CD&R Leading the Way on Healthcare Divestitures

While healthcare has been a robust source of private equity deal flow, valuations are on the rise. As a result, firms are beginning to see the benefit of executing corporate divestitures as a source of deal-making at relatively reasonable prices. Yet these complex deal structures often require an added layer of expertise for the private equity firm.

“Every divestiture, including those in healthcare, offer inherent complexities and nuances,” explains Derek Strum, a partner from Clayton Dubilier & Rice. “There is often an ongoing commercial and financial relationship with the seller, and the buyer must be a trusted steward for the business.”

Carve-outs in the healthcare space often require passing FDA regulatory hurdles, which can often take up to 24 months, on top of executing the deal itself and creating a standalone business. In the meantime, the owners of the newly formed entity must maintain the business and customer relationships.

For instance, government approval for healthcare companies to relocate facilities often takes many months. While waiting for approval, the new standalone business will need to continue to use a facility that now belongs to a different owner.

“You need that strong, positive relationship with the seller to ensure continuity for the new independent business,” explains Strum.

For CD&R, which recently closed its latest fund on $10 billion in capital commitments, executing complex carve-outs is all in a typical day’s work. Strum estimates more than half of CD&R’s total number of deals in its 35-plus year history have been carve-outs.

The firm most recently announced its agreement to acquire the dental digital business of Carestream. The company provides imaging systems and practice management software for general and specialist dental practices worldwide. The new company will be named Carestream Dental.

Strum characterized this deal as a “carve-out of a carve-out,” noting the firm is not separating the entire dental segment from Carestream’s medical segment, but rather carving out the digital dental piece only. Carestream will keep the other parts of the dental business, creating further complexities in the carve-out.

CD&R will leverage its operational expertise to accelerate growth, including relying upon the expertise of advisor John Dineen, who led GE’s $18 billion healthcare business. The firm will also work with deal partner CareCapital Advisors Ltd., a specialist investment platform focused on the dental and consumer sectors in Asia.

Strum says healthcare today, particularly for medical products and devices, is maturing and will continue to do so. That means companies will need to off-load non-core businesses that are underperforming their growth and profit potential. That, in turn will offer a significant opportunity for private equity firms that can bring expertise in executing these types of complex deals, and then instituting significant operational capabilities to create true value.

“We will continue to provide solution capital to these business units that have potential, but are lacking the focus and resources needed to optimize their success,” says Strum.