Last month, Iasis Healthcare Corp. slammed on the brakes after getting three-quarters of the way down the initial public offering runway. The for-profit hospital chain has since quietly parked itself back in the hangar to await more favorable conditions for takeoff into the public market.
Although healthcare services stocks have outperformed a confused market in recent weeks, it has not been a friendly environment for an untested commodity. Franklin, Tenn.-based Iasis found that out in March when it geared up to offer 13.4 million shares of stock with hopes of raising about $201 million.
The 15-hospital company-which was founded in 1998 but didn't acquire its first hospitals until late 1999-had registered with the Securities and Exchange Commission in January for an IPO in March. It was banking on the favorable investment climate of last year for for-profit hospital companies, which generally provided lift for the entire sector.
Changing market climate
What Iasis encountered, however, was a somewhat turbulent market that is rewarding only performers that have a track record of strong earnings.
"We were actually battling some fairly steady head winds all the way through the process," says David White, Iasis' chairman and chief executive officer.
Institutional investors in this choosier market have not been as willing to take a risk on a new company unless its offering is steeply discounted, industry observers say.
"Investors aren't all that interested in buying anything right now," says Kyle Huske, a market analyst for IPO.com, a New York-based online site that tracks the market for stock offerings.
So far this year, she says, 17 companies have priced IPOs, whereas last year at this time more than 100 had. Even though last year was busy for healthcare offerings, most of those were related to e-commerce and genomics (Feb. 26, p. 40).
And so far this year, 78 companies have withdrawn IPOs.
"That's quite significant," Huske says. "Things that are coming out are companies that desperately need the money."
Iasis' story is quite different from that of Community Health Systems, Brentwood, Tenn., which went public last June. Community raised more than $500 million in its IPO and subsequent secondary offering. Although Community's hospitals are rural and Iasis' are in midsize markets, the timing also helped propel Community's stock price to nearly double from its initial $13.
Iasis officials ultimately decided they did not need the money badly enough to accept a steep discount in the price of their stock, which would have resulted in them netting far less cash than they had anticipated. So on March 9, when Iasis was slated to price its offering, it instead postponed it.
White would not comment on the specific valuations underwriters had proposed, but sources who requested anonymity and who were involved in shopping around the IPO say the company could have sold its shares at about $12 apiece. That is slightly lower than the $14-to-$16 range the company anticipated in a February prospectus it filed with the SEC. But a couple of dollars less per share translates into a lot less money for the company.
Coming up short
In this case, Iasis stood to reap about $160 million, compared with the $187 million to $213.6 it had hoped for, a difference of at least $27 million.
"At the end, it was just going to be too big of a discount for us to take, and we value the company at a greater amount than we felt we were going to be asked to take as far as an IPO discount," White says.
The company did not withdraw its IPO registration with the SEC, and White says the company will re-examine the market in about six months to determine if conditions are right to make another attempt.
Some analysts believe Iasis made the right decision in waiting, for reasons related to both the market and the company's own situation. For its first quarter ended Dec. 31, 2000, Iasis reported a net loss of $3.6 million on revenue of $219.4 million.
"For anything not profitable, it's really a closed market at this time," Huske says. "We believe you're not going to see the market pick up for companies like this until the NASDAQ makes a recovery."
Iasis also has been working to turn around operational losses at Rocky Mountain Medical Center in Salt Lake City, a 118-bed facility that had been closed by its previous owner, Houston-based Paracelsus Healthcare Corp., and that Iasis reopened in April 2000. Since then, it has had trouble because of what Iasis sees as exclusionary contracting practices by a competing hospital in town.
Rocky Mountain incurred operating expenses of $7.6 million during the quarter ended Dec. 31, 2000, and suffered an operating loss of $3.5 million before interest, taxes, depreciation and amortization. But Iasis was able to negotiate managed-care contracts that went into effect Jan. 1, 2001, with two large insurers in Salt Lake City, and it has begun to see a turnaround in Rocky Mountain's census figures, the company disclosed in its prospectus.
Frank Morgan, a healthcare analyst with Jefferies & Co. in Nashville, believes that if Iasis waits six months before attempting an IPO, it will have more time to turn around performance at Rocky Mountain and at its other 14 hospitals.
"I'm confident the company will come back to the market, and with another quarter or two of improving operating results, that the market should be more receptive to a higher valuation than what they could have gotten done during their first trip to the market," Morgan says.
White says Iasis has enough credit to do some acquisitions in the near term, but it will need additional equity to complete its long-term acquisition goals.
"We just elected to step back," he says. "We can wait a while and as things change, as market conditions change, and as we get some more seasoning under our belt as a company, it will put us in a better situation."