US sees biggest leveraged buyout in years

CHICAGO - HCA, the No. 1 US hospital chain, today agreed to be acquired by an investor group for about US$21 billion ($34 billion) plus the assumption of about $11.7 billion in debt, making it one of the largest leveraged buyouts in history.

Under terms of the deal, shareholders of HCA will be paid a modest premium of about 6.5 per cent over its Friday closing stock price.

News of the deal sent the company's shares up 2.8 per cent and helped support a rally on the broader stock market.

Oppenheimer analyst Balaji Gandhi said the deal reflects continued deterioration of fundamentals in the hospital industry. It came as HCA separately reported a 27-per cent drop in second-quarter profit, hurt by unpaid medical bills.

"When you look at the takeout price of US$51 ($82.84), it's not quite where the near-term high for the stock has been, but when you have flat to declining earnings, I think they are using this as an opportunity to lock in some value," he said.

HCA currently owns and operates 176 hospitals and 92 freestanding surgery centers in 21 states, England and Switzerland.

Gandhi said the investor group will probably divest various HCA businesses, but are not likely to unravel a key peg in the nation's health infrastructure.

"You won't see these people walking into hospitals and saying, 'You guys are fired. We're going to turn this into a Macy's,"' he said.

The buyout group includes Bain Capital; Kohlberg, Kravis Roberts (KKR); Merrill Lynch; the family of US Senate Majority Leader Bill Frist, whose relatives founded HCA; and HCA's current management.

The acquisition would rank among the largest leveraged buyouts ever, behind KKR's US$25.07 billion agreement to buy tobacco and food industry giant RJR Nabisco in 1988, according to research firm Dealogic. KKR also assumed US$6 billion in debt.

The HCA deal highlights how top-tier private equity firms, flush with the most funds ever raised, are going after ever larger corporate targets.

The boom in private equity deals in the last 18 months is being fueled by low interest rates, liberal debt markets and record amounts of investor money moving away from lackluster equities into buyout funds.

Despite rising bad debt and slowing admissions, analysts say hospital valuations are at historic lows at a time when private equity coffers are brimming with cash. Stifel Nicolaus analyst Robert Hawkins, in a note to clients on Friday, said reports of a deal had sparked new interest in hospital stocks, which traded 6 per cent higher last week excluding troubled hospital operator Tenet Healthcare Corp.

Morgan Stanley Healthcare Provider Index rose 1.37 per cent in Monday afternoon trade.

Hawkins said that "may be attractive to private equity firms that have raised record funds".

Analysts have said going private could afford troubled hospitals the chance to right their ships without pressure from Wall Street.

The deal comes on top of a weak second quarter, as growing bad debt and weak admission trends continued to weigh on the Nashville, Tennessee, based hospital chain.

HCA reported on Monday that its second-quarter net profit fell to US$295 million or 72 cents per share from US$405 million or 90 cents per share a year earlier.

- REUTERS

sml Wall Street analysts polled by Reuters Estimates, on average, expected 77 cents per share.

CIBC analyst Charlie Lynch, in a note to clients, said GAAP earnings missed his estimate of 76 cents, but adjusted for special items, results were only 64 cents per share.

"Results certainly shed more light on HCA's decision to accept what appeared to be a fairly conservative takeout offer," he said.

The US$51 offer represents an 18 per cent premium to the US$43.29 that HCA was trading at before the Wall Street Journal reported on July 19 that HCA was considering a leveraged buyout.

Hospital companies are struggling to boost profit margins as they grapple with increased competition from doctor practices and the burden of unpaid hospital bills, fueled by the 46 million people without health insurance in the United States.

Second-quarter revenue increased to US$6.4 billion from US$6.1 billion. Same-facility revenue gained 6 per cent.

Bad debt expense totaled US$677 million, or 10.6 per cent of revenue, compared with US$541 million, or 8.9 per cent of revenue, in the prior year.

When adjusted for discounts given to uninsured patients, bad debt totaled US$935 million or 14.1 per cent of revenue in the quarter, versus US$725 million or 11.6 per cent of revenue.

Oppenheimer's Gandhi said the bad debt expense was worse than expected. He had been looking for bad debt of about 9.8 per cent of revenue.

- REUTERS