By Brooke A. Masters
Washington Post Staff
Writer
Tuesday, July 25, 2006; D01
NEW YORK, July 24 -- HCA Inc., the hospital company founded by the family of Senate Majority Leader Bill Frist (R-Tenn.), agreed Monday to be acquired by a group of private investors, including Frist's brother, for a record $21.3 billion in cash.
Without accounting for inflation, the deal, which also includes the assumption of $11.7 billion in debt, is the largest-ever leveraged buyout, just topping the $31 billion deal to take RJR Nabisco private in 1989.
The buyers include the private equity firm Kohlberg Kravis Roberts & Co., which engineered the Nabisco deal; Bain Capital; and Merrill Lynch Global Private Equity. HCA co-founder and former chief executive Thomas F. Frist Jr., who owns an estimated 4.4 percent of the company, is also part of the consortium.
Hospital companies such as HCA are attractive to private equity firms because they have substantial and relatively stable cash flow. Nashville-based HCA, the nation's largest for-profit hospital chain, owns 176 hospitals and 92 surgery centers, many of them in cities that are growing faster than the rest of the country.
"We can take a longer-term view than the public markets, and from a long-term perspective, this is an outstanding company," said Stephen Pagliuca, managing director at Bain.
The consortium plans to invest $7.5 billion over five years on capital improvements, said Michael W. Michelson of KKR.
Private equity firms have become big players on Wall Street in recent years. Low interest rates have made it easier to borrow money, and the use of that leverage has allowed these firms to offer returns well above the stock market's.
Buyout firms typically put up 20 percent to 50 percent of their offer in cash and then borrow the rest, much as a home buyer uses a mortgage to fund the bulk of a purchase. Cash flow from the acquired company is then used to pay interest on the debt until the investors sell stock to the public again and get their money out.
Monday's deal represented a growing trend on Wall Street in which as many as half a dozen private equity shops join forces to fund deals that would be too large or too risky for a single firm.
HCA, which was founded in 1968 by Thomas Frist and his father Thomas Frist Sr., was taken private once before, in 1989, in a management-led buyout. The company went public again in 1992, merged with Columbia Hospital Corp. in 1994 and sold off its non-hospital businesses in 1997 as part of a restructuring.
Under the transaction announced Monday, HCA shareholders would receive $51 a share, 18 percent higher than the company's share price early last week before rumors of the deal began to swirl, and 6.5 percent higher than Friday's close. The stock closed at $49.48 on Monday, up $1.61 after the deal was announced.
HCA also has 50 days to encourage other private equity firms, such as Blackstone Group and the District's Carlyle Group, to put forward a competing bid in hopes of starting an auction process.
While HCA comes with a relatively low share price -- the offer is roughly eight times the company's earnings before taxes, depreciation and amortization -- the new owners face some potentially strong headwinds. The whole hospital sector is burdened with bad debt from uninsured care, and the industry is vulnerable to regulatory changes, such as changes in the Medicare reimbursement formula. In a separate announcement Monday, HCA said that higher costs of uninsured care helped fuel a 27 percent decline in its second-quarter profit, to $295 million from $405 million a year earlier.
Furthermore, the Securities and Exchange Commission continues to examine documents and to interview witnesses about possible insider trading by Bill Frist and HCA executives. Stock sales by Frist and several corporate officials came weeks before HCA disclosed problems collecting revenue from uninsured patients and missed an earnings forecast. The announcement triggered a 9 percent drop in the stock price on a single day in July 2005. Frist has denied wrongdoing and said he is cooperating with the investigation. Representatives for the lawmaker say he no longer owns HCA stock.
Analysts not connected to the transaction say they think it makes sense. Unlike the mutual funds that currently own most of the stock, private equity firms are not expected to produce profits immediately. In addition, though interest rates are rising, borrowing money remains relatively cheap in historical terms, making it easier for such deals to turn a profit.
HCA may do well as the population ages, increasing the demand for health care, and it could also grow by taking over troubled nonprofit hospitals and cutting costs.
"It's not unreasonable for a long-term investor to say there's a lot here," said Bill Bonello, an equity analyst with Wachovia Securities. HCA "really has a top-notch portfolio of hospitals and a really solid set of assets."
Staff writer Carrie Johnson and staff researcher Richard Drezen contributed to this report.
