HealthTrust-The Hospital Co. will pay $7 a share for Epic Healthcare Group, but how was the price determined?
Because stock of Dallas-based Epic isn't traded on Wall Street, the value of its stock isn't determined every day by a buy-and-sell process, as are the shares of other investor-owned hospital chains.
Most of Epic's stock is held by an employee stock ownership plan, which acts as a pension plan for its workers. Epic, which is 52% owned by the ESOP, is the nation's fourth-largest employee-owned company. Epic's 15,000 employee-owners will see the value of their ESOP stock rolled over into HealthTrust's pension plan.
Last week, Epic employees were told they were receiving more than twice the "street value"-believed to be slightly more than $3 a share-for their stock.
"These people have hit a home run," said Kenn George, Epic's chairman, president and chief executive officer, last week about the employee-owners. He noted that Epic executives felt a "unique obligation of maximizing the value of the pension plan."
Other shareholders benefit as well. American Medical International, a Dallas-based hospital chain that owns a 22% stake in Epic, plans to post a pre-tax gain of $69 million; that will yield about $43 million after taxes.
And company executives also will benefit. Stock appreciation rights, which are convertible to stock, will be valuable. The SARs owned by Mr. George, for example, will be worth about $15 million.
Whether the $7 price is fair is debatable.
"They paid full price" rather than a bargain price, noted Ed Mally, a bond analyst for Salomon Brothers, a New York-based investment banking firm.
In Epic's annual report, the value of the company's stock appreciation rights, or SARs, was set at $8 per share.
However, an analysis of the worth of the ESOP stock earlier in the year put the value at less than $3 per share, according to industry insiders.
The stock's value was affected by the unique position of the ESOP as both a controlling shareholder and a lender, said Alan Chamison, an Epic director and AMI's chief financial officer. For example, the ESOP was entitled to a certain revenue stream that increased the value of the shares, he said.
"I think the conclusion of everybody is they arrived at a fair compromise" on a price, he said.
In the mid-1980s, three hospital chains-Charter Medical Corp., HealthTrust and Epic-used ESOPs, which carry certain tax advantages, to finance their companies. HealthTrust converted to a traditional pension plan in 1991 after the company completed its public offering. Charter's ESOP saw its value dwindle to a fraction of its original worth when the psychiatric hospital chain reorganized under Chapter 11 bankruptcy laws. Epic's ESOP essentially will end when the company's bought by HealthTrust.-Sandy Lutz