Dade Behring Primed To Become Public Firm

Once-beleagured diagnostics giant initiates comprehensive financial restructuring plan

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CEO SUMMARY: Dade Behring is executing an ambitious plan to restructure its finances and become a public company. To reduce its debt burden, Dade’s three owners are giving up their stock. Banks and bondholders will swap a portion of their debt for shares of stock in Dade. Once the financial restructure is completed, Dade Behring intends to expand the menu of diagnostic products and assays it offers laboratory customers.

FOLLOWING 20 MONTHS of intense negotiations with banks, bondholders, and shareholders, Dade Behring Inc. filed a pre-packaged Chapter 11 Bankruptcy action in Chicago last Thursday.

“This is a very important day for our company,” stated Jim Reid-Anderson, President and CEO at Dade Behring. “This step triggers the execution of a comprehensive financial restructuring plan which has the agreement of all stakeholders.”

Three Benefits To Dade

“We expect three major benefits from our financial reorganization,” he continued. “First, we will emerge with 50% less debt. Second, this court filing preserves our ability to utilize substantial tax benefits. Third, by using a Chapter 11 filing, it enables Dade Behring to become a public company.”

The laboratory industry has long heard rumors about the financial difficulties at Dade Behring. This financial restructuring resolves those problems and leaves Dade in a strong financial position. Because the use of bankruptcy is a strategic tool in the restructuring, Dade’s sales and service teams visited lab customers to explain the details and replace rumors with facts.

Debt-For-Equity Swap

“The key element is a debt-for-equity swap in which Dade’s three corporate owners, Aventis SA, Bain Capital Inc., and Goldman Sachs Co. give up their equity ownership of Dade Behring,” stated John Duffey, Chief Financial Officer at the company. “This equity will then be distributed to banks and bondholders in exchange for a reduction of existing debt by about half.”

The story of Dade Behring’s creation in 1995 explains the current need to restructure the company’s finances. “Dade was literally created by Goldman Sachs and Bain. Starting in 1995, these companies acquired certain diagnostics divisions from Baxter, DuPont, and Aventis,” explained Duffey. “Money to finance these acquisitions came from bank debt and bonds.”

In fact, the creation of Dade Behring was part of the consolidation wave in diagnostics that lab administrators and pathologists saw through most of the 1990s. But, as a company built through acquisitions, Dade Behring was saddled with considerable debt. Against 2001 revenues of $1.2 billion, Dade had to pay $160 million in interest to service its $1.5 billion of debt.

As many laboratorians know, Dade Behring holds a solid share of the market in several diagnostic categories, such as chemistry/immunochemistry, hemostasis, plasma proteins, and microbiology, among others. Worldwide, it has more than 39,000 installed instrument systems.

“Over the past 18 months, we’ve undergone many changes as a company,” noted Duffy. “Jim Reid-Anderson became our new CEO at the end of 2000. We realigned the company’s strategy to focus on customer excellence and customer relationship management. We also reduced our work force and pruned costs, generating about $75 million per year in savings.

Dade’s Restructure Eases Debt Burden

TO REDUCE ITS $1.5 BILLION DEBT BURDEN, Dade Behring’s financial restructuring plan includes the following elements:

1. Banks and bondholders will trade approximately half their debt (about $750 mil- lion) for stock in Dade Behring.

2. Aventis, Goldman Sachs, and Bain Capital will give up their Dade stock.

3. A prepackaged Chapter 11 Bankruptcy action is being used to implement the debt-for-equity swap.

4. Use of the Chapter 11 filing allows Dade to carry over valuable tax benefits.

5. Use of the Chapter 11 filing allows Dade to have publicly tradable stock upon discharge of the bankruptcy.

6. Customers and suppliers of Dade will see uninterrupted services and payments because this financial restructuring was agreed to in advance by all parties.

Recent Revenue Growth

“During these same 18 months, Dade’s revenue grew 11% and operating profit moved into the black to over $120 million for the 12-month period ending June 2, 2002,” he added. “Overall, our business is dynamic and thriving. But the huge debt burden prevents us from accomplishing more. Our success in the marketplace caused both our shareholders and creditors to recognize a common interest in reducing our overall debt burden.”

“Because we’ve pre-packaged our Chapter 11 filing, we believe it will be discharged in less than 60 days,” observed Reid-Anderson. “That’s because all the banks, bondholders, and shareholders agreed to its terms in advance and have already voted upon this plan.

“Even as this pre-packaged Chapter 11 action is moving ahead, we are preparing to file registration for our stock,” added Reid-Anderson. We will be a public company upon discharge of the Chapter 11 and expect to be a NASDAQ-listed stock by year’s end.”

Plans For Coming Years

“As part of our planning, Dade Behring has been in close communication with its suppliers and customers to help them understand that all of Dade’s services will continue unchanged and unaffected during this financial restructuring,” noted Duffey.

For laboratory executives and pathologists, Dade’s financial restructure is an early sign of change. Once completed, Dade is planning to become more aggressive in the marketplace. In particular, it wants to enter the high-volume chemistry instrument segment with a product it calls Epsilon.

In the 24 months following the discharge of Dade’s Chapter 11 filing, laboratory customers can expect to see a more energized Dade Behring competing in the marketplace, both in sales efforts and in the launch of new diagnostic products. In fact, between 2001 and 2003, Dade is boosting spending on research and development by 31%.

Its three corporate stockholders—Bain Capital, Goldman Sachs, and Aventis—are losing their equity in order to “wipe out” $800 million of debt.

“In spite of our heavy debt load, Dade Behring has consistently performed well for six consecutive quarters. However, that has not stopped the competition from taking advantage of the situation,” remarked Reid-Anderson. “Now we are cutting that debt by more than half, while maintaining full services to customers and suppliers. We are now serving notice to both our customers and our competitors: Dade Behring is financially sound; it is investing substantial amounts of money in research and development; and it is dedicated to improving the products and services it provides to its many laboratory customers throughout the United States and the World.”

A “Put Together” Company

The unique fact about Dade Behring lies in its formation back in 1995. Unlike most diagnostic manufacturers, Dade Behring was assembled from divisions divested by corporate parents. It found itself in the unusual position of offering customers an established line of instrument systems and reagents, but having to focus internally on developing a common corporate culture from the business units formerly owned by Baxter, DuPont, and Aventis. The large debt burden, created when its institutional owners bought the pieces that created Dade Behring, never gave its executive team enough cash flow to service the debt and still have enough to invest in future products.

Built Through Consolidation

Lab executives and pathologists should also not overlook a key strategic business observation about Dade Behring and why it needed to do this unusual financial restructuring. THE DARK REPORT has frequently written in the past about the fact that many companies built through consolidation had a difficult time paying back the debt used to fund their acquisitions.

This is certainly the case at Dade Behring. Its three corporate stockholders—Bain Capital, Goldman Sachs, and Aventis—are losing their equity in order to “wipe out” $800 million of debt. For these stockholders, the acquisition strategy did not prove to be a long-term business success. It’s another example of a “grow by acquisition” effort that failed for the original owners.

On the other hand, the fundamental business within Dade Behring’s component parts was always sound. Now that the company is cutting its onerous debt burden in half, its management team will have the time to concentrate on building the business, and the cash flow necessary to support healthy growth.

Collectively, these business actions should make Dade an even tougher competitor than it has been in recent years. Certainly Dade CEO Jim Reid-Anderson won’t allow any competitors to “pick on Dade Behring” any longer.


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