In the August 2006
issue:
One For the Record Book
A consortium of private equity firms has been formed to take hospital
operator HCA private in a leveraged buyout worth $33 billion. Read inside to
see who may benefit from the largest hospital transaction ever announced.
...
The Month In Deals
July posted 69 mergers and acquisitions in the health care industry. Based
on revealed prices, a total of $35.5 billion was spent to fund them. Deals
in the health care services segment captured the greatest deal and dollar
volume for the month.
...
In The Departments
Services
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Health Care Services
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Deal Summaries
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Additional Transactions
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Transaction Updates
Technology
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Health Care Technology
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Deal Summaries
Additional Transactions
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Transaction Updates
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Articles Archive
Companies Mentioned in this issue:
August 2006
A
Adams Respiratory Therapeutics p16
AEW Capital Management p7
Affiliated Computer Services p11
Allied Capital Corp. p4
Allion Healthcare p9
American Medical Systems p15
Antelope Valley Hospital p8
Aphton Corp. p11
Applera p12
Ardent Health Services p4
Astellas Ventures p11
AstraZeneca p10
Athenagen p10
B
Bain Capital p2
Baptist Health System p4
Bayer Diabetes Care p15
Bayer HealthCare, LLC p15
Bear, Stearns & Co. p7
Beckman Coulter p12
BH1 Investments p4
Brookdale Senior Living p7
C
Cambridge Antibody Technology p10
Canada Microsurgical p12
Canyon Creek Development p8
Cardinal Health p16
Caregiver Services p9
CB Richard Ellis p8
Cedars Hospital p3
Charter Life Sciences p11
Cherry Oaks p8
Chiron Corp. p10
Churchill Downs, Inc. p10
Cilag GmbH p16
CIT Healthcare p7
Citigroup p7
Clayton Associates p4
ClinForce p9
Cloverleaf Partners p4
CLP Healthcare Services p4
Community Health Systems p3
Confluent Surgical p12
Consulate Healthcare p7
Corus Pharma p10
Crdentia Corp. p9
Cross Country Staffing p9
CVS Corporation p9
D
Dava Pharmaceuticals p16
Dia Real p9
DINMAR p11
E
Emergis p11
Enhanced Equity Fund, LP p4
Enzon Pharmaceutical p10
ev3 p15
Evercore Partners p9
F
F. Hoffman-La Roche, Ltd. p12
Facet Technologies p9
Fairmont Partners p9
Fisher Scientific International p12
Florida Acute Care Specialists p8
Formation Capital, LLC p7
Frost and Sullivan p12
G
GE Healthcare Financial Services p7
Gilead Sciences p10
GlaxoSmithKline p16
GV Instruments p12
H
Hanger Orthopedic Group p8
Harris Williams & Co. p4
Haven Behavioral Healthcare p4
HCA, Inc. p1
Health Management Associates p3
HealthSouth p9
HomeCare Specialists, LLC p4
Hurrie Orthopaedic Physical Therapy p9
I
Integra LifeSciences p12
J
Jaba Farmacêutica p16
Janssen-Cilag p16
Jeffries & Co. p7
JER Partners p7
Johnson & Johnson p15
JPMorgan Partners p10
K
Kenner Regional Medical Center p4
Kohlberg, Kravis Roberts & Co. p2
Kyphon p15
L
Laboratorios Ranbaxy S.L. p16
Lehman Brothers p9
Life Science Angels p11
LifePoint Hospitals p2
M
Macri Technologies p10
Matria Healthcare p9
McKesson Corp. p10
Meadowcrest Hospital p4
MediConnect Global p12
Medsite p11
Memorial Medical Center p4
Merck & Co. p16
Merrill Lynch p7
Merrill Lynch Global Private Equity p2
Metastatin Pharmaceuticals p11
Metrika p15
Metropolitan Research Associates p9
Metropolitan Research Staffing Associates p9
MGI Pharma p15
MinuteClinic p9
MOMS Pharmacy p9
Mundogen p16
N
National Deaf Academy p3
New Beacon Hospice p4
Novartis AG p10
Novo A/S p10
NTD Laboratories p10
O
