Apax, CPPIB and PSP Sell Acelity to 3M

CPPIB and PSP Investments put out a press release, Apax Funds, CPPIB and PSP Investments Agree to Sell Acelity/KCI to 3M for $6.725 Billion:
A consortium comprised of funds advised by Apax Partners (the "Apax Funds”), together with Canada Pension Plan Investment Board ("CPPIB") and the Public Sector Pension Investment Board ("PSP Investments"), today announced that it has entered into a definitive agreement to sell Acelity, Inc. and its KCI subsidiaries worldwide to 3M for approximately $6.725 billion. KCI markets a broad range of negative pressure wound therapy, specialty surgical and advanced wound dressing products in approximately 90 countries.

Since 2011, Apax Partners, CPPIB and PSP Investments worked closely with KCI’s senior leadership team to transform the business into a leading global company focused on advanced wound care and specialty surgical solutions. The company’s strategic M&A program included targeted acquisitions, such as Systagenix in 2013 and Crawford Healthcare in 2018, and disposals of non-core businesses, such as the LifeCell business unit, which was sold for $2.9 billion in 2017 and the Therapeutic Support Systems (TSS) unit, which was sold in 2012. KCI also has undertaken a range of organic growth initiatives including investments in R&D, clinical studies, and the expansion of its sales force.

The product offering includes the KCI branded negative pressure wound therapy, advanced wound dressings, and negative pressure surgical incision management systems. The company’s industry-leading brands include V.A.C.® Therapy, PREVENA™ Therapy and PROMOGRAN PRISMA™ Matrix, as well as the iOn Digital Health platforms. Upon completion of the transaction, KCI will become an integral part of 3M’s Medical Solutions business, which applies 3M science to deliver safe and effective solutions that improve clinical outcomes and healthcare economics.

“Today, KCI embarks upon a new era in its long history as a pioneer in healthcare,” said R. Andrew Eckert, CEO of Acelity. “The combination of KCI with 3M will accelerate the reach of a business that is a leader in innovation, customer experience and clinical and economic evidence. Backed by the resources and expertise of 3M, KCI will be able to offer clinicians and patients even more compelling solutions designed to speed healing and improve outcomes. I would like to thank Apax, CPPIB and PSP Investments for their close partnership and strategic direction over the years shaping KCI into a premier global advanced wound care company.”

Steven Dyson, Chairman of the Board of Acelity and Partner at Apax Partners, said, “We are proud of our close work with management to successfully transform KCI through a range of growth initiatives, including an M&A program, that enhanced the Company’s strategic direction. We believe the business will have a great future with 3M. Lastly, we are grateful for the opportunity to have joined in this highly successful investment with CPPIB and PSP, two long-standing investors in the Apax Funds.”

“CPPIB is pleased to have supported KCI’s delivery of medical devices and products that benefit millions of patients around the world. During our investment, the company helped restore lives with the launch of innovative solutions and expansion into new geographies,” said Ryan Selwood, Managing Director, Head of Direct Private Equity, CPPIB.

“We are proud to have supported KCI and its management team during its exciting transformation journey, in partnership with Apax and CPPIB,” said Simon Marc, Managing Director and Head of Private Equity, PSP Investments. “KCI has successfully invested into novel organic growth initiatives and we are confident about its continued growth prospects with 3M.”

The transaction will be effected through the sale of Acelity, Inc., a direct wholly-owned subsidiary of Acelity L.P. Inc., and is subject to relevant regulatory approvals and fulfillment of certain other customary conditions prior to closing, which are expected to occur in the second half of 2019.

JP Morgan and Goldman Sachs are acting as financial advisors to the consortium. Simpson Thacher & Bartlett LLP and Jackson Walker LLP are acting as legal advisors to the consortium.
Bloomberg reports this is 3M's biggest deal, topping its 2015 purchase of Capital Safety for $2.5 billion. 3M's CEO Mike Roman said healthcare has been a strong growth marketplace so they've been investing in a broader range of technologies.

Interestingly, Bloomberg also notes the deal marks a change of course for Acelity because Apax, CPPIB, and PSP Investments had been speaking with advisers about a potential initial public offering of the San Antonio, Texas-based company but instead sold it to a strategic buyer (3M).

As far as returns, a person familiar with the deal said the sale will result in Apax achieving a return of more than three times its original investment.

I went back to look at the 2011 press release PSP put out stating the original PIPE deal the consortium entered was valued at approximately $6.3 billion, including KCI’s outstanding debt.

Something didn't add up because they acquired KCI for $6.3 billion and sold it for $6.725 billion so I wondered where the big money was made.

I reached out to CPPIB's Ryan Selwood and PSP's Simon Marc to ask them what I was missing and Simon was kind enough to reply: "In 2017, Acelity sold LifeCell to Allergan for $2.9bn. That is the main piece you were missing." Ryan subsequently confirmed what Simon stated. I thank both of them.

My bad. If you read the press release above, it clearly states part of the company’s strategic M&A program included the disposals of non-core businesses, such as the LifeCell business unit, which was sold for $2.9 billion in 2017 and the Therapeutic Support Systems (TSS) unit, which was sold in 2012.

Anyway, the main point is this was a great deal for all parties including 3M as healthcare was its third-largest business segment last year, with sales of $6 billion. Acelity had 2018 revenue of $1.5 billion.

CPPIB and PSP co-invested with Apax on this deal and got scale, lowered their overall fees and obtained great returns.

It's just another example of how large sophisticated pension funds can enter into large, complex deals with a top private equity partner because they have the internal expertise to analyze these deals quickly and turn around to co-invest alongside them.

It also goes to show that these large pensions aren't just long-term buyers, when it makes sense, they sell to strategics to realize great gains.

That leads to another problem, namely, they need to put that money back to work to maintain their allocation in private equity but that is why it's important to have a strong pipeline of large deals all the time.

Lastly, Private Equity International released their inaugural Future 40 list, which features 40 professionals under the age of 40 regarded by their peers as future industry leaders. I want to publicly congratulate Audinga Besusparyte, PSP's Senior Director Private Equity (Europe), for making the list.

Below, the SNAP™ Therapy System combines the simplicity of advanced wound dressings with the benefits of negative pressure therapy in a discreet design that won’t get noticed. The SNAP™ Therapy System helps makes a difference in patients’ quality of life, without being visible.

Also, V.A.C.® Therapy is an advanced wound healing therapy that can be readily integrated into the clinician’s wound healing practice, to help optimize patient care. Watch the clips below.