Blackstone, Carlyle, H&F’s Medline Buyout Is No Old-Style LBO

The biggest leveraged buyout since the global financial crisis is no old-fashioned LBO.

In their plan to buy a majority of Medline Industries Inc. for more than $30 billion, private equity giants Blackstone Group Inc., Carlyle Group Inc. and Hellman & Friedman LLC are injecting new capital while keeping the old management. The acquisition also involves about 50% debt to the total cost, according to people with knowledge of the deal, a fraction of the leverage in “Barbarians at the Gate”-era takeovers.

And unlike the LBO heyday, the investment is a bet on growth of the closely held health-care product firm, rather than a plan to cut costs and increase efficiency. Medline will continue to be run by the Chicago-based Mills family, now in its fourth generation in the medical-supplies industry.

“The new partnership gives us a lot of flexibility for the future while maintaining the family-led culture that has been core to our success,” Medline President Andy Mills said in an emailed statement. The deal will bring more resources for growth at home and “provide momentum for international expansion which make up only a small percentage of our sales today.”

Record Stockpiles

One big factor behind the deal: Private equity firms need to spend the record stockpile of cash they’ve raised. The firms had $1.6 trillion of dry powder globally in the first quarter, according to Preqin Ltd., which tracks the alternative-asset industry. Fundraising in the first quarter returned to pre-pandemic levels, with a record 4,597 funds seeking to raise $914 billion from investors, Preqin reported.

“They raised so much money they have to spend it,” Ludovic Phalippou, a professor of financial economics at University of Oxford Saïd Business School, said in an interview.

The Medline deal “smells to me a bit like placing money,” Phalippou said. “I think it’s a fairly safe bet. It sounds like a deal that’s going to earn a normal rate of return like 8% or 10%. It will not go very high or very low. They’re just placing money almost passively.”

Northfield, Illinois-based Medline averaged 12% growth annually for the five years preceding the pandemic, according to a company spokesman. It’s the biggest private U.S. manufacturer and distributor of medical supplies like gloves, gowns and exam tables to hospitals and doctors’ offices.

Medline, with 2020 revenue of $17.5 billion, declined to disclose its earnings, and Phalippou said that lack of detail makes it hard to judge some important leverage ratios. The deal is worth as much as $34 billion including debt and would include a $17 billion so-called equity check, according to one person familiar with the deal who asked not to be identified.

Leverage Risks

Big previous LBOs ran into trouble because buyers overpaid or were unable to carry the debt, Phalippou said. In history’s biggest LBO, dating from 2007, private equity firms led by KKR & Co. and TPG Inc. took TXU Corp. private in a $48 billion takeover deal. TXU filed for bankruptcy in 2014 when the energy industry ran into trouble.

The Mills family will remain the largest individual shareholder after the transaction closes, which is expected to occur later this year. Blackstone, Carlyle and Hellman & Friedman will have equal parts of their majority stake. GIC, Singapore’s sovereign wealth fund, is also investing as part of the partnership.

The private equity firms have worked together on previous deals. In April, Carlyle and Hellman & Friedman struck a deal to sell PPD Inc., which manages medical clinical trials, to Thermo Fisher Scientific Inc. for $20 billion. The two private equity firms bought PPD in 2011 with an initial $3.6 billion investment.

Blackstone and Hellman & Friedman previously joined in a failed bid to buy Scout24 in 2019.

Carlyle is raising $22 billion for its largest fund ever. Hellman & Friedman’s latest fund raised $23 billion. Blackstone Capital Partners Fund VIII, its biggest, raised more than $25 billion in 2019.

It’s a trend they plan to continue.

“In every one of those cases, I think virtually every one, we should raise a fund that’s larger than the predecessor,” Blackstone President Jon Gray said during a June 3 investor conference. “That basically has been our history now for 35 years. So we think our traditional business will continue to grow.”

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