On the Verge of a Deal for Dade Behring

A year ago, Dade Behring, the nation's sixth largest diagnostics company, was facing a huge debt and very angry debt holders. Now, the company seems close to a deal that would allow it to cut the debt in half (to about $750 million) and give debtholders full ownership of Dade Behring. The company would file a voluntary pre-packaged bankruptcy in federal court, which would also enable it to start trading securities on the public equities market. Nothing is finalized, but sources say the company is confident it will prevail. Meanwhile, its financial performance is picking up, with strong growth in all core product lines.

A year ago, Dade Behring Inc. 's financial situation looked bleak: the nation's sixth largest diagnostics company, with revenues of $1.18 billion, was staggering under a debt of more than $1.5 billion. (See "Dade Behring's Recap Plans," IN VIVO, July 2001 (Also see "Dade Behring's Recap Plans" - In Vivo, 1 Jul, 2001.).) But no one could agree on a way to restructure the company. The banks were playing hardball by not letting Dade Behring make interest payments to the bond holders, who in turn were furious as they watched the value of senior subordinated debt plummet to less than 90% discount to par.

Meanwhile, the company's owners were trying to sell it whole or in pieces at valuations many considered unrealistic. Rumors were rampant. It seemed that a plan, begun nearly six years earlier, to build an independent diagnostics company with a broad portfolio of products and take that company public was in imminent danger of collapse—as many people predicted would happen from the start.

Now, sources say, Dade Behring is close to finalizing a debt-for-equity swap that halves the long-term debt and results in the company having publicly tradable securities. In exchange, debt holders get 100% equity in the company, with two-thirds going to the roughly 60 banks that hold Dade debt and one-third going to an equal number of bondholders (and a small portion to management). None of the debt holders would own more than 10% of the company. Current owners Aventis SA , Bain Capital Inc. and Goldman Sachs Co., which pulled together the company from four disparate businesses, will give up all of their holdings.

Implementation of the agreement will likely take the form of a voluntary pre-packaged bankruptcy, which the company will probably file this summer in US bankruptcy court. In this kind of arrangement, the parties agree on a strategy for debt repayment and reorganization before the filing, and then present it to the judge for approval in what is intended to be a relatively rapid process that takes only a few months.

At the end of the bankruptcy proceeding, the company would emerge with publicly traded securities (through the pink sheets, meaning it won't immediately issue new stock), sources say, at a share value that has yet to be determined—providing shareholders with liquidity, and the company with currency for future transactions. Down the road, Dade Behring is likely to be listed on the Nasdaq or another exchange.

If it goes through, the proposition seems sensible for all involved, with everyone giving up, but also gaining, something. Goldman and Bain would appear to make modest profits, certainly not the amounts they hoped for when they formed Dade International Inc. in the mid-1990s, as part of a roll-up strategy incorporating a broad line of diagnostics products. (See "Update Dade: Creating a Dx Consolidator," IN VIVO, January 1996 (Also see "Update Dade: Creating a Dx Consolidator" - In Vivo, 1 Jan, 1996.).) After cleaning house, they hoped to take the company public [See Deal].

But, that didn't happen and given the company's dire straits less than two years ago, their take-home figures from this new deal would be impressive. Goldman and Bain reportedly put a combined $40 million into Dade Behring and pulled out $400 million three years ago as part of a reorganization of the capital structure that gave a bigger share of the company to Aventis and helped create the impending problems. Aventis, which owns 57% of the company as a result of the 1999 restructuring, seems to get the least from the plan—until one considers that the giant drug company did manage to unload its money-losing Behring Diagnostics subsidiary onto Dade without having to pay for an expensive restructuring (See "Dade Behring's Next Act," IN VIVO, February 1999 (Also see "Dade Behring's Next Act " - In Vivo, 1 Feb, 1999.).) Dade, renamed Dade Behring Inc. in the wake of the Behring merger, reorganized and integrated Behring, assuming responsibility for the hefty pension costs associated with laying off several hundred German workers, notes Henry Weinert, president of Boston Biomedical Consulting [See Deal].

