Tuesday, October 4, 2011

WSJ's PEU Beat

WSJ reported on billion dollar health care deals:

Just as celebrities seem to die in threes, it seems multi-billion dollar deals seem to come in pairs. The same day that Carlyle and Hellman announced their $3.9 billion deal for PPD, a group led by Apax Partners agreed to pay $6.5 billion for wound-care company Kinetic Concepts Inc. Interestingly, though that deal is nearly twice the size of the PPD deal, the investors are putting in less equity–$1.75 billion compared with the $1.8 billion for PPD.
The WSJ reporter failed to notice PPD and Kinetic Concepts current capital structure, prior to private equity underwriter (PEU) deals.  Take Kinetic Concepts now, with its $3.3 billion balance sheet and $1.1 billion in long term debt:

Mix in Apax Partners and two Candian pension funds and Kinetic Concepts explodes in blue debt:

PPD currently has no long term debt, thus a complete absence of blue.

The $1.8 billion in Carlyle-Hellman equity means $2.1 billion in new PPD debt. The picture blues under PEU ownership:

PEU deals look to make health care costs blue.  Interest costs on $6.85 billion in new debt and 2% annual PEU management fees will add significant costs, roughly $640 million per year, to America's obscenely expensive health care system. 

That's what the Morning Leverage missed.

Update 10-17-11: Carlyle will pay PPD executives and board members $21 million in golden parachute money.  That's on top of their stock holdings.