Unusual deal terms: Mednax hands over anesthesia biz to American Securities platform

Happy Thursday!

How’s everyone doing this week? The White House Coronavirus Task Force said it was winding down by the end of May, and then backed away from those plans, all the while infections continue to climb on a national level. Regardless, PE firms are starting to prep their portfolio companies for a myriad of potential legal exposure expected to surface as workers return to the workplace. Check out my story.

Creative deal structures:

The lack of equilibrium between buyers and sellers on valuation is one of the biggest impediments to dealmaking right now, sources tell me. Many processes are indefinitely stalled or called off. Still, we’re beginning to see interesting deal structures emerge as parties try to bridge valuation gaps. Big picture: people still want to transact.

A Wednesday announcement revealed that North American Partners in Anesthesia, a portfolio company of American Securities, agreed to buy American Anesthesiology from publicly-traded Mednax. The structure of the pending transaction caught my interest for a couple reasons.

Although Mednax will receive a small upfront consideration of $50 million in cash at closing, one of four transaction components is an earnout based upon the “multiple of invested capital returned to NAPA’s owners [American Securities] upon exit of the investment.”

In other words, as opposed to the seller receiving a contingent consideration tied to the business’s future performance, the earnout is tied to American Securities overall success on NAPA — a platform it backed about four years ago.

More specifically, the 8K disclosed that Mednax will begin to receive a payment at an exit multiple of 2x, with its economic interest valued up to as much at $250 million should the PE firm’s return reach 5x. (Which seems to be a pretty high threshold.)

The earnout is unusual, one healthcare banker told me, “particularly since [the] seller has no control or governance related to the platform.”

“This is indeed a fairly unusual structure, although when you unpack it, it’s quite similar to a buyer just paying a portion of the consideration with its stock (except here the return on their equity is more structured as Mednax doesn’t participate until American Securities has achieved a specified return),” added Kevin Rinker, who co-chairs Debevoise & Plimpton’s Mergers & Acquisitions practice and is a leader in the Private Equity and Healthcare & Life Sciences groups.

Losses off the books: Another unusual component of the deal is Mednax’s immediate cessation of cash losses related to American Anesthesiology. Mednax said it expects the unit’s future cash losses related to covid-19 of at least $150 million to $250 million.

Because American Securities now owns the business, its responsibility for cash losses is pretty standard, one of the bankers said, but it is rare to acquire a business losing that much money at the time of purchase.

“It goes to show how desperate they were to dump the business given the pressures that platform has been facing,” the banker said.

Facing activist pressure, Mednax had been weighing the divestiture of the unit for several months now. The company estimated American Anesthesiology’s April revenue fell below its pre-covid-19 outlook by approximately 60 percent to 70 percent. In other words, the unit has been suffering for some time — particularly since 2017, Mednax said — with the crisis only exacerbating its problems.

What’s next for Mednax, everybody? The company also encompasses radiology, office-based womens’ and child services, and a neonatal services units — the latter which Mednax said in its quarterly report has yet to experience any measurable covid-19 impact. Pre-crisis, sources told me there would be an eager buyer for the radiology arm, while characterizing the womens’ and childrens’ unit as particularly ‘defensible’.

Other strategies I’ve written about in the midst of the crisis include equity backstops. Are you seeing other interesting renegotiation of terms or unique deal structures? Hit me up at springle@buyoutsinsider.com.

Top Scoops

Growth equity firm FTV Capital led a £78.4 million ($98 million) growth equity investment in Bought By Many, a rapidly growing pet insurance provider in the UK, the firm told PE Hub. Read more.

Consonance Capital, whose fundraising I just wrote about, just sold Turn-Key, the remaining piece of Enclara not purchased by Humana in a more than $700 million deal last year. The buyer is CareCentrix, which Summit Partners has now owned for almost a decade. Read more.

That’s it for me today. As always, reach me at springle@buyoutsinsider.com with your comments, tips, or just to stay hello.

Sarah