BD Spin-Out Points To More Private Equity In Medtech

| About: Becton, Dickinson (BDX)

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.

Deep breath

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).

Selected medtech acquisitions by private equity, 2011-16
Announcement date Acquirer Target Deal type Value ($m)
July 12, 2011 Apax Partners Kinetic Concepts/Acelity Company acquisition 6,100
January 16, 2014 The Carlyle Group Ortho-Clinical Diagnostics Business unit 4,150
November 6, 2014 EQT Partners Audiology Solutions business of Siemens Business unit 2,669
June 16, 2013 Cinven CeramTec Company acquisition 1,980
November 4, 2015 Citic Biosensors International Company acquisition 817
July 1, 2015 Madison Dearborn Partners Patterson Medical Business unit 715
February 22, 2011 GTCR SteriGenics International Company acquisition 675
June 18, 2015 XIO Group Lumenis Company acquisition 510
March 9, 2016 Apax Partners Respiratory Solutions business of Becton Dickinson Business unit/joint venture 500*
November 17, 2011 Bain Capital Physio-Control Business unit 487
*Valuation of the entire unit
Click to enlarge
Click to enlarge

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.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter