Friday, 11 March 2011

HCA, Hospital Corporation of America

HCA IPO will be biggest in a long time and is actually oversubscribed

Tonight will see the pricing of HCA Holdings Inc.’s third IPO and second from private equity ownership in what should be the largest U.S. private equity backed IPO ever. HCA is the largest privately owned hospital chain in the U.S. and is looking to raise about $3.5 billion from the offering. This would translate to a market cap somewhere in the $15 billion range. Back in 2006 the company was taken private by Bain Capital, KKR, and Merrill Lynch Global Private Equity in a $32 billion deal at the peak of the LBO craze. Below is a sampling of the company’s business overview from its 10-K filing:

At December 31, 2010, we operated 164 hospitals, comprised of 158 general, acute care hospitals; five psychiatric hospitals; and one rehabilitation hospital. The 164 hospital total includes eight hospitals (seven general, acute care hospitals and one rehabilitation hospital) owned by joint ventures in which an affiliate of HCA is a partner, and these joint ventures are accounted for using the equity method. In addition, we operated 106 freestanding surgery centers, nine of which are owned by joint ventures in which an affiliate of HCA is a partner, and these joint ventures are accounted for using the equity method. Our facilities are located in 20 states and England.

Many of HCA’s hospitals are located in “high growth” urban and suburban areas with 9,808 beds and 38 hospitals in Florida, as well as 10,410 beds and 36 hospitals in Texas. On the company’s most recent earnings call Chairman Richard Bracken said that the company’s size, efficiency and diverse nature should promote future growth on the bottom line.

According to Renaissance Capital shares are expected to price in the $27-$30 range, but I have seen rumors that demand is high, the deal is significantly oversubscribed and that shares may actually price at $31. Some analysts, however, are suggesting investors wait until August after the 6 month lockup period expires to buy shares. At that time another 383 million shares will be eligible for sale.

The excitement about the offering ignores a heavy debt burden and a somewhat uncertain regulatory environment for healthcare providers. HCA has more than $27 billion of long-term debt on its balance sheet and the Republican majority in the House continues to try to hack away at Obamacare by withholding funding if not outright repeal. Nonetheless, I can understand the deal’s oversubscription. Healthcare spend in this country continues to grow and will approach 20% of GDP over the next several years. The aging of the Baby Boomer generation has just started and hospitals will be a prime beneficiary of this country’s largest generation’s diseases and surgeries. With an economic recovery underway (most would argue), it’s only a matter of time until hospitals see meaningful recovery in their patient volumes and the expansion of the insured population under Obamacare will further reduce bad debts. If nothing else the HCA IPO will bring some attention to a healthcare sector that has lagged the overall market for the past 2 years at a time when investors are looking for more than gold and silver as defensive plays.

Source : HedgeFund

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