A $34 Billion LBO is a Gift to Blackstone and Pals

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It’s a statement of private equity power when a giant health-care firm chooses a $34 billion leveraged buyout instead of a deal with a rival or an initial public offering. Blackstone Group Inc., Carlyle Group Inc. and Hellman & Friedman faced relatively sparse competition in their agreement to buy a majority stake in Medline Industries Inc.

But if the winning consortium had an easy ride on the way in, getting out of a jumbo-deal could be tougher going.

Medline is a closely held medical-equipment colossus that makes and distributes products ranging from surgical trays to protective masks. The sale’s timing makes sense. The company is clearly worth more since Covid woke governments up to the need for ample supplies to cope with medical emergencies, even if personal protective equipment (PPE) is only a small part of the business.

The Mills family that owns and runs Medline appears to have been keen to partner with private equity. But there aren't many financial sponsors who can cobble together a consortium with the required firepower. The transaction — the largest LBO since the financial crisis — therefore plays into the hands of big players that can write sizeable equity checks and are comfortable doing a so-called club deal.

These dynamics make it less likely that the bidding group has overpaid. And with a lot funds sloshing around, mega-deals put a chunk of idle capital to work all in one swoop. Still, the investment needs to earn good returns too.

Medline’s sales were $17.5 billion last year, coming from distribution and manufacturing. Listed distributors against which it competes, such as Cardinal Health Inc. and McKesson Corp., have Ebitda margins of 2%. Makers of health-care products like Becton Dickinson and Coloplast A/S are at over 30%.

Assume a mid-teens margin for Medline, and Ebitda of around $2.5 billion, and the deal would  value the firm in the region of 14 times trailing Ebitda. That places this in the middle of the pack, with Cardinal at 7 times, Becton at 12 and Coloplast at 30. 

This looks reasonable value for a company that’s been consistently growing sales at a double-digit rate, largely organically. It’s plausible there’s more to come, most obviously by targeting non-U.S. markets or harnessing the capabilities of logistics and warehouse firms in the consortium’s existing portfolios.

The relatively undemanding level of debt involved here, accounting for roughly half the purchase price, implies the strategy aims substantially to grow sales and expand margins, rather than use leverage to amplify otherwise modest performance gains.

On that basis, Medline could end up becoming a very large company indeed. That would in turn limit options for Blackstone, Carlyle and Hellman & Friedman to exit. The natural path would be an IPO, but it would take a while for the consortium members to fully sell their positions in the market, and time is normally the enemy of returns.

The challenge will be persuading investors to value Medline on the punchier multiples afforded to medical-equipment makers than distributors. If it can do that, the consortium could end up selling a business on a higher multiple of higher profits than seen in the transaction.

And who knows, by then maybe another private equity consortium will have decided the time is right to attempt a $50 billion LBO and that Medline is the right target.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2021 Bloomberg L.P.

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