- Since 2009, 23 of CD&R’s 38 deals have been partnerships
- CD&R allows Cardinal to share capital burden, operational risk in naviHealth
- Deal underscores industry themes: value-based care, cost and quality management, payer-provider integration
Clayton, Dubilier & Rice’s partnership deal for Cardinal Health’s naviHealth underscores how a rapidly changing healthcare landscape is creating interesting opportunities for private equity.
The New York firm in August completed its transaction with naviHealth, acquiring a 55 percent stake in the company, which aims to reduce the cost of post-acute healthcare. Cardinal, retaining its remaining stake with an option to buy back all of naviHealth in five years, said it expected to receive after-tax net proceeds of $650 million. Additional financial terms weren’t disclosed; however, sources familiar with the matter previously told Buyouts the deal was valued at approximately $1.2 billion.
The deal highlights an important theme unfolding in the healthcare universe: Major players are redefining their strategies as technology disrupts the way services are funded and delivered. Large companies like Cardinal acknowledge that assets closer to their core strategy require more focus internally and they don’t have the personnel to maximize the value of emerging areas, said CD&R Partner Ravi Sachdev.
While Cardinal is among the world’s largest distributors of pharmaceuticals and medical products, naviHealth is in a much different line of business. A young but high-growth company, naviHealth uses technology to reduce the cost of healthcare and improve care for patients after they are discharged from the hospital. It collaborates with insurers, doctor groups and hospitals, providing software to manage care for patients in post-acute care settings like home-health agencies.
According to data collected by CD&R, post-acute care accounts for more than a quarter of total healthcare spending and about a third of total healthcare waste, which refers to needless spending that does not improve patient health.
“Cardinal will have to be in those places over time, and I think they recognize that’s the case,” Sachdev said. “But they’re not going to own all of that execution. These spaces are so nascent … They’re not big enough contributors within the whole, yet, to say ‘I have to own it [all] today.’”
By partnering with CD&R, Cardinal can share that operational risk, said CD&R Partner Sarah Kim. At the same time, naviHealth gains a dedicated team focused on accelerating value creation and developing the right equity incentives for the management team, Kim said.
That includes access to CD&R Operating Partner Ron Williams, chairman of naviHealth. Williams — as the former chairman and CEO of Aetna — is well connected to payers, Sachdev said.
CD&R isn’t the only firm eager to share the capital burden with healthcare companies looking to navigate through uncharted territory. In 2017, Humana inked a $4.1 billion deal for home health giant Kindred Healthcare, which it bought in partnership with TPG Capital and Welsh, Carson, Anderson & Stowe. The same group also bought hospice company Curo Health Services from Thomas H. Lee in a $1.4 billion deal.
The idea is that Humana can funnel patients to its own providers. Like Cardinal, Humana sees an opportunity to bend the cost curve, but wants to share that capital burden.
“They think it’s an area that matters a lot, but they’re not going to do it on their own, right?” Sachdev said.
While corporate carve-outs and partnership transactions aren’t new, of course, there’s a reason we haven’t seen more deals of this structure in healthcare.
That’s largely because big healthcare services companies historically haven’t been created with disparate divisions and a conglomerate-like mindset, Sachdev explained.
Organizations of the past were more singularly defined: Payers offered insurance, hospitals ran health systems, and distributors distributed. Until recently, Sachdev said, healthcare services companies haven’t had to contemplate both operating outside the core strategy and divesting anything: “People have been rewarded for a long time for just being really, really good at their core business.”
One exception is UnitedHealth Group, which has fueled growth through its Optum subsidiary. The prolific acquirer today encompasses businesses ranging from urgent care networks to pharmacy benefits management.
Of course, further disruption to the market has been driven by mega-deals including the pending CVS–Aetna and Cigna–Express Scripts transactions.
Creation of the idea
Major players see that the lines of the healthcare supply chain continue to blur, and want to adapt. But it’s largely on sponsors like CD&R to educate possible partners around what could strategically make sense.
Opportunities like naviHealth don’t come up every day. “The reality is, most of the time you have to go create them,” Sachdev said.
Continuous dialogue with the companies CD&R has identified as likely partners at some stage — including all the major payers — helps to avoid competitive situations, Kim said. To the extent that there is competition, CD&R needs an information advantage so that it can react quickly or bring a differentiated approach, Kim said.
“It can take years and not all of [these conversations] will be fruitful,” Kim said. “If you can execute on one of these [deals] every couple of years, then it’s worth the investment and time.”
The NaviHealth deal is a good example. The parties worked together before — CD&R in 2013 sold AssuraMed to Cardinal — but their history extends well beyond that. “We’ve looked at partnership deals together,” Sachdev said. “They’ve looked at buying other assets from us. And so there’s good personal connectivity at a firm level as well.”
By the time naviHealth came around, the firm knew the company and management well, so it could move fast, Kim said. “It doesn’t always work out that way, but that’s the attempt.”
Track record in complexity
CD&R wasn’t alone in its pursuit for naviHealth, as Buyouts previously reported. So what gave it an edge?
It’s a challenging price environment, the pools of capital seeking investment in healthcare are constantly expanding, and sponsors are pulling out all the stops as they look to differentiate.
Importantly, valuation isn’t everything. In fact, a complex situation like naviHealth — in which many factors influence the decision-making process beyond price — actually worked to CD&R’s benefit, the partners said.
While naviHealth represents CD&R’s first true partnership deal in healthcare from an ownership perspective, the firm’s partnership strategy formalized about a decade ago.
Since 2009, 23 of its 38 investments have been partnerships, representing 62 percent of the firm’s capital invested, CD&R said. Of those, a dozen were done alongside a corporation, while the rest were in partnership with a family, entrepreneur or investor.
Out of Fund X, four of six investments have been partnership deals. That’s about 60 percent of invested capital.
The results are also telling on a deal-by-deal basis. For example, CD&R in 2011 partnered with industrial manufacturer Ingersoll Rand when it bought a 60 percent stake in its refrigerated display products unit Hussmann. Through the asset’s eventual sale to Panasonic, CD&R generated a gross multiple on investment of about 5x, the firm said.
The partnership also paid off for Ingersoll. Hussmann’s valuation increased by about 175 percent over that additional investment period, CD&R said.
“There was really no debate from the Cardinal perspective if we could partner effectively,” Sachdev said.
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