Moreover, Beith says, chief executive officers are very open to taking their companies private. For many CEOs, they dont see tremendous benefit to being a public company. The hospital industry, by virtue of 40% of its revenue being generated by government, is subject to political whims, and the public markets dont like that volatility.
Two private-equity-backed healthcare deals have already been announced in 2007. Welsh, Carson, Anderson & Stowe is buying United Surgical Partners International, a surgery center chain, in a $1.8 billion deal (Jan. 15, p. 12). Welsh Carson was the founding equity sponsor for Addison, Texas-based United and also owns a majority stake in privately held Ardent Health Services, Nashville, and Select Medical Corp., Mechanicsburg, Pa. Also, Formation Capital, Alpharetta, Ga., and JER Partners, McLean, Va., agreed last week to acquire long-term-care provider Genesis HealthCare Corp., Kennett Square, Pa., for $1.7 billion.
If the executives of these companies are questioning the benefits of public stock ownership, theyre not alone. Public company CEOs across all sectors of the economy are finding it unpleasant in the public company spotlight, says Steven Kaplan, professor of finance at the University of Chicagos Graduate School of Business. Theyre criticized incessantly, theyre having to deal with regulations that I think good CEOs find unnecessarylike Sarbanes-Oxleyand they are relatively underpaid compared to what they can make as the CEO of a private-equity-led company, Kaplan says.
The private equity firms are drawing the interest of investors because the firms are earning better returns than other investment options, Kaplan says. The firms also have taken advantage of the willingness of banks to lend at very favorable rates, he adds. Even though short-term interest rates have been rising since 2004, rates overall are still historically low. Access to both equity and debt capital is the fuel behind all the deals, he says.
The interest rate spread between the safest debt, U.S. Treasury bonds and risky debt, such as noninvestment grade corporate bonds, is also very low, Kaplan says. That enables companies that have undergone a leveraged buyout to sell bonds at attractive interest rates. Bond investors see the risk of default as low because corporate profits have been so strong in recent years, and those profits indicate an ability to service debt, he says.