BREAKINGVIEWS-Medline IPO girded by vast US healthcare complex

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, Dec 17 (Reuters Breakingviews) - The biggest initial public offering in four years comes with both a health warning and a ready cure. Medline, a supplier of everything from gauze to wheelchairs, raised more than $6 billion at a nearly $40 billion valuation. Although its trio of private equity owners larded the company with debt and pinched pennies, solid growth in U.S. healthcare spending will cover up those wounds.

Medline’s top line hasn't faltered in more than five decades, and expanded 14% annually since 2014. It's a one-stop hospital shop providing next-day delivery. Last year's $25 billion in sales were divided about evenly between distributing medical supplies and selling ones under its own label. The company, now led by Jim Boyle, has been steadily moving into manufacturing more complex, higher margin and faster growing items, expanding from scrubs and gloves to surgical instruments and diagnostic tests.

The business unsurprisingly attracted Blackstone BX.N, Carlyle CG.O and Hellman & Friedman, which bought control from the Mills family in 2021 in a deal valuing the company at $34 billion, including debt. About $4 billion of the money raised in its market debut, the biggest since electric-vehicle maker Rivian Automotive went public in November 2021, will help pay down the hefty borrowing.

The buyout shops also squeezed Medline. Operating expenses grew 5% a year between 2022 and 2024, or about half as fast as revenue did. It's possible they were just running a tighter ship, but it raises questions about the sustainability of newly improved profitability. If the cutting went too far, cost increases may start gathering pace. Curiously, the highest paid executive last year was its head of human resources, thanks to a signing bonus.

Medline also carries abundant debt. Even after reducing leverage with the IPO proceeds, it will have nearly $13 billion on the balance sheet. The sum is equivalent to about four times last year's adjusted earnings before interest, taxes, depreciation and amortization.

Based on the market debut price, new investors are imputing an enterprise value of almost 15 times that measure of earnings. It puts it on a par with rival Cardinal Health CAH.N, whose net debt is only about one times EBITDA. Medline is growing faster, however, and generates a higher EBITDA margin. Billionaire investor Warren Buffett once compared U.S. medical costs, now at roughly 17% of GDP, to a parasitic tapeworm. They indeed eat away at the economy, but will keep feeding Medline, too.

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CONTEXT NEWS

Medline said on December 16 that it sold about 216 million shares at $29 apiece, raising about $6.3 billion at a nearly $39 billion valuation in its initial public offering, and plans to repay debt with some of the money. It had been planning to offer 206 million shares for between $26 and $30 each.

Private equity firms Blackstone, Carlyle and Hellman & Friedman took majority control of the medical supplier and distributor in 2021 in a deal that valued the company at $34 billion, including debt.

Goldman Sachs, Morgan Stanley, BofA and JPMorgan are the global coordinators and lead bookrunners with dozens of other firms acting as managers on the deal.

(Editing by Jeffrey Goldfarb; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))