800 million ($1.1 billion). However, buying health-care companies isn't all plain sailing, and getting decent returns from an investment is tricky while large amounts of debt to finance deals remain unavailable and the ability to grow a company uncertain. Competition for attractive assets is so fierce that buyout firms wanting to secure a deal ahead of the game need to show the buyer that they can deliver immediately. For example, Cinven paid for the acquisition of Sebia in cash, with plans to raise debt financing at a later stage. Apax Partners similarly paid cash for the GBP975 million acquisition of another pharmaceutical support company when it bought Marken from Intermediate Capital Group PLC (ICP.LN) in December, only taking on debt later. Even where acquisitions are made with debt, the proportion of debt to equity is far less than in the boom years when banks were falling over themselves to lend. Buyout firms are stumping up at least half the price, if not more, compared with as little as 30% or even 20% of the total acquisition cost a few years ago. And banks are still being conservative, lending at 2.5- to 3.5-times the target company's earnings before interest, depreciation, taxes and amortization, or Ebitda, rather than the 5- or 6-times seen previously. "Banks don't want to be caught out, and private equity firms [are putting in more cash in deals generally because they] want to be adequately capitalized and not have to refinance in a short time," said Mo Merali, partner and head of private equity at Grant Thornton. The danger of overleverage in the sector is typified by U.K. care-home group Four Seasons, which went through a comprehensive restructuring with its lenders last year after being over-burdened with debt by its buyout owners, Qatari-backed Three Delta. The eventual deal saw the company's debt pile being reduced to GBP780 million from GBP1.5 billion via a debt-for-equity swap but it is now in talks again with its bondholders to extend a GBP600 million loan. If buyout out firms can't rely on debt to boost returns, being able to grow the company becomes crucial but can be difficult. For instance, one potential bidder for the Priory said that the company had already been run efficiently and had a high occupancy rate, so the buyout firm was unlikely to join what is bound to be a fiercely fought auction. Private equity firms will also find it difficult to capitalize on the depressed value of real estate and buy land for new developments, said David Jones, health-care partner in Deloitte's corporate finance group. "New organic growth is difficult for private equity because of the time scale involved," Jones said. "Time spent getting planning permission and developing a site isn't profitable for a private equity firm, which typically sells on an investment after five years at the most," he added. -By Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241; marietta.cauchi@dowjones.com (Jessica Hodgson contributed to this article.) (END) Dow Jones Newswires June 24, 2010 08:34 ET (12:34 GMT)