MedCath, known for operating heart hospitals, is selling out to two big-league New York investment firms for $240 million in cash and the assumption of $200 million in debt.
The decision to take a leveraged buyout and go private signals MedCath's desire to escape the watchful eyes of short-term investors who have punished the company's stock after missed earnings estimates.
MedCath, based in Charlotte, N.C., operates three heart hospitals and has five in the works. It also manages five medical practices with more than 100 physicians.
"We believe MedCath's strategic plan can be implemented more effectively as a private company," said Ned Gilhuly, an executive with investment giant Kohlberg Kravis Roberts & Co., in a statement released Friday to coincide with the announcement of the $440 million deal.
"The stock was substantially undervalued," said William Michalak, vice president of research at Interstate/JohnsonLane in Atlanta. "Their cash flow was not being recognized in the equity marketplace, and (management) didn't feel it was ever going to be recognized."
MedCath spokesman Jeff Barnett said: "We felt it was in the best interest of shareholders to give them instant liquidity. Our earnings estimates in 1998 will be below current projections, so we felt that given the way the stock has behaved in the past, that this (leveraged buyout) is best."
The company's stock closed at $18.13 Friday, up $1.63 from the previous day. Its 52-week low is $12.38.
KKR and Welsh Carson Anderson & Stowe, working together for the first time, are each investing $105 million in MedCath. They will form a company with a $75 million credit line to acquire MedCath.
The rest of the purchase price will come from MedCath management, who will contribute $17 million.
MedCath's management team will remain intact, Barnett said.
A date for completion of the deal has not been set. MedCath expects to holds a special meeting of shareholders within three months to seek their approval of the transaction.
Michalak predicted the investment firms will hold onto MedCath for two to three years before taking the company public again.