Ochsner Health System p4
Odyssey HealthCare p4
Orbimed p10
Oscient Pharmaceuticals p15
Osteobiologics p12
Owens & Minor p9
P
Paul Capital Partners Royalty Fund II, LP p15
Pediatric Cardiology Associates p8
Pediatrix Medical Group p8
PerkinElmer p10
Primax Recoveries p11
Primedex Health System p7
Prospect Partners, LLC p4
Psychiatric Solutions p3
R
Radiologix p7
Raiser Resources, LLC p8
Raiser Senior Services, LLC p8
Ranbaxy Laboratories p16
Receptor BioLogix p11
Recordati SpA p16
Regency Healthcare Group, LLC p4
Regional Nuclear Pharmaceuticals p16
Reliant Pharmaceuticals p15
Remuda Ranch p4
Rescare p10
Roche Diagnostics p12
RTA Hospice p4
S
Samaritan Pharmaceuticals p11
Sanderling Ventures p11
Senior Living Investment Brokerage p8
Shiloh Health Services p7
Smith & Nephew plc p12
Southwest Regional Medical Center p7
Spinecore p15
St. Jude Pharmacy & Surgical Supply Co. p9
St. Vincent’s Hospital p4
Stada Arzneimittel p16
Stada, Inc. p16
Sulzer Spine-Tech p15
Summit Hospital p7
Sunrise Senior Living p8
SuperGen p16
T
T. Rowe Price Associates p10
Tandem Healthcare p7
Tarrant Dialysis Centers p7
Team Health p8
Temple Medical p8
Tenet Healthcare Corp. p4
The Blackstone Group p3
The Vertical Group p15
Thermo Electron Corp. p12
Thoma Cressey Equity Partners p4
Tiara Medical Systems p12
Tornier p15
Triad Hospitals p2
Tyco International p12
U
U.S. Renal Care p7
Union County Hospital p7
Universal Health Services p3
V
Viasys Healthcare p12
W
Warburg Pincus, LLC p15
Water Street Capital Partners p9
WebMD p11
Williamson Memorial Hospital p7
Wright Medical Group p15
X
Xomed Surgical Products p15
Z
Zapaq p10
ZEROP Medical p12
Zimmer Holdings p15
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One For the Record Book - HCA Agrees To Be
Taken Private For $33 Billion
Email Editor
For the second time in its
history, hospital operator HCA, Inc. (NYSE: HCA) has agreed to be
taken private. This time a group of private equity firms, along with HCA
management and the founding Frist family, have banded together to form a
consortium to buy out the hospital giant. Valued at $33 billion, this deal
is one for the record book, though not the one most observers have
thought.
HCA, whose roots reach back to 1969, has grown into the country’s largest
owner and operator of acute-care hospitals and related health care
facilities. Though publicly traded for most of its life, it was taken
private for three years in the late 1980s, only to go public again. Its
largest growth spurt took place in the mid-1990s under the leadership of
Richard L. Scott, when it swallowed up company after company and finally
emerged with the name Columbia/HCA Healthcare Corp.
By 1997, Columbia/HCA had 318 acute-care hospitals, 18 psychiatric
hospitals, 145 outpatient surgery centers and 550 home health agencies,
among other assets. It operated hospitals across the U.S., and in England,
Spain and Switzerland. In 1997 it generated revenue of $18.8 billion and a
net loss of $305 million. That year’s loss was a clear symptom that the
strategy of growth for growth’s sake was not delivering financially,
particularly at a time when reimbursement protocols were undergoing a
major overhaul, so the company set out to reinvent itself. It spun out two
of its five divisions into separate companies, LifePoint Hospitals
(NASDAQ: LPNT) and Triad Hospitals (NYSE: TRH), divested noncore
business lines, undertook a corporate rebranding and shuffled senior
management, notably removing the empire-builder Scott from the helm.
As led today by CEO Jack Bovender, HCA now operates 172 hospitals, 92
outpatient surgery centers and affiliated services. On a trailing 12-month
basis, it generated annual revenue of $25 billion, EBITDA of $4.1 billion
and net income of $1.3 billion.
