Saturday, July 9, 2011

Not Driving Down Healthcare Costs: Blackstone & KCI

Bloomberg reported:

at least two private-equity firms were in discussions with KCI on a possible sale of the company for more than $5 billion.
KCI makes wound care products.  WSJ narrowed the race to Blackstone Group, a private equity underwriter (PEU) associated with Stephen Schwarzman and Peter G. Peterson.  Blackstone recently milked for-profit hospital company Vanguard Health Systems via debt for dividend before taking Vanguard public.

After the WSJ story, KCI's stock rose 15% on the day.  It's up 58% on the year.  Oddly, City of San Angelo early retiree dependents saw their health insurance premiums rise 58%, despite the City's participation in PPACA's Early Retiree Reinsurance Program.

How will a $5.5 billion KCI sale lower rapidly rising health care costs?  KCI's 2010 10-k shows a $3 billion balance sheet.  Growing it to $5.5 billion is an 83% increase.  KCI had $2 billion in revenue, making the standard 2% PEU management fee $40 million a year.

Blackstone would steer KCI's cash flow toward interest payments on $4 billion in debt and management fees.  KCI's high margin business would need to increase to cover PEU costs.

There is no bending the curve on PEU capital costs for healthcare raids.  That curve must be bent elsewhere, by cutting research & development, salaries and benefits, and offshoring jobs/production.

It's the PEU way.

7-14-11:  Apax Partners and two Canadian pension funds won the PEU race for KCI.  Including assumed debt, the deal is worth USD 6.3 billion.