The focus of healthcare investors and analysts sharpened on Triad Hospitals last week as a hedge fund critical of Triads management stepped up the pressure.
TPG-Axon Capital Management said in a securities filing that it will nominate five candidates to be directors of Plano, Texas-based Triad. The companys board currently has 14 members. The fund also revealed that it has boosted its stake in the company to 8.9%. A group of funds led by TPG-Axon Capital purchased more than 1.3 million shares in six transactions in January for a total of $56.5 million. The funds owned a 6.2% stake in the company in November 2006, when they first criticized Triad for spending too much on risky acquisitions and failing to provide sufficient returns to shareholders.
The pressure on Triad has been building for months. Even before Nashville-based HCA announced its $33 billion leveraged buyout in July, analysts were speculating that Triad could go private. In a research report in November, shortly after TPG-Axon went public with its criticisms, Deutsche Bank analyst Darren Lehrich wrote that Triad was an excellent candidate for a leveraged buyout.
Triad shares tumbled to around $37 per share in late October, the stocks lowest level since December 2004, after the company announced a charge related to rising bad-debt expense. The low share price and the management teams frustration with shareholder criticism, Lehrich wrote, made Triad a buyout candidate.
Then, just before Christmas, Triad made changes to its employment agreements with senior managers, including Denny Shelton, chairman and chief executive officer, that boost compensation if there is a change in control of the company. The company also canceled its appearance at an investors conference and did not provide guidance or a set of expectations for its financial results. Triad provided annual guidance for each of the years from 2002 through 2006, usually in January, company news releases show.
Another analystwho had been doubtful of a leveraged buyoutGary Taylor of Banc of America Securities, acknowledged in a report on Jan. 19 that the likelihood of a buyout was going up. Taylor still recommended against buying the stock because he believes that the upside from a leveraged buyout is only about $5 per share vs. a downside of $10 to $12 if one does not occur.
At deadline, Triad had not responded to several requests for comment. Triad has said its spending on acquisitions and capital projects is appropriate. Since TPG-Axon made its criticism public, two potential joint ventures between Triad and not-for-profit hospital systems have unraveled. The company also said in November 2006 that capital expenditures for that year were slowing to a range of $570 million to $630 million from Triads previous expectation of $630 million to $780 million. Triad owns or operates 53 hospitals and 13 ambulatory surgery centers in 17 states.
TPG-Axon declined to comment for this article. A source familiar with the groups thinking, however, fleshed out the concerns that TPG-Axon has briefly described in its securities filings. TPG-Axon would like to see Triad scale back projects that call for entering new markets by building hospitals. Some examples over the past two years include projects in Alaska, Hawaii and Ireland.
TPG-Axon sees such projects as huge drains of capital with very risky returns. Even though TPG-Axon would like Triads overall capital spending to fall, the investors would like the company to spend more on its existing hospitals and keep up its maintenance spending. In general, TPG-Axon would like Triad to focus on better managing the operations of its current facilities than in doing more and more expansion deals.
The source also described TPG-Axons investment approach. The fund was started by Dinakar Singh, a former Goldman Sachs partner. Texas Pacific Group, a private equity firm that owns a controlling stake in Iasis Healthcare Corp., is a minority investor in TPG-Axon, but the two are legally separate organizations. The fund invests in both publicly traded and privately held companies and also in physical assets, such as real estate.
TPG-Axon doesnt consider itself an activist fund, but one that works hard to learn a business and then takes significant minority positions in well-placed companies in that business with a long-term investment horizon. Once the investment has been made, TPG-Axon is not interested in taking on the day-to-day management of its portfolio companies, but is active enough to offer advice and seek information about the business. When one of its companies goes off course, in TPG-Axons estimation, the fund seeks to work with management to get back on track.
As of Sept. 30, TPG-Axon held significant stakes in several other publicly traded healthcare companies (See chart), a securities filing shows. These include: hospital operator Community Health Systems, renal-care-provider DaVita and four health plansAetna, Cigna Corp., UnitedHealth Group and WellPoint. TPG-Axon thinks the markets are undervaluing hospital companies based on short-term issues such as bad-debt expense and are failing to grasp the long-term growth potential of the business, the source said.