German health minister's 'locust sponsors' comments spook live healthcare deals

This has also resulted in investors already present in the sector to rush to get bolt-on deals across the line before any new rules come into play, the sources said.

In an interview with tabloid Bild published on 24 December, the minister said he will look to introduce legislation this quarter to stop "these locusts" from acquiring clinics, known locally as MVZs, adding that a profit margin of 10% or more is unjustifiable.

The remarks have made sponsors wary, lawyers, advisors and funds told this news service. One lawyer added that at the most extreme, the possibility will completely remove private equity from the market, despite nobody knowing at this stage what is constitutionally possible.

"Any new platform deals and new investors all seem to be on hold," the same lawyer said, adding that he recently advised one international fund to reconsider a bid on a dental asset, citing too much uncertainty when investing a limited partner's money.

Live deals that could be partly affected by the minister's remarks include Nordic Capital's plans to exit of European Dental Group, Equity Capital Management's sale process for skin care specialist Dermatologikum, and Gilde Healthcare's expected sale of imaging platform RAD-x, while other deals like NORD Holding's ophthalmology group Zentrum Gesundheit are chugging along without a buyer.

"Of course, I see that private equity is already pulling back from investments in the sector," a second lawyer said, although another source added that investors are also spooked by wider macro woes in valuation declines and debt financing.

Outpatient sectors like radiology, ophthalmology and dentistry are most likely to be affected by any new legislation, the sources said, where sponsors like EQT Infrastructure and Montagu have in recent years ploughed capital into consolidating platforms like Meine Radiologie and Artemis that are now ripe for exits.

Any new legal measures could also affect new entrants to the sector like family-office GBL, which acquired Sanoptis last April, and CVC-owned Finnish strategic Mehilainen, which sees the country as a core growth market.

Bolt rush
Some of these large vendors are impatiently seeking to strike deals now instead of waiting, in anticipation of any radical changes to future restrictions, one fund operating in the market said, and there are also a lot of small, founder-owned clinics with succession issues now looking for a quick exit, one of the lawyers said.

This is creating opportunities for bolt-ons for the larger platforms, with one lawyer saying that these deals now take up 90% of his pipeline.

If new limits do come into play, sponsors that already own assets are likely to be protected by grandfathering exemptions so they are not forced to sell out, one of the lawyers said.

That means sponsors are also rushing to acquire so-called "plan hospitals", which are a prerequisite under German TSVG law to owning outpatient groups, the lawyer continued.

"People are buying like crazy to get deals over the line before anything comes into effect," one of the lawyers said, "particularly buying the plan hospitals that give the necessary licence to own hospitals. Once that bottleneck is out of the way then people should be more relaxed."

Last year, Mehilainen acquired the necessary hospital to operate in the German market, alongside sponsor Warburg Pincus, which does not otherwise own an outpatient group.

Intense lobbying
Lauterbach's remarks have yet to be put into legislation, and one lawyer told this news service that formal documents have already been pushed back to the second or third quarter of the year, and will likely be watered down or stopped completely by coalition partners in the Department of Justice.

One key roadblock to such legislation is a strong basis for the international investment community in Germany to succeed in compensation-loss claims against the government, much like Swedish energy group Vattenfall when the Bundestag prematurely phased out nuclear power production in Germany in 2011, the same source said.

There is precedent for German healthcare reforms impacting M&A. Last year, the state ruled that increased pay for caregivers could not be passed on to patients, which partially fed through to low appetite for Nordic Capital's care home group Alloheim, which struggled to present normalised earnings.

Doctors themselves are fighting on either side; one source suggested that Lauterbach is in an informal coalition with powerful doctor lobbies that want to protect their assets.

On the other side of the equation, younger doctors like that private capital prevent them from spending millions of their own money on capex like new machines, and appreciate structures that can help female doctors, especially, take time off to have children, one of the lawyers said.

"Doctors wouldn't even get out of bed for 10%," this lawyer said. "Most have 30-50% margins, which is deserved, and will want to keep it that way."

For now, some private equity firms and advisors are now lining up with their lawyers to assess the potential full impact of the proposed law, a sector banker said. "It could definitely impact dealmaking, but we need to understand it a bit more. It's definitely led to a higher level of caution in the community."

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