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Kinetic Agrees to $4.98 Billion Acquisition By Apax Group

Kinetic Concepts Inc., a maker of wound-care products and hospital beds, agreed to be acquired for $4.98 billion in cash by a group including private-equity firm Apax Partners LLP in the biggest leveraged buyout since the collapse of Lehman Brothers Holdings Inc.

Stockholders will receive $68.50 a share, San Antonio-based Kinetic said in a statement today. The price is 6.2 percent above yesterday’s close on the New York Stock Exchange, and 17 percent above July 5, the day before Bloomberg News reported that the company was in talks on a buyout.

While sales in Kinetic’s main wound-treatment business are little changed since 2008, the company’s free cash flow yield of almost 9 percent and a new portable wound-care device may help generate a return of as much as 40 percent in five years, Piper Jaffray Cos. estimated before the deal was announced.

“The cash flow is the attraction for private equity, and the questionable growth outlook means there’s a limit to how much public investors and strategic buyers are willing to pay,” said Jason Wittes, an analyst for Caris & Co. in New York, in an interview today. "$5 billion is about the range I was expecting,” he said.

Kinetic has 40 days in which it can solicit alternative proposals from potential buyers, according to the statement.

Wanted a ‘Go-Shop’

London-based Apax made a formal offer “some time ago,” Kinetic Chief Executive Officer Catherine Burzik said in an interview today. “We wanted to have a go-shop, and we’ll see if others are interested.”

Kinetic rose $3.74, or 5.8 percent, to $68.23 at 4:06 p.m. in New York Stock Exchange composite trading. The shares have gained 63 percent this year.

“It’s a pretty good deal for shareholders,” said Spencer Nam, a Boston-based analyst for Madison Williams & Co., in a telephone interview. “I don’t think there’s going to be a higher bidder.”

Kinetic’s price tag of $6.3 billion when assumed debt is included surpasses the $5.68 billion takeover of Del Monte Foods Co. to become the biggest private equity LBO since New York-based Lehman filed for bankruptcy protection in September 2008.

Financial Advisers

J.P. Morgan Securities LLC was the financial adviser to KCI, and Skadden, Arps, Slate, Meagher & Flom LLP and Cox Smith Matthews Inc. were legal advisers, according to the statement. Morgan Stanley & Co. LLC was the financial adviser to the buyout group, and Simpson Thatcher Bartlett LLP are acting as legal advisers. Kirkland & Ellis LLP acted as the group’s legal adviser on the financing and Epstein Becker was health-care regulatory counsel.

The buyers include the Canada Pension Plan Investment Board and the Public Sector Pension Investment Board. The Canada Pension is a “significant minority shareholder with the appropriate governance rights in this transaction,” said Andre Bourbonnais, senior vice president of private investments for the investment board.

Apax, which manages a 11.2 billion-euro fund ($15.8 billion) and is on the road to raise another 9 billion euros from investors, is joining other firms including KKR & Co. and Blackstone Group LP in resuming purchases after the credit crisis brought dealmaking nearly to a halt for two years. Private equity firms have announced $234 billion of deals this year, more than double the amount in the same period last year, according to Bloomberg data, as banks resumed lending to fund acquisitions.

Burzik raised Kinetic’s full-year earnings forecast in April. Profit for 2011 will rise to $4.96 to $5.08 a share, Kinetic said in a statement.

Kinetic has increased sales for its products using vacuums and skin grafts to treat wounds this year and leads the global market for negative-pressure therapy using vacuums to aid healing. The company has lost ground to lower-priced competitors, said Michael Matson, a Mizuho Securities analyst in New York, in a June 16 note to clients.

To regain business, Kinetic introduced new products including the disposable wound-care system V.A.C.Via and expanded into new geographic areas including Japan and Brazil, Tao Levy, an analyst with Collins Stewart in New York, said on July 6.

Founded in 1976

The company, founded in 1976 by emergency-room physician Jim Leininger, generated $1.41 billion, or 70 percent of its revenue, from negative-pressure devices last year. Tissue-regeneration products that use skin grafts in hernia and breast reconstruction surgeries rose to $341.4 million, while sales of beds and other hospital equipment fell to $270.2 million.

Kinetic holds about 81 percent of the worldwide market for negative-pressure products, followed by London-based Smith & Nephew Plc, with about 5 percent, said Matson, the Mizuho analyst. The two companies have been battling over patents for the technology, with Kinetic winning lawsuits in the U.S. and U.K. in the last two years.

Going private may allow Kinetic to more easily shed or buy units, changing its direction, Madison Williams’ Nam said. Apax and Kinetic have not yet had discussions about any change in strategy, Kinetic’s Burzik said.

There were 540 announced acquisitions of medical products and equipment companies in the last 5 years through July 5, according to data compiled by Bloomberg. The average premium for a takeover was 51 percent. The largest was Johnson & Johnson’s $21.3 billion purchase of Synthes Inc., announced in April.

Kinetic Concepts is the second private-equity deal involving Canada Pension Plan Investment Board in the past six weeks. Canada’s second-biggest public pension manager was among a group that agreed to buy a 24.1 percent stake in Europe’s Gassled natural gas pipeline network from Statoil ASA for about $3.3 billion on June 6.

Canada Pension began investing in private equity in 2001 and has committed about C$34 billion to private-equity fund investments, of which more than C$24 billion has been invested so far, according to the Toronto-based fund’s Web site. The Toronto-based fund has also completed more than C$7 billion in investments predominantly alongside its private equity fund managers.

The Public Sector Pension Investment Board, also known as PSP Investments, manages retirement savings for public service employees including the Canadian Forces and Royal Canadian Mounted Police. The Ottawa-based fund, which has C$46.3 billion in assets, joined British Columbia Investment Management Corp. in buying Canadian lumber producer TimberWest Forest Corp for C$910 million in April.

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