Blackstone bets big on healthcare

The firm has a history of large healthcare-related investments, including last week’s $3bn take-private of medical payment manager Emdeon, representing the firm’s fourth largest deal since 2007.

Blackstone has made a huge bet on healthcare, agreeing to take private medical payment manager Emdeon in a deal worth $3 billion, which once closed would be the listed firm’s fourth largest deal since 2007. The transaction is expected to be completed before the end of 2011.

The firm agreed to pay $19 per share for the Nashville-based company, representing a 9.6 percent premium over Emdeon’s closing price on 4 August, 2011.

Blackstone is investing from the $16.1 billion mega-fund it has been raising since 2008, a vehicle it has still not officially closed.

At just over $3 billion, the deal for Emdeon is the firm’s fourth largest transaction since 2007 and second largest of 2011 after the $9.4 billion deal for Centro Properties Group, according to data provider Dealogic. Blackstone invested in Centro from the world’s largest real estate opportunity fund – Blackstone Real Estate Partners VI. 

Opportunities in healthcare

Blackstone has been an active investor in healthcare, with approximately 18 percent of the firm’s existing investments – 66 portfolio companies across multiple funds – falling into the healthcare sector.

In June 2008, Blackstone took home healthcare services company Apria Healthcare Group private in a deal valued at approximately $1.8 billion. Previous healthcare investments include products and services provider DJO Incorporated, which focuses on musculoskeletal and vascular health; and Cardinal Health, a provider of products and services that improve the safety and productivity of health care. Blackstone acquired the companies in 2007 for $1.6 billion and $3.3 billion, respectively.

“There is a growing demand for high-quality [healthcare] services,” Blackstone managing director Michael Dal Bello told Private Equity International. “That's what patients who are becoming increasingly educated about their healthcare choices are focused on:  quality.”

Private equity firms have mixed views on the future opportunities in the healthcare sector because of the massive medical insurance reform taking place in the US. The healthcare reform bill in the US, which was signed into law by President Barack Obama in March, is expected to eventually bring in 30 million new entrants into the US system, presenting a huge opportunity in some areas of healthcare, sources have said in prior interviews.

Healthcare reform will make some areas of healthcare less attractive however, because of higher taxes and potential government cuts to subsidies, hospitals, doctors or service providers. Healthcare products and pharmaceuticals, on the other hand, are unlikely to suffer from cuts, a source told Private Equity International in a prior interview.

Emdeon is in a strong position to take advantage of the changes in the sector by “simplifying” complex process, Dal Ballo said. “We think that data and information can lead to services that help decrease the overall cost of care, so we see it is a solution to a big problem.”

Private equity past

The Emdeon deal also will be a major exit for General Atlantic and Hellman & Friedman. In late 2006, General Atlantic invested $485 million in the company's spin-out from HLTH Corporation in a deal valuing the business at $1.25 billion. The buyout house acquired 52 percent of Emdeon in the deal, which represented the largest-ever amount of equity invested in a single portfolio company for General Atlantic at the time. In 2008, Hellman & Friedman acquired the remaining 48 percent of the company owned by HLTH.

The buyout pair then decided in August 2009 to float the company on the New York Stock Exchange. Emdeon priced at $15.50 when it went public, with General Atlantic and management selling $201 million-worth of shares, and issuing others to bring the total to $367 million. The IPO valued Emdeon at roughly $1.8 billion on a fully diluted basis.

Last Thursday, Emdeon had a closing price of $18.29 after opening at $18.25.