Becton Dickinson’s (NYSE:BDX) decision to spin off its respiratory devices into a joint venture with Apax Partners will allow it to offload an underperforming segment and concentrate on its core business of diagnostics. And the agreement also highlights the growing involvement of private equity in the medtech industry.
The BD deal is the third this year to involve a private equity group, and the first quarter is not yet over. There were six such transactions in all of 2015. Over the last five years private equity companies have spent around $20bn on device companies, and with the relatively poor performance of medtech shares over the last 12 months the conditions are right for an escalation of activity (see table below).
The latest in a long chain of private equity deals will see BD carve its Respiratory Solutions unit out as a joint venture with London-based Apax Partners, having sold the company a 50.1% stake for an undisclosed amount.
Obtained through its acquisition of CareFusion in 2014, BD’s respiratory unit includes ventilation products, respiratory diagnostics and vital signs monitoring equipment and has sales of around $900m a year. However, BD said that Respiratory Solutions was the only part of its Medical unit- which makes up around two-thirds of the company by sales- to show declining revenue in the first quarter of fiscal 2016.
Analysts at Jefferies value the new entity at around $500m but say that “profitability appears much lower than [they] initially thought”, at around 9% of EBITA.
Becton Dickinson ought to get around $220m of net proceeds, the analysts say. The company said it will use this cash to buy back its own stock.
Post-divestment, BD will be more streamlined having shucked off a non-core unit, and can avoid having to make the incremental investments needed by the fragmented business, freeing up resources it can channel to higher return projects.
The joint-venture structure is unusual: most private equity-medtech agreements are a straight purchase of a business unit or an outright company acquisition. Assuming Apax will run the venture along traditional private equity lines- strip it down, load it with debt and sell it on- retaining a minority stake will allow BD a slice of the profits.
Past and future
Apax Partners certainly has form in medtech. It is responsible for the largest private equity buyout in the sector’s history, that of wound care specialist Kinetic Concepts in 2011, for $6.1bn. In accordance with the approximately five-year cycle of private equity, Kinetic Concepts- having been renamed Acelity – filed for an IPO last year (Acelity files to float, but is it secretly seeking a buyer?, August 28, 2015).
Though Acelity said it wanted to raise $100m the actual figure was expected to be ten times that. But nothing more has been heard, and if Acelity is still pursuing a float- or in negotiations to be bought- it could be that buyers or potential shareholders are hesitant owing to Acelity’s gross debt of nearly $5bn.
The Kinetic Concepts /Acelity buy was the largest private equity deal, but certainly not the last. By EP Vantage’s reckoning there have been 26 purchases of medical device businesses by private equity groups since then.
With three already agreed so far in 2016 the rate at which these types of transactions are occurring looks to be increasing. There seems little prospect of it slowing down in future.