This July a consortium of private equity firms announced a plan to buy HCA
and take it private in a leveraged buyout. The consortium consists of such
notables as Bain Capital; Kohlberg, Kravis Roberts & Co. (KKR);
and Merrill Lynch Global Private Equity. Joining them are HCA
management and members of the Frist family, whose late patriarch Thomas
Frist, Sr. started it all. In short, they propose to offer $51.00 for each
share of HCA common stock outstanding and to assume $11.7 billion in debt,
for an overall purchase price of $33 billion.
This proposal offers shareholders an 18% premium to the stock’s price the
day before rumors started flying about the deal. This is in line with the
average 20% premium that had been offered for acquisitions during the
first six months of 2006. The acquisition multiples should give us pause
because of their, well, skimpiness. The price to revenue multiple is 1.3x
and the price to EBITDA multiple is 8.1x. These are the kinds of multiples
that single, well-run hospitals have been commanding in recent
transactions, making it appear that there is virtually no acquisition
premium for being the largest company of its kind.
So why do this deal? And who benefits from it? Clearly, the bankers will
get juicy fees, and ordinary shareholders get a little bang for their
buck. Going private will give management a freer hand to concentrate on
operations, which may include selling off underperforming facilities,
rationalizing staffing, increasing admissions and containing the impact of
uncollected bills, all without having shareholders peer over management’s
shoulders for quarter-to-quarter earnings. Well and good. Maybe the people
at the private equity firms know something more about operating hospitals
than Mr. Bovender, but it’s hard to see what that could be. Maybe
management is anticipating an upcoming recession and is battening down the
hatches in this move. Fine. All are reasonable enough explanations in the
current operating environment for going private, but what about the exit
strategy?
Part of the secret lies in the low acquisition mulitples noted above. If
HCA can ultimately be taken public again at, say, 10x EBITDA, the
investors will have real realized a very tidy return for themselves. To
finance this deal, however, about $5.5 billion is being paid in cash, with
debt making up the difference, making HCA a highly leveraged company. The
investors are likely banking on cash flow to service debt, but it is also
needed for capital projects at the hospitals, so it may take some effort
and creative financing to get the higher multiple when taking HCA public
again, in whole or in parts. Rumors have circulated that The Blackstone
Group might mount a sweetened counteroffer for HCA, but a higher price
would only cut into the returns, perhaps modest, contemplated in the
current offer.
One waggish online commentator, Daniel Gross, has suggested the
possibility of a political connection. He noted that Senate Majority
Leader Bill Frist is related to HCA’s founding dynasty; that Massachusetts
governor and Republican presidential aspirant Mitt Romney is a founder of
Bain Capital; that Henry Kravis of KKR is a major GOP donor. All of them,
he speculates, are betting on the continued expansion of government
spending on health care. Could it be that the GOP is leaning towards,
gasp, universal health care to increase the funds flowing into hospitals?
(And if Hillary is derailed in the process, so much the better.) While
this tongue-in-cheek scenario owes more to those amusing conspiracy
theories that dot the Internet than to hard fact, we are left scratching
our heads to see whether there is anything more concrete or compelling
motivating the deal.
This deal has naturally raised the spectre of other hospital companies
being targeted by LBOs. Universal Health Services (NYSE: UHS) has
come out with a statement that while it is always looking for ways to
enhance shareholder value, an LBO isn’t in the works. We are just as
sanguine about other players such as Community Health Systems
(NYSE: CYH) and Triad, although Health Management Associates (NYSE:
HMA) seems a bit vulnerable these days with analysts lowering ratings.
It has been stated that this is the largest leveraged buyout in history,
edging out KKR’s $31.3 billion buyout of RJR Nabisco in 1989. It is not,
at least not in real terms. The $31.3 billion spent in 1989 would have an
adjusted buying power today of $50.8 billion in today’s market. What is
certain, though, is that this is the single largest hospital deal, buyout
or not, ever undertaken. And if it closes, it will crown 2006 as the year
with the greatest dollar volume in the hospital M&A market.
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