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By Guillermo Parra-Bernal and Aluisio Alves
SAO PAULO, April 27 (Reuters) - Private-equity firm Carlyle Group LP agreed on Monday to pay 1.75 billion reais ($600 million) for a stake in Rede D'Or São Luiz SA, Brazil's largest hospital chain, a source with direct knowledge of the deal said.
Washington, D.C.-based Carlyle acquired the stake through a capital increase, with controlling shareholder and Chairman Jorge Moll and Grupo BTG Pactual SA agreeing to being diluted to welcome their new partner, said the source, who requested anonymity since terms of the deal remain private.
Under the terms, BTG Pactual's stake will be reduced to 23.5 percent from 26.5 percent, with the Molls controlling about 68.5 percent. The Carlyle investment values Rede D'Or, which Moll founded in 1977, at around 19 billion reais, or 10 times the size when BTG Pactual agreed to become a shareholder late in 2010, the source added.
The source said Carlyle agreed to pay about 11 times estimated annual operational profits for this year, below the 12 times and 17 times average multiple seen in healthcare deals in the Americas, according to Thomson Reuters data. In the first quarter, healthcare industry mergers and acquisitions was the most active sector worldwide, with 609 transactions worth $110 billion, the data showed.
Brazilian hospitals and health clinics are drawing strong interest from global buyout firms like Carlyle in the wake of a January government decision allowing foreign ownership of those facilities. While the hunt for assets is already under way, most funds want to understand the particulars of the market before making a move, bankers, lawyers and investors familiar with those plans told Reuters recently.
The purchase of the Rede D'Or stake gives Carlyle direct exposure to a sector that accounts for 10 percent of Brazil's gross domestic product but is grappling with ageing infrastructure, a dearth of qualified staff and rising costs. Rede D'Or, which operates 27 hospitals in four Brazilian states, last year had revenue of 5.5 billion reais and earnings before interest, tax, depreciation and amortization of about 930 million reais.
In a statement released shortly after Reuters reported the deal, Carlyle said it used funds from its Carlyle Partners VI, Carlyle South America Buyout Find and a local investment vehicle it raised jointly with state-controlled Banco do Brasil SA. Rede D'Or will use the money to finance expansion.
"This partnership with Carlyle Group is another achievement for Rede D'Or and is aligned with a long-term strategy in the Brazilian hospitals market ... allowing us to accelerate our quality improvement plans and expand geographically," Moll said in the statement.
The transaction is expected to close by the end of the quarter, the source added.
Industry leaders expect private equity involvement in Brazil's hospital industry to help restore profitability. Returns have stayed near record lows for the past two years due to high inflation and strained capacity, which the rapid expansion in health plan membership in the last decade only worsened, according to Anahp, a group representing private hospitals.
To ease the existing mismatch between supply and demand for hospital services, an additional 13,000 hospital beds are needed by 2017, Anahp data showed. Some funding for that increase, which could cost 7 billion reais, could come from private equity money.
Before President Dilma Rousseff's decision to end the ban on foreign ownership in the sector, foreign investors could only gain exposure to Brazilian hospitals and clinics by buying health insurers the way UnitedHealth Group Inc did in 2012, when it paid $4.9 billion for Amil Participações SA.
Carlyle hired Bank of America Merrill Lynch; JPMorgan Chase & Co; Skadden, Arps, Slate, Meagher & Flom LLP; and Mattos Filho, veiga Filho, Marrey Jr & Queiroga Advogados to advise on the deal. Rede D'Or was advised by BTG Pactual, the largest independent investment bank in the emerging markets, and law firms Barbosa, Mussnich & Aragão and Kirkland & Ellis LLP.
$1 = 2.915 reais (Additional reporting by Stephen Eisenhammer; Editing by Richard Chang)