BMS Sells ConvaTec: Are More Private Equity Deals on the Way?

Earlier this month, Bristol-Myers Squibb Co. (New York City) announced its intention to sell its ConvaTec unit to private equity firms Nordic Capital (Stockholm, Sweden) and Avista Capital Holdings LP (New York City) for $4.1 billion. Based in Skillman, NJ, ConvaTec is a leading manufacturer of wound therapeutics and ostomy care products, and generated 2007 revenues of $1.16 billion. The unit has more than 3400 employees in nearly 100 countries.

The acquisition represents this year's largest medtech deal to date and the largest private equity transaction in the sector since the $10.9 billion sale of orthopedics manufacturer Biomet Inc. (Warsaw, IN) to a private equity consortium led by the Blackstone Group LP (New York City) in September 2007. Over the past year, Bausch & Lomb Inc. (Rochester, NY) and DJ Orthopedics Inc. (San Diego)—two mid-cap, publicly traded medtech firms—have gone private in deals valued at $4.5 billion and $1.5 billion respectively.

Bristol-Meyers Squibb chairman and CEO James M. Cornelius said that selling ConvaTec would provide the financial resources to support the company's “next-generation biopharma strategy.”

ConvaTec CEO Dave Johnson commented: “I am excited to partner with Nordic Capital and Avista Capital Partners as we transition ConvaTec to a stand-alone company. Both firms have a proven track record of success in the healthcare industry. They are passionate believers in ConvaTec's future growth and will be strong supporters of the ConvaTec business. Their deep experience in guiding strategy and backing companies will help take ConvaTec to the next level of success as an independent company.” Johnson will continue in his current position.

According to reports, Avista and Nordic Capital are putting up a little more than half the purchase price, with the remaining $2 billion funded by a consortium of 10 banks, including J.P. Morgan Chase & Co. (New York City), the Royal Bank of Scotland Group PLC (Edinburgh), Swedbank AB (Stockholm), and Mizuho Financial Group (Tokyo).

The deal is expected to close in the third quarter of this year, subject to regulatory approvals.

Nordic Capital's medical device portfolio includes Permobil (Timra, Sweden), a manufacturer of powered wheelchairs, and Atos Medical AB (Horby, Sweden), which produces medical devices for ear, nose, and throat applications.

Earlier this year, Avista Capital Holdings acquired Bristol Meyers Medical Imaging, which it has since been renamed Lantheus Medical Imaging (North Billerica, MA). Additionally, Avista owns NAMIC/VA (Marlborough, MA), a manufacturer of single-use fluid management and venous access medical devices.

Private equity firms have long been recognized as an established funding resource for medtech start-ups and early-stage companies. But over the past year, such firms have continued to show interest in acquiring larger companies with market valuations of $500 million and greater. The Biomet, Bausch & Lomb, DJ Orthopedics, and ConvaTec deals represent a combined medtech market valuation of $20 billion.

Yet industry observers continue to question whether such deals are isolated examples of private equity deals—or whether they represent a discernible trend that will continue into the future.

J. Casey McGlynn, chairman of the life sciences group at Wilson Sonsini Goodrich and Rosati (Palo Alto, CA), believes there is an emerging trend. “Private equity is particularly interested in acquiring underperforming public medtech companies where there is an opportunity to revitalize the firm with better management and new products,” he says.

“Private equity is particularly interested in opportunities where companies and products can be combined and consolidated to create better value,” agrees Joseph E. Gilligan, a partner with the law firm of Hogan and Hartson LLP (Washington, DC). “Medtech is increasingly seen as presenting less risk and more opportunity for reward without the boom and bust cycles of other life science sectors, notably biotechnology.”

Andrew E. Rawlins, partner and chair of the medical device practice at Foley and Lardner LLP (Chicago), also notes that the medtech industry is seen as a more stable investment environment than its counterparts. “Some of the other life science sectors are no longer seen as the darlings that they once were,” he says.

Gilligan notes that at the same time private equity firms are becoming increasingly aware of the value of medtech, many of them are also flush with cash and looking to do deals. “These firms are very active in the $500 million to $3 billion valuation range,” he says.

McGlynn and Gilligan agree that private equity firms generally take the initiative in pursuing deals—although a medtech firm that is seeking to restructure may let it be known that it might be interested in going private. According to McGlynn, “A medtech company that is being buffeted by the public market and perceives itself as oversold might approach investment bankers on the feasibility of transitioning to private ownership, but such self-generated transactions are relatively rare.”

Gilligan says that moving from a publicly traded firm to a privately held organization can provide a “transformative environment that allows for the kind of reorganization and restructuring that is often difficult to pursue within the framework of a quarter-to-quarter perspective—particularly considering the increasing activism of today's stockholders.”

Company leaders sometimes cite the time and expense associated with compliance procedures in the era of Sarbanes-Oxley as motives for taking a public company private. While acknowledging the importance of those issues, however, McGlynn and Gilligan do not see them as the key factors in such changes. “No doubt, legal compliance for a public company is costly and time consuming,” says Gilligan. “Yet, it's part and parcel of the cost of doing business, and becomes less and less of an issue as a company gets bigger.”

“One of the primary advantages for going private is the opportunity to rebuild your business away from the public eye,” adds McGlynn. “However, a company has to be concerned about giving control over to a private equity firm that may have a vision for the future that is not in line with management's perspective.”

Rawlins also notes that a public company that goes private gains a number of advantages—particularly if it's looking to restructure. “Not being beholden to stockholders enables a company to take a longer term perspective in grooming new management, developing new products, and creating the platform for a more robust company,” he says.

Rawlins acknowledges all the factors typically cited as reasons for the increasing interest of private equity firms in structuring medtech deals. But he also wonders how much of the trend has really been driven by access to capital at the artificially low interest rates of the past few years.

Rawlins agrees that many private equity firms are indeed awash in money. “But they typically do not put up all the funds in these deals,” he says. “And as cheap credit becomes more difficult to obtain, they would have to front more of their own money in order for this trend—if it is a trend—to continue.”

Going forward, Rawlins expects a slowdown in mid- to large-cap private equity deals as the credit squeeze begins to affect medtech in the same ways it has virtually every other business sector.

Brian L. Davidoff, managing director of Rutter Hobbs and Davidoff Inc. (Los Angeles), an attorney specializing in corporate structuring and reorganization, agrees. “Many of these private equity deals over the last few years have been structured with leveraged funds,” he says. “In today's market, with reduced valuations and higher risk premiums, there's been a major retraction of available funds. Additionally, major lenders have become more stringent about full compliance with loan covenants, as the days of ‘covenant lite' are basically behind us.”

Although Davidoff has not been particularly active in the medtech arena, he says that the current credit squeeze is affecting virtually every business and industrial sector.

Yet, Davidoff does not expect that deals backed by private equity will dry up entirely. “Structuring the financial transaction will not be as easy as it was over the last few years, but deals will continue to be made,” he says. “Good companies—whether in medical technology or some other sector—will always find a buyer.”

© 2008 Canon Communications LLC

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