Huge private equity firm to buy Apria

Sunday, June 22, 2008

LAKE FOREST, Calif. - Despite unrelenting reimbursement pressures and a slumping stock price, Apria Healthcare announced June 19 that it has negotiated a $1.6 billion buyout offer from an affiliate of The Blackstone Group, one of the largest and most prestigious private equity firms.

If Apria's shareholders approve the offer in September, making the public company private, they will receive $21 per share. That's a premium of about 33% over $16.08, the closing share price on June 18.

"It's a good premium," said one industry source. "Blackstone must see some potential for growth to pay that kind of money."

At press time, Apria's market capitalization was $873.79 million and its share price was $19.92. The week before the deal was announced, Apria's share price was $15.55, the lowest it has been since 2000.

Blackstone, industry sources say, likely sees the growing demographics for home medical equipment outweighing declining reimbursement from national competitive bidding and other measures.

"The fundamentals, from the demand side of things, are compelling enough that people are starting to take the risk," said Bob Leonard, an associate with The Braff Group, a mergers-and-acquisition firm in Pittsburgh.

Efforts in Congress to delay competitive bidding, which would cut reimbursement by 26% on average, have also made Blackstone more confident about the acquisition, industry sources said.

Additionally, Apria's 2007 acquisition of Coram, which increased its footprint in the red-hot home infusion market, may have helped to make the provider more attractive, industry sources said.

"In general, there's more interest in home infusion on the private equity side," said Tyson Graygor, an analyst with Provident Healthcare Partners, an investment banking firm in Boston.

Blackstone, industry sources say, probably already has an exit strategy for Apria. The firm could strip the provider down, making it more efficient, and sell it for a profit. It could build it up by making acquisitions or adding different product lines and sell it for a profit. Or it could take the provider public again and make a profit that way. Due to a struggling stock market, Blackstone may even try to sell Apria to another private equity firm, industry sources say.

"As a service business, I don't think Apria is a big asset-stripping opportunity," said an industry source. "I think Blackstone will maybe invest in more technology to be efficient and maybe explore different delivery models. I think they're going to want to make it bigger and better."

Whatever the strategy, changes are in store at Apria, industry sources say.

"If (Apria CEO Larry Higby) thought he had pressure from competitive bidding to become more efficient, he hasn't seen anything like being owned by someone like Blackstone," said an industry source. "They demand good management."

Per the deal, Apria can entertain other offers until July 24, but industry sources doubt anyone will come close to Blackstone's.

Blackstone, which plans to pay for the deal with its own cash and debt financed by Bank of America, Wachovia and Barclays Capital, is no stranger to the healthcare industry. It has investments in specialty hospitals operator Vanguard Health Systems; physician outsourcing company TeamHealth; and rehabilitation device maker ReAble Therapeutics.