Merger Monday: Healthcare Wins Again

Investors awoke to the second big Merger Monday of the month, with three brand-name deals worth more than $13 billion hitting the tape ahead of the opening bell.

It was the largest flurry of deal activity in two weeks, or ever since Google (GOOG) bought Waze. Here are the companies wheeling and dealing in the latest bout of mergers and acquisitions:

  • British telecommunications giant Vodafone (VOD) struck an agreement to buy German cable company Kabel Deutschland (KBDHY) for $10.1 billion.
  • Tenet Healthcare (THC) will scoop up Vanguard Health Systems (VHS) for about $1.8 billion, plus the assumption of $2.5 billion in debt.
  • Private-equity firm Kohlberg Kravis Roberts (KKR) made a deal to buy privately held PRA International, a huge provider of clinical laboratory services, for a reported $1.3 billion.

Including the assumption of debt, the total value of these deals comes to $15.7 billion, the biggest splash in M&A since the $40 billion in deals announced on a Merger Monday in mid-April.

As much as M&A activity helps bolster confidence in stocks and investment banks’ bottom lines, it also takes shares out of the market, thereby reducing the total supply of equities (at least in the case of publicly traded target companies) — a generally bullish development.

But the latest deals also help confirm that 2013 is shaping up to be a good year for what was widely anticipated anyway: further consolidation in the telecom and healthcare sectors.

Especially healthcare.

With that in mind, here’s a rundown of Monday’s deals — and a look at what they could portend for investors going forward:

Vodafone/Kabel Deutschland

Usually when Vodafone’s name comes up in deal rumors, it’s about how the telecom is looking to sell its stake in Verizon Wireless to Verizon (VZ) — but can’t — because of the massive tax bill it would have to pay.

Meanwhile, Kabel Deutschland, Germany’s largest cable company, has been the subject of acquisition rumors for months, with John Malone’s Liberty Global (LBTYA) said to be in the mix. So much for that.

The deal will allow Vodafone to offer bundled services like quadruple-play packages to customers (cell, landline, broadband and TV) and makes it a stronger competitor to Deutsche Telekom (DTEGY).

As for U.S. investors, the deal removes a potential acquisition target for Liberty Global, and perhaps even AT&T (T), which is looking to expand on the continent.

Tenet Healthcare/Vanguard Health Systems

It’s rare that shares in an acquiring company rise when it announces a big purchase, but Tenet’s stock bucked the trend, rallying more than 10% soon after market opened.

The euphoria probably stems from the fact that in the case of these two for-profit hospital operators, those usually elusive post-merger cost-savings will actually come to fruition — just as the total market opportunity is set to expand dramatically.

The pending implementation of national healthcare reform extends insurance to millions of new customers … er, patients.

The acquisition of Vanguard not only increases Tenet’s hospital and licensed bed base by more than half, but also expands its geographic footprint an diversifies the company package of services. The market loves this deal, and investors should too.

KKR/PRA International

In another healthcare sector deal — albeit one from a very different subsector — KKR is buying one of the biggest lab contractors in the world from fellow PE firm Genstar.

PRA conducts clinical trials for pharmaceutical companies. As we saw a couple weeks back when AstraZeneca (AZN) bought privately held Pearl Therapeutics, the pharma companies can’t get new potential blockbuster drugs into their pipelines fast enough.

PRA benefits from that cash-rich research & development spigot, which helps explain why it’s so attractive to private-equity shops. KKR has been looking to get into the clinical testing industry for more than a decade, according to reports, and with PRA it has done so in about as big a way as possible.

True, the deal doesn’t mean much for the broader market; PRA was privately held and KKR has a market capitalization of less than $5 billion. Besides, buying and selling companies is what PE shops do. But it does bode well for further activity in healthcare and related subsectors.

The Verdict

The bottom line is that consolidation in the healthcare sector ahead of a sweeping overhaul looks to continue apace. AstraZeneca, Tenet and KKR have all gone shopping in the past couple weeks alone. That should help support any valuations based on takeout potential.

After all, healthcare stocks have been the market’s top sector for the year-to-date and past 52 weeks. Impending reform and a robust M&A landscape helps make the case for more gains ahead.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

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