One of the largest leveraged buyouts in recent years took just 18 weeks from start to finish.
New details on the $6.3 billion acquisition of Kinetic Concepts Inc. (NYSE:KCI) by a consortium of a private equity firm and two Canadian pension funds reveal three months of intense negotiations between the San Antonio, Texas-based wound management company and its lone suitor. Those negotiations would see the offer price for KCI change five times, as leaks to the press and a difficult debt market put the terms of the deal in flux, according to regulatory filings.
But, contrary to published reports, there were never any serious second bidders for KCI’s services besides Apax.
The talks began in late March, when KCI chairman Ronald Dollens received an inquiry from Apax Partners (a London-based private equity firm that’s raised more than $33 billion for buyouts in the health care, financial & business services, media, retail & consumer and technology sectors) to discuss “matters related to KCI’s business,” according to the filings. Within days, KCI received an opening offer of between $63 to $65 per share, an 18.5 percent to 23 percent premium on its closing price March 28, one day prior to the offer.
“Apax indicated in the proposal letter that it had significant prior experience within the wound care industry based on its prior portfolio investments, had performed a substantial amount of due diligence based on public information prior to the submission of the proposal letter and that any remaining diligence would be confirmatory in nature,” according to the regulatory filings. “Apax stated in the proposal letter that the acquisition would likely be effected through a merger of KCI with a new company formed by funds advised by Apax and that the merger agreement would include a ‘go-shop’ provision that would permit KCI to solicit competing proposals for a reasonable period after the signing of the acquisition agreement.”
After signing confidentiality agreements, the two parties held a meeting in mid-April to discuss KCI’s strategic plans and lay out the private equity firm’s vision for the future. Shortly thereafter, KCI received a revised offer of between $67 to $70 per share, contingent on an agreement to negotiate exclusively with Apax during a 30-day due diligence period.
The company’s board batted the offer around in a late-April meeting, discussing several alternatives. But the group ultimately decided that if Apax increased its offer, it would sign off on the 30-day exclusive negotiation process with a go-shop period tacked onto the deal. By the first week in May, KCI had a new offer in hand, of $70-$72 per share.
In early May, Apax received permission to bring in the Canada Pension Plan Investment Board and the Public Sector Pension Investment Board as partners in the deal and the due diligence period began. By July 6, press reports started circulating that KCI was in play, sending its share price up 13 percent in a single day, to $66.20. Over the next several days, the company was contacted by representatives of two additional private equity firms, but neither engaged in serious discussions. Those firms were rumored by several media outlets to be the Blackstone Group and competitor Kohlberg Kravis Roberts & Co., neither firm was named by KCI officials in their filing.
Then, on July 10, KCI was told that the Apax was putting a revised offer of $67.50 per share on the table.
“The written offer indicated that the sponsors were reducing the proposed transaction price from the previous proposed price range in light of, among other things, the challenging global credit markets, KCI’s revised expectations for Q2 2011 for the Active Healing Solutions segment, higher than expected tax liabilities and other execution complexities,” according to the filing. “In addition, the sponsors noted that the expected cost of their debt financing would be higher than originally contemplated.”
When KCI balked at the price reduction, Apax and its partners upped the bid to $68.50 per share, refusing to go any higher. Finally, on July 12, KCI’s board agreed to that price, setting in motion a deal valued at about $6.3 billion, making it the largest leveraged buyout in recent memory.