The structure of privately held Medline’s proposed stake sale to a consortium of Hellman & Friedman, Blackstone, and Carlyle Group looks like a seller’s dream. The founding family will retain the largest stake, senior management stays in place, and at 50 percent, the reported equity check financing the deal places less debt pressure on the target’s balance sheet. The same factors make the financial sponsors’ exit path less clear. What is the return profile on the “new” style of LBO evinced by the consortium’s proposed takeover of Medline?
The path to profitability might be narrower than in the average buyout. The buyers reportedly seek upside through investment rather than cost cutting, and the company will use the deal proceeds to “expand its product offerings, accelerate international expansion and continue to make new infrastructure investments to strengthen its global supply chain.” Indeed, with the same senior management team in place as before the deal, the consortium might well have less leeway for operational changes than in a typical buyout.
And while growth underpins the investment thesis, the play on healthcare supply manufacturing and distribution comes on the tail end of a pandemic. Medline is also already a leading player in its market, potentially complicating the path to stellar growth.
Other private equity firms have done well on similar wagers. Bets on health sector growth rather than cost cutting are a familiar theme for healthcare exposed firms, see Frazier Healthcare Partners’ approach to its latest fundraising. It’s also an approach that’s borne fruit in high growth industries, as Riverside Co.‘s Greenphire exit shows. The fund’s largest exit came after stewarding the healthcare software company through 8x revenue growth.
But there’s no question the focus on one side of the balance sheet places more pressure on returns. The most successful exits, like the sale of Greenphire to Thoma Bravo, were on scalable software solutions that played efficiencies from eliminating paper records and monetizing data as well as an industry-wide healthcare recovery.
What returns the consortium does find will be tempered by the deal’s capital structure, which reportedly includes 50 percent debt rather than the standard 70 percent.
The shift toward bigger deals is a substantial departure for an asset class that has remained discriminating about capital deployment. Remember, Blackstone’s quarterly investment activity came in at $17.7 billion in Q1, lower than Credit Suisse analysts’ projected $18.3 billion and substantially off the $25.4 billion deployed in Q4. And KKR’s annual letter highlighted “opportunistic” rather than broad dealmaking.
Record levels of dry powder and now seemingly routine oversubscribed fundraises could mean a dealmaking bonanza. The return of the mega-deal is good news for many dealmakers, but the Medline deal structure contains enough deviations from past practice to prompt questions on the level of return firms will notch.
For more coverage of the deal, see Blackstone, Carlyle, H&F, Buy a Majority Stake in Medline.