Group of PE firms $34 billion acquisition of Medline Industries

Overview of the deal

On June 5, Medline Industries, America’s largest privately held manufacturer and distributor of healthcare supplies, announced that it had entered into a definitive agreement with three major Private Equity funds. Through this agreement, Medline will receive a majority investment from Blackstone, Carlyle and Hellman & Friedman. The deal size is estimated to reach $34 billion.

The pharmaceutical and health industries are one of the scarce sectors for which the Covid-19 pandemic has been a boon rather than a bane. The need for medical supply has been consistently increasing over the past few years, and the recent events have favoured even more such a fast-growing industry. This is precisely what raised the attention of Blackstone, Carlyle and Hellman & Friedman. So far in 2021, those private-equity firms had largely shied away from the biggest deals. Until this very deal.

Following the close of the transaction, Medline will remain a privately held, family-led company. Yet its very probable growth will of course benefit the three PE funds which made this investment decision.

Company Details: Acquirer – Blackstone

Founded: 1985

Headquarters: New-York

CEO: Stephen A. Schwarzman Status: Public

Number of Employees: 3165 (2020)

The Blackstone Group was initially founded in 1985 as a mergers and acquisitions firm by Peter G. Peterson and Stephen A. Schwarzman. Both men previously worked together at Lehman Brothers. Blackstone invests across alternative asset classes on behalf of pension funds and other leading institutions.

Blackstone’s private equity fund holds the equivalent of $112 billion of assets under management. It has $39 billion of capital to invest, with 95 companies in its portfolio. Over the years, Blackstone has invested in very diverse companies : from Bumble to Ancestry in a variety of sectors all over the world. Blackstone traditionally purchases secondary interests in mature, high-quality private equity funds from investors seeking liquidity. By acquiring portfolios diversified across sector, vintage year and geography, the company yields high returns for its investors.

Company Details: Acquirer – Carlyle

Founded: 1987

Headquarters: Washington

CEO: Kewsong Lee Status: Private

Number of Employees: 1800 (2020)

Located in five continents, The Carlyle Group invests across asset classes, regions and industries on behalf of more than 2,675 investors from 95 countries. Those investors range from private and public pension funds to sovereign wealth funds.

Carlyle holds the equivalent of $137 billions in assets under management, with a total of 640 active investments. The Carlyle Private Equity fund mainly invests in nine areas : aerospace, media, financial services, transportation, technology services, real estate, infrastructures, energy and healthcare. As far as the latter is concerned, private equity funds managed by The Carlyle Group acquired PPD in 2011, a leading global contract research organization.

Company Details: Acquirer – Hellman & Friedman

Founded: 1984

Headquarters: San Francisco

CEO : Patrick Healy Status: (Private or Public) : Private

Number of Employees: 150

Founded in 1984, Hellman and Friedman usuallys targets large-scale equity investments in companies operating in very select sectors. Over its investing history, Hellman & Friedman has raised over $50 billion of committed capital and invested in over 100 companies. The private equity fund owns the equivalent of $48,9 billion with its assets under management.

In the field of healthcare, Hellman & Friedman had already invested in seven firms in this sector prior to this transaction. These investments included the acquisition of Change Healthcare (2008) and Sheridan Holdings (2007), a leading provider of physician services to hospitals and other healthcare facilities.

Company Details: Target – Medline Industries, Inc.

Founded: 1966

Headquarters: Northfield, Illinois

CEO: Charles N. Mills Status: Private Society

Number of Employees: 23 000 (2020)

Revenue: $17,5 billion

EBITDA: Approximately $2,5 billion

Medline is a closely held medical-equipment company that makes and distributes medical and pharmaceutical supply, ranging from surgical trays to protective masks. The company operates as a manufacturer, a distributor and a solutions-provider for healthcare business. Although Medline was created in the United States, a country which still accounts for the majority of the company’s sales, Medline’s 28 000 employees are now working worldwide with business activities in more than 110 countries. International sales account for 10% of Medline’s business.

Medline is and will remain a family-owned company. It was originally founded in 1966 by the Mills brothers, Jim and Jon. From generation to generation, the company grew at a rapid rate, which accelerated over the past few years. Since 2005, the volume of annual sales has been multiplied by more than eight.

The company is clearly engaged in an upward trend, since Covid reminded governments of the need for ample medical supplies to cope with potential emergencies. Although masks and other personal protective equipment only represent a small part of Medline’s business, the company has benefited from the spotlight directed at the health industry because of the pandemic outbreak.

SYNERGIES

According to the Press Release published by Blackstone, Medline “plans to use the new resources from the partnership to expand its product offerings, accelerate international expansion and continue to make new infrastructure investments to strengthen its global supply chain”.

The experience gained by the three acquirors in the health industries will undoubtedly boost synergies. Massive strategic changes are not to be expected : this agreement should above all enable the company to keep up with its global competitors and to continue with its current internationalization. In the long term, this agreement should also enable more external growth for the company, which doesn't appear to have a history of large-scale M&A.

The rather undemanding level of debt involved (half the purchase price) suggests that the firm essentially aims at growing sales and expanding margins, rather than use leverage to amplify its otherwise moderate performance gains.

STRATEGIC RATIONALE FOR THE PE FUNDS

With their previous expertise in the medical field, Blackstone, Carlyle and H&F are not taking any particular risks with this investment. Medline should guarantee steady revenues for them and thus lower the risk of their portfolio as far as the health industry is concerned.

If Medline manages to keep growing at the same rate, the company could eventually end up becoming a very large health group. The natural financial evolution would thus be an IPO, but such an operation would require the three PE companies to sell their positions, which they might not be willing to agree to if they believe growth prospects are high.

FINANCIAL CONSIDERATIONS

Although the shareholding structure is clearly affected with this transaction, the Mills family will remain the largest single shareholder. Moreover, Charlie and Andie Mills will remain in their leadership roles. If the family remains the largest shareholder, this could imply ~$4b each for the 3-sponsors, $1b GIC and $7b stake for the Mills. That leaves ~$23b in cash for the Mills family.

For the three acquirors, forming this agreement also meant seizing a potential financial opportunity. Since the beginning of the Covid crisis, PE funds had been rather shy when approaching companies in the medical sector. Assuming an EBITDA of $2.5 billion, the $34 billion deal would here value the firm in approximately 14 times the trailing EBITDA. For a company with a rather low internal risk and a reassuring financial structure, this transaction — which is the largest LBO since the crisis - was clearly not overpaid.

The portion of debt involved ($17 billion) equals half the deal total price. In other words, there is no significant attempt to use leverage as a means of growth for the company.

RISKS AND UNCERTAINTIES

As explained earlier, Medline Industries doesn’t look like a very risky company. However, the consistent role of the Mills family could someday be an eventual setback for the three PE funds. Indeed, because of this family legacy, Medline seems to be a rather conservative organization, which might make innovating and capturing new businesses more complex. In the long term, more aggressive groups (such as Cardinal Health in the United States or Drive Devilbiss in France for instance) might start gaining over Medline's market share.

CONCLUSION

All in all, this agreement looks like a promising deal for all the actors involved. For Medline, the additional capital will be a decisive tool to keep growing and gaining market shares, while ensuring a secure and potentially fast-growing revenue for the PE firms involved. Yet the key to success will be Medline’s ability to balance its family heritage and the need for disruptive innovation and more vehement competition against its rivals. If the Mills family manages to do so, Medline might become a particularly interesting IPO candidate in the next few years.

Authors: Pierre Faury

Contact: pierre.faury@hec.edu

Date: 30-June- 2021