(For more Reuters DEALTALKS, double-click on )
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."
Curitiba-based Grupo VITA, Belo Horizonte-based Hospital Mater Dei, Recife-based Hospital Santa Joana and São Paulo-based maternity hospital Pro Matre Paulista have sparked some interest among potential investors, the sources said.
Yet the industry's crown jewels, non-profit hospitals owned by communities and philanthropic foundations, are not for sale. The most prominent, Hospital Israelita Albert Einstein, is controlled by Brazil's Jewish community and runs its own endowment.
"I don't see non-profit hospitals morphing into for-profit firms," Bradesco BBI analyst Rafael Frade said.
Einstein and peer Hospital Sírio Libanês would fit well into buyout funds' strategy of acquiring companies whose high degree of specialization allows them to charge more for services.
Mater Dei and VITA denied being involved in merger or acquisition talks. KKR, Advent and the other hospitals declined to comment.
Private equity involvement in Brazil's hospital industry could help restore profitability, Bradesco BBI's Frade said. Returns have stayed near record lows for the past two years due to accelerating inflation and strained capacity, data from industry watchdog ANS shows.
Hospitals look attractive because they stand to benefit from a growing number of elderly Brazilians in coming years. A 20 percent slump in Brazil's currency over the past year has also made acquisitions cheaper, said Ricardo Gaillard, a partner at law firm Souza Cescon Barrieu & Flesch Advogados.
The rapid expansion in health plan membership in the last decade was not accompanied by an equivalent improvement in infrastructure, triggering a supply-and-demand mismatch that buyout firms may want to close in coming years, he added.
To ease the supply crunch, an additional 13,000 hospital beds are needed by 2017, Anahp's Balestrin said. Some funding for that increase, which could cost 7 billion reais, could come from private equity money, he added.
In addition, rising costs from the lack of scale are pushing up medical inflation. Average revenue per patient per day rose almost 2 percent last year, Anahp estimates, well below overall inflation of 6.5 percent.
$1 = 2.885 Brazilian reais Editing by Todd Benson and Lisa Von Ahn