By ERIK SCHELZIG, AP Business Writer
The board of HCA Inc. is recommending the nation's largest for-profit
hospital operator accept a $21.3 billion deal to take the company private in one
of the largest leveraged buyouts ever.
The deal, which would involve the assumption of $11.7 billion in debt,
comes while HCA is struggling with sliding earnings, slow growth and escalating
costs for uninsured patients.
The buyout would take the Nashville-based company private for the second
time since its initial public offering in 1969, and it would give HCA time to
turn around its market performance.
"This gives a company like HCA the ability to duck in the hole, so to
speak, in a difficult time for industry fundamentals," said Darren Lehrich, a
managing director at Deutsche Bank.
"It takes a little bit of the quarter-to-quarter pressure off the
management team and has a much longer term view in this environment, where we've
witnessed soft volumes and deteriorating bad-debt trends for the better part of
three years," he said.
Shareholders of the company, which was founded by the family of Senate
Majority Leader Bill Frist, would receive $51 in cash for each share of common
stock under the deal announced Monday.
The deal would present an 18 percent premium to HCA's closing share price
last Tuesday, the last major trading day before media reports about a potential
buyout of the company, and a 6.5 percent premium to its closing price on
Friday.
Shares of HCA rose $1.61, or 3.4 percent, to close at $49.48 on the New
York Stock Exchange, and have traded in the $41.80 to $52.74 range over the last
52 weeks.
Barring a better offer, HCA expects to complete the deal in the fourth
quarter.
The buyer is an investor group made up of Bain Capital, Kohlberg Kravis
Roberts & Co., and Merrill Lynch Global Private Equity, none of which
immediately returned phone calls seeking comment.
Dr. Thomas Frist Jr., 67,
the senator's brother and a board member of HCA, is joining with
the private equity groups to acquire the company he founded with his father in
the 1960s. Other members of senior management at HCA, including Chairman and
Chief Executive Jack Bovender, 60, have agreed to reinvest part of their HCA
equity into the new entity.
"This transaction will position the company to continue its tradition of
high-quality service provided with genuine caring," Thomas Frist said in a
statement. "In addition, the transaction will position the company and its
employees for sustained future success."
HCA on Monday reported second-quarter earnings of $295 million, or 72 cents
per share, down 27 percent from $405 million, or 90 cents per share, in the same
year-ago period.
HCA's earnings have been hampered by increasing costs for uninsured
patients. In the second quarter, HCA's provision for "doubtful accounts" was
$935 million, or 14 percent of revenues.
Wachovia Securities analyst Bill Bonello said HCA is an attractive buyout
candidate because its share price has been low "despite the fact that its
operating metrics have been comparable to its peers."
The costs incurred by uninsured patients are an industrywide problem,
Bonello said, meaning HCA could be poised for long-term growth if a government
or industry solution is found.
"There aren't a tremendous number of company-specific problems that HCA is
facing," Bonello said.
HCA went private once before through a $5.1 billion leveraged
buyout in 1989 when the company was concerned about a hostile takeover. That
investor group included Chairman Thomas
Frist Jr., HCA
management and
Texas businessman Richard Rainwater.
The company went public again in 1992 and later combined with Columbia
Healthcare.
Ratings agencies Standard & Poor's and Fitch placed HCA on negative
watch lists following Monday's announcement, citing the increased debt load.
Nancy Weaver, a managing director at Stephens Inc., said hospitals make
attractive investments for private equity funds because they generate a lot of
cash flow.
"Even though the earnings are volatile, they produce cash flow," Weaver
said. "And private equity look at cash flow."
There may be similar deals in the hospital sector as long as hospitals'
cash flow remains high and hospital stocks remain shaky, she said.
Paul Ginsburg, president of the Center for Studying Health System Change, a
Washington-based research organization, said the deal is not likely to have much
effect on patients.
He said that while the new owners might want to raise prices to help pay
down the debt, marketplace competition would make such a move unlikely.
Gerard Anderson, director of Johns Hopkins Center for Hospital Finance and
Management, said he doesn't know how the new owners will go about paring down
debt.
Because HCA hospitals are generally not the only players in their markets,
they don't have much flexibility to raise prices, he said.
"They tend to have a large market share but they are not the only game in
town," he said.
Ginsburg said removing the yoke of quarterly earnings reports can free
hospitals to take on expensive, long-term projects, but given HCA's debt that
might not be a likely outcome of the deal.
The deal is structured so that competing bidders have a 50-day window in
which to submit a counter bid. However, one merger and acquisition analyst said
the likelihood of another hospital group making an offer is slim ・ especially
given HCA's sluggish second-quarter earnings report.
But private equity firms ・many flush with cash from several years of strong
equity-market performance ・could form a consortium and launch an offer, said
Howard Horowitz, director of research for
Water Island Capital, which
manages the Arbitrage Fund.
"It is possible another group of private equity buyers could team up in a
club deal and up with a counter offer," Horowitz said.
"More and more you'll see five, six, eight private equity firms teaming up
to do a syndicated buy, and this is a hot space," he said. "As far as a
strategic buyer, they've got a window of time ・but there's no obvious names.
Private equity has a lot of cash to deploy."
Last year, federal prosecutors and the Securities and Exchange Commission
launched an
investigation of the
Bill Frist's sale of HCA stock
from his blind trusts. The sale occurred in June 2005 near the 52-week peak of
HCA share's price, and shortly before the stock fell 9 percent.
Frist, who is considering a 2008 run for president, said he sold the stock
to avoid the appearance of a conflict of interest.
HCA owns or operates 176 hospitals, 92 freestanding surgery centers and
facilities for outpatient and ancillary services in 21 states,
England
and Switzerland.
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