Wednesday, July 14, 2010

Carlyle Group Reconsidering HealthScope Bid

Australian Business with WSJ reported on the HealthScope takeover battle:

A combination of poor debt market conditions and heightened conservatism are believed to be behind Carlyle Group, one of the world's largest private equity houses, signalling to its partners yesterday that it was contemplating withdrawing from the bidding syndicate.

Carlyle will decide in the next 24 hours whether to stay in the consortium with Blackstone and TPG. They're competing against private equity underwriters (PEU's) KKR and CVC.

A source close to the situation said that Carlyle was wavering for a variety of factors, including the "eye-watering upfront fees and spreads" being demanded by lenders and the unfriendly terms attached to expensive subordinated debt, also known as mezzanine finance. Another factor causing anxiety was the recent deterioration in the market structure of the pathology sector -- which makes up close to a fifth of Healthscope's operations -- because of unfavourable government reforms.

That unfavorable government reform? Deregulation. Carlyle counts on government protected franchises and huge amounts of government funded business in many of its takeovers.

As for the upfront fees, spreads and unfriendly terms from lenders, might they be upset from past Carlyle bankruptcies or debt cramdowns? The latest to default is Oriental Trading. Carlyle and its PEU brethren might reap what it they've sown.

Update: Blackstone Group pulled out of the consortium, leaving Carlyle and TPG scrambling.