Mid Europa explores Eastern European healthcare

The London-based firm has broadened its presence in the Central and Eastern European healthcare market as it seeks to benefit from the rising demand for private healthcare.

Mid Europa Partners has been exploring the burgeoning opportunity for healthcare deals in Central and Eastern Europe driven by a growing middle class that can afford private care.

This week, the firm agreed to acquire a laboratory diagnostics provider called Alpha Medical from Penta Investments, based in Prague. Both firms declined to comment, though a source familiar with the matter told Private Equity International the deal value was between €100 million and €500 million.

Mid Europa will buy the company, which has 50 laboratories across Slovakia, the Czech Republic and Poland, as an add-on acquisition to the Polish medical laboratory chain Diagnostyka, in which it acquired a “strategic stake” in July 2011. In December 2011, Mid Europa also acquired Fryda, another laboratory business.

Mid Europa plans to further consolidate the laboratory market in Central and Eastern Europe. “We think there is quite a bit of growth both organic and through smaller acquisitions in each of those markets, so we are in active dialogue in Poland for several add-ons,” firm partner Matthew Strassberg said.

 The growing middle classes have the financial means to opt out of the state clinics system and seek premium privately provided solutions

Matthew Strassberg

The firm made the investment from its €1.53 billion Fund III 2007 vintage, which is currently 80 percent deployed. The fund is expected to be fully invested by the middle of 2013, the firm said.

Mid Europa declined to comment on fundraising.

Growth under prior owners

Alpha Medical now has revenues of €65 million, according to Penta. But when the firm bought the Slovakian laboratory business in 2006, it had revenues of under €2 million, Václav Jirku, investment director at Penta, said. “We used the platform for consolidation in the market and through organic growth and acquisitions we expanded the company in three countries,” he said.

After expanding the company in Slovakia, Poland and the Czech Republic, Penta did not have the willingness to internationalise the business further, Jirku said. “After six years of doing a tough job we recognised we were at the top of what we could do [for this business] in Czech and Slovakia and we therefore decided to exit,” he added.
Penta Investments declined to comment on the return multiple, but the price “is very good and we are definitely happy with the outcome,” Jirku said.

The sale was agreed through an auction process which was carried out by The Rothschild Group, and a pre-selected group of potential buyers was approached, Jirku said. He declined to comment on which parties were involved, but said most of the potential buyers were already operating in the region.

MEP was advised by PwC, Weil Gotshal & Manges and Kinstellar.

Healthcare and the middle class

In Eastern Europe, demand for private healthcare sector is on the rise, Mid Europa said. “The growing middle classes have the financial means to opt out of the state clinics system and seek premium privately provided solutions. The medical care is roughly comparable; it’s more the ambiance, modern equipment and a shorter waiting time,” Strassberg said.

One healthcare sub-sector that is ripe for investment is the laboratory market, which in Central and Eastern Europe is still very fragmented, the firm said. “The US market has approximately 300 million inhabitants and is served by little over 100 laboratories. The population of Czech and Slovakia is around 15 million in total and in Czech there are several thousand labs. This shows the magnitude of the fragmentation,” Strassberg added.

“Laboratories in the region are largely manual, the turnaround times are very slow and human error is quite common”, Strassberg said. These aspects can be improved by consolidating the laboratories into centralised, highly automated centres, he said. “It’s a benefit to the customer – it enhances the efficiency of the business and hopefully makes it a bit more profitable,” he said.