Bloomberg News broke the story last week, attributing the information to five unnamed sources who said PPD, rumored since mid-July to be for sale, is now in exclusive talks with Carlyle, a private equity firm with assets exceeding $150 billion in 84 funds. Carlyle isn’t new to CROs: in 1996, it bought a majority stake in PRA International, selling it to Genstar Capital in 2001.
Also at the table with PPD for a time, according to Bloomberg, were mega equity firms Blackstone Group, which has $150 billion under management, Hellman & Friedman and KKR, best known for its 1988 leveraged buyout of RJR Nabisco, later chronicled in the book and movie Barbarians at the Gate.
Wilmington, N.C.-based PPD is not commenting. And those who watch the space aren’t surprised by the news. Said William Blair analyst John Kreger, “We continue to be in this pattern where the private equity shops seem to be very interested in pharmaceutical outsourcing.”
In the last 18 months, there’s been a flurry of CRO-private equity firm activity. In May, CCMP Capital bought Medpace. In April, Nautic Partners acquired Omnicare Clinical Research. In December 2010, Warburg Pincus purchased RPS. Last August, Avista Capital acquired INC Research, which then turned around and bought Kendle International in May. Thomas H. Lee Partners acquired inVentiv in May 2010, and then inVentiv bought i3 in January and recently completed its purchase of PharmaNet. It’s a veritable CRO feeding frenzy.
Bloomberg reported most of the bids for PPD—considered the third biggest CRO in the market behind Quintiles and Covance—were between $33 a share and $38 a share, or as much as $4.3 billion. The day the news broke, PPD stock traded at $32.28, giving the company a value of about $3.68 billion.
PPD, which has been publicly traded since 1996, said in a statement in July that its “board of directors has asked management to review PPD’s strategic plan and capital structure with a focus on unlocking value for shareholders.”
But why sell now? Likely because its founder and CEO is ready to leave.
“One of the things happening here is the founder of the company trying to hand the keys over to someone else,” said Kreger, referring to Fred Eshelman, 62, who founded PPD as a one-person consulting firm in 1985 and who now owns 7.3% of the company.
“They’re going through the process of the founder and long-time CEO looking for liquidity,” he said. “That might be something the company doesn’t want to undertake in the scrutiny of a public setting and one reason they’re considering selling.” PPD has been actively searching for a new CEO.
If PPD were to be sold to a large private equity firm, not much in its day-to-day operation likely would change, according to Neal McCarthy, managing director of investment bank Fairmount Partners. PPD would be taken private, but likely would continue on very much as before, with extra backing should it be needed.
“The nice thing about CROs is they really don’t need a lot of ongoing financing; they generate a lot of cash,” McCarthy said. “Unlike, say, a lab, for which you have to keep buying new equipment, with a CRO doing phase II and III work you just need human beings, computers and a roof to put over everyone’s head.”
A private equity firm that buys PPD could potentially put up $2.5 billion for the CRO, borrow another $1.5 billion and let the company’s cash flow pay down that debt over a few years, he said, at which point it would be reasonable to sell the asset to another private equity firm for a profit or try to take it public again.
What details would current PPD-Carlyle Group talks focus on? “Outside of money, they’re likely discussing senior managers staying in place after a deal, and maybe what those managers’ option pool will be,” McCarthy said, explaining that typically, to encourage managers to stay on, private equity buyers offer them between 5% and 10% of the profit earned when the company is sold again. McCarthy added that talks would also include discussion of a break-up fee to be paid to Carlyle if another entity swoops in to buy PPD at a higher price and/or more favorable terms.
“Carlyle would be disappointed, but a multi-million dollar fee would soothe their pain and cover their expenses,” he said.
According to the 2011 PEI 300 ranking, based on capital raised over the last five years, Carlyle was ranked the third largest private equity firm in the world. Bloomberg reported that Carlyle is talking to other private equity firms about joining it in an offer for PPD, and that Morgan Stanley is advising PPD.
PPD has more than 11,000 employees scattered around the globe and contracts that brought in close to $1.5 billion in revenue last year. The acquisition would be the largest for Carlyle since announcing the $3.9 billion purchase of telecommunications equipment maker CommScope last fall. Carlyle is currently in the process of selling old investments and making new ones as it prepares for an initial public offering.
If the two reach a deal, an announcement could come any day, said McCarthy, with the process of garnering shareholder approval taking another 60 to 90 days.
Kreger, though, warned reports of a possible deal are unconfirmed. “I still think it’s too soon to draw conclusions about who the winner will be.”