(KCI) Kinetic Concepts Aquired by Apax Partners and Two Canadian Pension Funds

Private equity firm Apax Partners and two Canadian pension funds are set to acquire leading medical technology company Kinetic Concepts (KCI). The deal, including Kinetic’s outstanding debt, is valued at approximately $6.3 billion.

As an independent global partnership, Apax exclusively focuses on long-term investment in growth companies. The acquisition of Kinetic is part of Apax’s intention to support deals in the financial & business services, healthcare, media, retail & consumer and technology sectors. However, probably its budget doesn’t permit such a big acquisition at this point, so Apax teamed up with the Canada Pension Plan Investment Board (CPPIB) and the Public Sector Pension Investment Board (PSP Investments) to get the deal done.

As per the terms of the agreement, Kinetic’s shareholders will receive $68.50 in cash for each share of the company, representing a premium of 6.2% over the closing price of the stock on Tuesday, July 12, 2011, a premium of approximately 21% to Kinetic’s average closing price over the last month and 52% premium to its stock price a year ago.

Last week, there were some unconfirmed news regarding the possible takeover of Kinetic following which, share prices jumped 13%. Tuesday after the official announcement of the bid, share prices surged 5.61% to $68.11 and remained just below the offer price. The deal, however, is subject to regulatory as well as shareholders’ approval and is expected to be completed in the second half of 2011.

Texas-based Kinetic is a bellwether in the high technology therapy industry. The company is engaged in the rental and sale of Active Healing Solutions (AHS), regenerative medicine (LifeCell) products and therapeutic support systems (TSS) in North America (comprising United States, Canada, Puerto Rico and Latin America) and EMEA/APAC (comprising principally of Europe as well as the Middle East, Africa and the Asia-Pacific region). In fiscal 2010, the company reported revenues of $2.0 billion.

Kinetic suffered several setbacks over the past few quarters mainly on the back of declining sales in the TSS segment. During the first quarter of fiscal 2011, Kinetic’s TSS segment reported total sales $67.6 million (down 9% year over year) with $44.6 million (down 7.8%) from the North American market while EMEA/APAC (down 8%) accounted for the rest. This was impacted by lower sales in the critical care business due to less severe flu season coupled with lower rental volume and average rental pricing. Overall, the company’s business hampered due to reduction in the length of the patient stay coupled with modest competitive share loss.

Further, Kinetic has been entangled in patent disputes with Smith & Nephew (SNN) since 2008 regarding its AHS products. In October 2010, the some patent claims licensed to Kinetic by Wake Forest University were marked invalid by the US District Court for the Western District of Texas under the litigation filed by Smith & Nephew. In March 2011, Wake Forest provided a written notice of termination under the license agreement with Kinetic and filed suit alleging breach of contract by Kinetic. In its termination notice, Wake Forest is demanding cease of Kinetic’s manufacturing and selling licensed products.

However, in spite of all the recent headwinds, Kinetic was a lucrative acquisition target due to its steady financials. The company witnessed continuous expansion in its top line and is gradually penetrating its Regenerative business in the EMEA region. Also, the AHS business, given the continuous product launches under its V.A.C. therapy system, is gradually streamlining its position globally. During the quarter, the company witnessed gradual improvement in this segment attributable to higher unit volumes in the US, resulting from increased usage of traditional V.A.C Therapy products and new negative pressure-based therapies. Moreover, the company is gradually gaining a strong foothold in Japan and Europe, which should boost the top line further. Moreover, TSS revenue should stabilize given the upside in Critical Care segment.

Most importantly, Kinetic’s stock price is much cheaper relative to its peers. We think with improved strategic interference, the Apax consortium will be able to rejuvenate the business going forward.

With gradual recovery of the global economy, more mergers and acquisitions are expected to take place in the fast growing medical device sector. Major medical companies and investors are seeking lucrative investments which have resulted in several acquisitions in recent times.

The recent acquisitions include TPG Capital’s purchase plan of Immucor (BLUD) for $2 billion and KKR’s (KKR) $2.38 billion buyout of Pfizer‘s (PFE) Capsugel unit. Moreover, in June 2011, Dentsply (XRAY) acquired AstraZeneca’s (AZN) dental implants and medical devices unit AstraTech for $1.8 billion.

ASTRAZENECA PLC (AZN): Free Stock Analysis Report

IMMUCOR (BLUD): Free Stock Analysis Report

KINETIC CONCPTS (KCI): Free Stock Analysis Report

KKR & CO LP (KKR): Free Stock Analysis Report

PFIZER INC (PFE): Free Stock Analysis Report

SMITH & NEPHEW (SNN): Free Stock Analysis Report

DENTSPLY INTL (XRAY): Free Stock Analysis Report

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