Terms for the $6.3 billion leveraged buyout of Kinetic Concepts Inc. (NSYE:KCI) are in flux once again as the debt crisis in Europe roils credit markets.
KCI agreed in July to a $68.50-per-share LBO by Apax Partners and a pair of Canadian pension funds. The London-based PE firm and its partners planned to finance the buyout with about $5 billion in debt, backed by lenders Bank of America Corp., Credit Suisse Group AG and Morgan Stanley.
The transaction was to have included a $2.6 billion term loan and a $200 million revolving credit line, plus a $1.25 billion bridge loan and $900 million in senior unsecured bonds.
Last week the company cut the term loan to $2.2 billion and boosted the secured notes by a commensurate amount, to $1.65 billion. KCI would then have sold the loan at about 96 cents on the dollar, aiming to boost investors’ returns but cutting into its own proceeds.
Now the $2.6 billion loan is also being scaled back to $1.65 billion, an anonymous source told Bloomberg. The $900 million bond offering is being delayed to boot, but the $1.65 billion worth of secured debt is still on track, according to "a person with knowledge of the transaction," the news service reported.
If it’s consummated as expected in early November, the deal will be the largest LBO since the Lehman Brothers debacle froze the credit markets in 2008. With Greece teetering on the edge of default, those markets are running scared again – junk bonds have lost 8.2 percent since July and below-CCC-grade debt has plunged 15 percent.
Moody’s Corp. (NYSE:MCO) slapped a “B3” rating on KCI’s $1.65 billion in secured notes and a "Caa1" rating on the unsecured debt; Standard & Poor’s gave the secured debt a "B" and a "CCC+" for the unsecured loans.
For its part, KCI said it expects to post third-quarter profits of $89 million to $93 million (up 4 percent to 5 percent) on sales of $529 million to $533 million (a 17 percent to 23 percent increase).
By 2012, the strengthening dollar will be working solidly against earnings, analysts say. Barclays analyst Adam Feinstein forecasts “a slight negative impact on earnings from FX for most of our companies” in the medical-supplies and -devices sector. Likely to get hit: St. Jude Medical Inc., Baxter International Inc., Covidien PLC and Stryker Corp., he wrote on Oct. 3 in a research note to clients.
Dollar’s rise threatens med-tech profits
The sputtering world economy is expected to continue to drive a rebound in the value of the dollar, meaning lower earnings for large-cap med-tech companies that have enjoyed a strong tailwind from foreign exchange rates all year.
The greenback regained the ground it lost this year in September as foreign currencies sagged on fears of another economic meltdown. According to Barclays analyst Adam Feinstein, companies like St. Jude Medical (NYSE:STJ), Baxter (NYSE:BAX), Covidien (NYSE:COV) and Stryker (NYSE:SYK) will see “a slight negative impact on earnings from [foreign exchange],” the Wall Street Journal reported.
BofA upgrades Stryker
Analysts at Bank of America/Merrill Lynch upgraded
their rating on Stryker from "neutral" to "buy," setting a price target of $57 per share.
SYK shares were trading at $50.19 this morning, up 1.6 percent as of about noon.
8 reasons to buy Medtronic
There are at least eight good reasons to pick up shares of Medtronic (NYSE:MDT), according to Bret Jensen, the chief investment strategist for Simplified Asset Management, a Miami hedge fund:
- Medtronic is selling at the very bottom of its five year valuation range based on P/E, P/S, P/B and P/CF.
- MDT provides a solid 3% yield. More importantly, it has grown its dividend payment by a 20% annual clip over the past five years.
- It is selling at the very bottom of its five-year valuation based on P/S, P/E, P/B and P/CF.
- Medtronic has an AA- rated balance sheet, a low beta (.91) and has increased its earnings by 8% on average over the past half decade despite very challenging economic times.
- 3 Insiders recently bought almost $600K of shares recently. They also have a new CEO and are going through a new product cycle.
- Medtronic consistently produces a return on equity just north of 20%.
- In its last quarter, for the first time in two years the company gained market share in pacemakers and stabilizing its share in ICDs.
- MDT is selling under analysts’ price targets. The mean analyst target on Medtronic is $40 and S&P has a price target of $39 on MDT.
Natus Medical’s Q3 prelims miss guidance
Natus Medical’s (NSDQ:BABY) preliminary results for the third quarter fell 6.2 percent short of its top- and bottom-line forecasts, but The Street didn’t seem to care.
BABY shares were up a tick to $7.86 as of about 12:30 p.m. today, despite the company’s prediction of about $51.5 million in Q3 revenues. Natus Medical’s previous guidance was $58 million for the top line.
"The revenue shortfall in the third quarter was primarily in our neurology business in both domestic and international markets where we experienced delays in orders and in the United States also a reduction in order size," according to CEO Jim Hawkins. "Our Medix subsidiary, with newborn care products sold primarily in South America, also experienced a shortfall due to delayed orders."
Natus lowered its sales forecast for the the full year, saying it expects sales of roughly $234 million instead of its earlier call of $236 million. Fourth-quarter sales are expected to be above the prior guidance, however, at $65 million rather than $61 million.
But earnings are now expected to be about 15 cents per adjusted share, not 19 cents to 20 cents.
Shares of heart valve maker Edwards, which lost nearly 7 percent Sept. 29 after a Centers for Medicare & Medicaid Services reimbursement review spooked Wall Street, had clawed its way back above its $72.40 open on the 29th. Shares opened Friday at $73.04 and hit $73.41 on their way to a $72.19 close, down 1.2 percent. Today EW shares opened at $72.01 and hit a high of $73.20 before falling back to $72.37 as of about 11:30 a.m.
Shares of Invo Bioscience, which makes a device designed to boost fertility for in vitro conception procedures, rebounded yesterday in heavy trading, closing just above 0.019 cents on volume of about 1.3 million shares. Prices had slipped to 0.0175 cents Friday before closing at 2 cents even. IVOB shares were trading at 0.019 cents this morning.