Making a fresh start is often easier said than done.
About five months after Columbia/HCA Healthcare Corp. spun off Triad Hospitals into a publicly traded company, Triad is still trying to move beyond the transition mode.
Key to Triad's strategy of luring investors are paying down debt carried over from Columbia and shedding unprofitable hospitals. It will take several more months, however, before the company can concentrate completely on operations at its core hospitals.
Each time Triad casts off undesirable portions of its inheritance from Columbia, it moves closer to coming into its own. But in the meantime, analysts are taking a cautious approach to the company's stock, which has vacillated between $8.25 and $14 per share since early May, although recently it has settled at $10 to $11 per share.
Columbia spun off Dallas-based Triad along with sister company LifePoint Hospitals, now a rural hospital company headquartered in Nashville.
Frank Morgan, a healthcare analyst at Nashville-based J.C. Bradford & Co., which recently began covering Triad, gave the company a "neutral" rating, based on Triad's transition status.
"Some investors are taking a wait-and-see position on Triad with regard to its restructuring activity," Morgan says. "Certainly after the company completes most of the divestiture program in the first quarter of next year, I think you'll see more people taking a good look at this company."
Until then, though, J.C. Bradford notes that Triad is lagging about six to nine months behind LifePoint in divestiture and portfolio development.
Triad, eager to move beyond this adolescent stage of development, paid off a $75 million loan in mid-September that was not due until May 2000.
In so doing, the company touted its ability to decrease its debt load promptly. The company used proceeds from hospital sales it has reported so far to pay off the loan.
"This was the one piece of our debt that was structured as an obligation related to the hospitals we're selling," says Burke Whitman, Triad's chief financial officer. "I think the Wall Street folks will like it."
Paying off the loan brings the company's debt-to-cash flow ratio down, but not as low as Whitman would like it.
Earnings before interest, taxes, depreciation and amortization, or EBITDA, is one rough way of measuring a company's cash flow.
Triad's debt-to-EBITDA ratio before the loan was paid off was about 4.5, and paying off the debt brought it down to about 4, Whitman says. That means the company's debt is roughly four times its annual cash flow.
"Our goal has been to get it down into the threes," Whitman says.
He says the company's objectives are to improve the operating performance of core hospitals by continuing physician recruitment while selling the remaining assets earmarked for sale.
Triad left the Columbia nest carrying about $675 million in debt. The debt stemmed from a bridge loan for a $75 million sale of assets; two term loans-one for $65 million and another for $200 million; and $325 million in high-yield bonds. The company also has a $125 million revolving line of credit that it has yet to use, Whitman says.
The hospital industry is highly leveraged, so any sign a company is reducing its debt is a good one, analysts agree.
"The interest in the stock is based on the potential for the company to improve operating leverage and capitalize on financial leverage," says John Hindelong, healthcare analyst at Donaldson, Lufkin & Jenrette in New York. "To the extent they are able to pay debt quickly, that should accelerate their ability to enter profitability on a permanent basis."
Triad and LifePoint are slightly hampered by having begun independent life with debt carried over from their days under Columbia's wing.
In addition, Triad is moving slowly but surely to sell its less strategically desirable hospitals, Whitman says.
So far, the company has completed four transactions. It sold two hospitals-114-bed Huntington Beach (Calif.) Hospital and 219-bed West Anaheim Medical Center, Anaheim, Calif.-to Vanguard Health Systems. In return for 117-bed Doctors Hospital of Laredo (Texas), which the company gave to Universal Health Services in a swap deal, Triad received 122-bed Victoria (Texas) Regional Medical Center. It also has sold 21-bed Panhandle Surgical Hospital in Amarillo, Texas, to 385-bed Baptist St. Anthony's Health System in Amarillo.
That leaves five more sales to go, Whitman says. The first one he expects to announce is the sale of 371-bed Beaumont (Texas) Medical and Surgical Hospital and the physical assets of the closed Silsbee (Texas) Doctors Hospital to Memorial Hermann Healthcare System in Houston, a deal that has been in the works since before Triad separated from Columbia. All five sales are expected to close before year-end.
Triad recently announced it had reached a verbal agreement to sell DeQueen (Ark.) Regional Medical Center to DeQueen Hospital Foundation. The deal is expected to close by Oct. 15.
Triad has not announced the remaining facilities it plans to sell.
"By the end of October, we expect to close on two additional sales (of the five)," he says. "This would finish up nine transactions and would let us turn our attention . . . to operations. So much of our attention has been on asset sales."
That would please the investment community.
"Each quarter that goes by that they meet or exceed financial expectations, you get one quarter closer to the kind of credibility that will put them on the par with some of the more established companies," Hindelong says.