DEALTALK-Private equity 'walks on eggshells' as funds eye Brazil hospitals
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By Guillermo Parra-Bernal and Paula Arend Laier
SAO PAULO Feb 27 (Reuters) - Brazilian hospitals and health clinics are drawing strong interest from global buyout firms after the government recently decided to allow foreign ownership of those facilities, although the suitors may find only a few promising targets.
Private equity tops a list of potential investors in a sector that represents 10 percent of Brazil's gross domestic product and shows promise of growth but is hobbled by aging infrastructure, a dearth of qualified staff and rising costs. Since 2007, the number of hospital beds fell by 9 percent while the base of insurance policyholders rose 35 percent, according to government data.
The hunt for assets is already under way, but some funds want to understand the particulars of the market before making a move, said four people familiar with their plans.
Two of those sources said a proposal by Carlyle Group LP to pay as much as 2 billion reais ($694 million) for a 30 percent stake in Rede D'Or São Luiz SA, Brazil's largest hospital chain, is the only deal in an advanced stage. Carlyle and Rede D'Or, controlled by founder Jorge Moll and Grupo BTG Pactual SA's merchant banking unit, declined to comment.
Other funds such as Advent International Corp and KKR & Co LP are "walking on eggshells" as evidence of poor governance, high debt and eroding margins in some clinics and hospitals abound, one of the sources said. Beyond Rede D'Or, "only a handful" of hospital chains seem well-equipped to receive a significant influx of resources, the same source added.
President Dilma Rousseff's decision last month to end the ban on foreign ownership in the sector seeks to lure capital into Brazil's 6,800 private hospitals. Until now, foreigners could only gain exposure to the sector by buying health insurers the way UnitedHealth Group Inc did in 2012, when it paid $4.9 billion for Amil Participações SA.
Ending the ban "was a milestone, but it's hard to see anything gaining traction in the short run," said Francisco Balestrin, president of Anahp, a group representing private hospitals. "Any new investors want to first understand the existing market asymmetries." Continuación...