Banks and bondholders, as part of the arrangement, have to forgive half the debt, but they get complete ownership of a company whose prospects now seem attractive. Although they have yet to vote on the measure, the banks and bondholders have contractually agreed to approve the measure, and their optimism is reflected in the value of the company's publicly-traded debt. Bonds, trading at five cents on the dollar a year ago, are now slightly above par, while bank debt is trading in the 110-115 range, up from 45 cents on the dollar. While a two-thirds majority vote is needed to approve the plan, those figures imply the odds look good.

The solution wouldn't have been possible without the company's steadily improving financials, a dramatic turnaround from December 2000, when Dade Behring hit bottom. The turnaround is the result of several factors. First, new leadership was put in place, effective the fourth quarter of 2000, with Jim Reid-Anderson, then the company's COO, assuming the CEO position. The new management redirected the company's business strategy, focusing on customer service to the central laboratory business and eliminating non-core activities. Key cost-saving initiatives included completion of an internal reorganization that involved laying off 14% of the workforce, which cut costs by $75 million a year. Also contributing to the turnaround was the continuing success of a chemistry business that brings in more than $400 million a year in revenues, the pay-back from the costly but ultimately sensible break-away from Allegiance Corp. as an outside distributor, and the surprising stability of seemingly mature product lines.

Overall, the company's revenues and bottom line are growing, with core product lines up 8% a year in revenues. Annual interest payments, which totaled $160 million a year ago, are now $135 million and are expected to drop to $65-70 million following approval of the bankruptcy petition. Dade has enough money to pay this amount: net cash flow would be $60-70 million following the Chapter 11 filing, so further debt reduction is feasible.

In the last 12 months, operating costs have declined from 42% to 35%, and are expected to decrease further as the company enhances back room activities and leverages increasing revenues. Operating margins are now at 10%, up significantly, and EBITDA is growing by 30% a year. The end of the restructuring process also means the company won't have to pay out hefty legal and consulting fees, estimated to be about $20 million for the year.

With financials looking good, the company is still opting for a voluntary prepackaged bankruptcy to eliminate the legal risk that could arise if outlying debt holders who don't endorse the agreement seek to strike deals of their own. Moreover, financial benefits accrue by going the prepackaged route—by not doing it in this way, Dade would lose certain tax benefits and would not be able to emerge as a public company.

Ironically, Dade's oft-criticized mix of mature product lines and its inability to fund R&D programs that could have spearheaded development of advanced technologies seem to be working in its favor, Weinert points out. Chemistry and hemostasis are driving growth, but all product lines are contributing to the company's well-being, sources say. The core product lines are growing market share, partly because the diagnostics market is expanding, but also because the company has continued to service customers reliably and provide quality products, they note.

In chemistry, the highly successful Dimension product line continues steady growth and is a modular system that other companies don't yet have. Its hemostasis business, which Dade participates in through an alliance with Sysmex Corp. [See Deal], grew 35% last year worldwide. But the gains are particularly surprising in microbiology, where Dade's Microscan division struggled for several years against better funded, more technologically aggressive competitors Becton Dickinson & Co. and bioMerieux-Pierre Fabre SA. (See "Focused Consolidator: bioMerieux," IN VIVO, May 1998 (Also see "Focused Consolidator: bioMerieux" - In Vivo, 1 May, 1998.).) Both of the latter launched new systems a few years ago, but microbiologists aren't converting to these rapidly; nor are they that eager to adopt the other potential threats to traditional microbiology—namely more sophisticated nucleic acid technologies, says Weinert. Also, Microscan sales are growing 4% a year and it has only two major competitors, he notes.

Overall, the company has stabilized sales and narrowed its once sprawling, erratic product line to accommodate the most attractive products. The company's R&D expenditures are now 9%—nearly in line with the industry average—and in some product lines, like chemistry, they exceed 14%.

The plan has been a long time in coming, possibly because owners were holding out for a better deal and because the banks had more urgent crises on their plates. Still, it seems that if one asks whether this is an operating company with a future, debt holders are likely to respond yes.