Tuesday, August 16, 2011

Carlyle in Exclusive Talks with PPD

Carlyle Group co-founder David Rubenstein said healthcare was the place to be at the Milken Institute meeting.  According to a report, Carlyle is the finalist for Pharmaceutical Product Development Inc., a contract drug developer.  Bloomberg reported:

The company, which has a market cap of $3.5 billion, provides contract drug development and discovery services for pharmaceutical, biotechnology, medical device, academic and government organizations. It has offices in 44 countries and more than 11,000 employees.

The deal is part of a move by the board of directors and management to review its strategy and capital structure, looking for actions that create value for shareholders.  Bids stood at $4.3 million or more.

It's not clear how much would be equity vs. debt:  PPD has a $2 billion balance sheet with nearly $400 million in goodwill.  This will more than double in a $4.3 billion deal.

How will interest expense and PEU management fees soar, thus not reducing health care costs?

PPPD's tax rate during the Bush years averaged 34%, dropping to 31% during the Obama administration and expected to go lower pre-PEU buyout.

Total gross unrecognized tax benefits were $30.0 million and of this total, $14.5 million is the amount that, if recognized, would reduce our effective tax rate.

PEU's hate paying taxes, so expect this to drop further.

Carlyle loves China and PPD is there, having acquired Excel and BioDuro in China. They like growing governmental business, currently 6-8% of PPD's revenues.

Interestingly, CLO manager Carlyle might buy packaged securities from PPD.

We held approximately $88.6 million and $78.7 million, net of unrealized losses, in auction rate securities at December 31, 2009 and 2010, respectively. Our portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate securities.
Should Carlyle win PPD, rest assured they have multiple ways to ring the register. How long before Carlyle conducts a debt offering for dividends, adding to an exploding health care pie?

Update 10-3-11:  Carlyle paired with Hellman & Friedman to buy PPD.  The deal fell from $4.3 billion to $3.9 billion.  Despite the smaller deal, goodwill will still balloon and health care costs are going up