Du Pont looks outside healthcare to find buyer for imaging division

Sterling Group specializes in management-led buyouts

Du Pont surprised the medical imaging industry last week whenit announced it would sell its Diagnostic Imaging business toa Houston-based investment group. While the sale was expected,few in the industry are familiar with the buyer, a private investmentfirm called the Sterling Group.

Du Pont put its Medical Products business on the block lastyear as part of a divestiture program launched to raise fundsfor a stock repurchase (SCAN 6/7/94). Du Pont Diagnostic Imaging,headquartered in Glasgow, DE, was the largest entity in the division,with annual sales of about $525 million.

As Du Pont solicited inquiries from what it said were dozensof interested buyers, speculation ran rampant about the identityof the suitor that would end up with the business. In the weeksbefore the sale was announced, Polaroid and Picker Internationalwere mentioned as front-runners.

Sterling Group apparently bested the offers from all othercompanies. The firm is unknown to most medical imaging industryobservers, but it has a history of acquiring Du Pont properties.In 1984 it helped Vista Chemical purchase a chemical businessof Conoco, Du Pont's energy subsidiary, and in 1987 it led CainChemical in its acquisition of another Du Pont chemical unit.In both cases, Sterling formed companies and arranged financingin cooperation with management-led groups that acquired the properties.Vista later went public and Cain was subsequently acquired byOccidental Petroleum.

Sterling's intentions for Du Pont Diagnostic Imaging are aquestion mark. Sterling and Du Pont did not disclose the termsof the acquisition and Sterling said it has not determined howit will structure the business once the purchase is completedlater this year.

Examining Sterling's past acquisition history yields some cluesas to the division's future, however. Sterling describes itselfas "a private financial organization engaged in the acquisitionand ownership of operating businesses." As in the Du Pontexamples, its activities usually take the form of leveraged buyouts,management-backed recapitalizations and add-on acquisitions. Sinceits formation in 1982, Sterling has made 30 acquisitions wortha total of about $4.5 billion, according to Hunter Nelson, a principalwith Sterling Group. Some of the companies go public while othersstay private, with Sterling often maintaining an equity stake.

"We sponsor the organization of the company that makesthe acquisition, then we run them as independent companies,"Nelson said. "They are owned by us and management teams andother investors."

Nelson declined to comment specifically on the Du Pont acquisition,saying that it would be premature to discuss Sterling's plansfor the business. Sterling is scheduled to hold a meeting withDu Pont and the management of the Diagnostic Imaging businessthis week to discuss its options.

Sterling's lack of a history in medical imaging may have beena point in its favor. While a film vendor would make a betterfit, companies such as Kodak or 3M would undoubtedly run intoantitrust problems if they pursued an acquisition. Other medicalimaging firms big enough to buy the unit, such as multimodalityvendors, are simply too absorbed with navigating the difficultmedical imaging market to take on a business as large as the DiagnosticImaging unit.

"It's fascinating that none of the existing players inthe industry wanted the business, or made a bid that Du Pont foundacceptable," said Michael Ellman, an analyst with WertheimSchroder & Co. in New York City.