Triad Hospitals, like HCA, its former parent company, is headed toward private ownership after a $6.4 billion leveraged buyout was announced last week, and it may be the last such deal for a while.
The deal fulfills speculation about a buyout of Triad that had been growing for months (Feb. 5, p. 14). Should the deal be completed, it would leave just seven publicly traded acute-care hospital companies: five large onesCommunity Health Systems, Health Management Associates, LifePoint Hospitals, Tenet Healthcare Corp. and Universal Health Services; and two smaller onesIntegrated Healthcare Holdings and SunLink Health Systems. Besides HCA going private and Triad heading in that direction, the publicly traded hospital ranks also were thinned in 2005 when LifePoint acquired Province Healthcare Co.
But some analysts arent expecting an increase in hospital divestitures from Triad as they do for HCA. Pauline Clark, director of hospital valuations for Tellatin, Short, Hansen & Clark, said the Plano, Texas-based companys buyout gives Triad needed financing for acquisitions. Theyre going to be in a much better position to participate in the concentration and market aggregation under way, she said. Merger-and-acquisition activity in the hospital sector in 2006 was the highest since 2000, (Jan. 22, p. 18).
Meanwhile, analysts have said that HCAs leveraged buyout is expected to spur the company to sell hospitals to help cover its debt load, though the company said thats not the case (Jan. 8, p. 12).
Looking ahead, additional going-private deals in the hospital sector are unlikely in 2007, according to one industry analyst. Darren Lehrich, a healthcare stock analyst for Deutsche Bank, wrote in a report that each of the five large public companies has company-specific reasons for remaining public, although he did not detail them.
So far, none of the five large publicly traded companies has attracted the sort of speculation that Triad weathered for much of 2006. LifePoint, like Triad, drew public criticism from a large shareholderAccipiter Capital Managementlast year, but few buyout rumors have been floated about LifePoint as of late. Tenet, meanwhile, continues its four-year fight to recover from the revelation that its profits were keyed by exceptionally high Medicare outlier payments. Health Management Associates has already leveraged itself, while remaining a public company, with a one-time, $10 dividend announced last month (Jan. 29, p. 12).
Universal is an unlikely candidate for a buyout because its management team is already largely sheltered from investor criticism. Alan Miller, the companys founder, president and chief executive officer, and his family control a majority of the voting stock through special shares that have greater weight in shareholder votes than shares that are publicly traded. Moreover, Universals financial performance is already being rewarded with a higher stock price, at nearly $60 per share, than its acute-care competitors, thanks in part to the companys diversification into psychiatric facilities.
While Lehrich does not expect another buyout, he also wrote that many of these companies will continue trying to restructure operations because of the challenges of bad debt and weak volumes, and also will look for ways to provide returns to shareholders to support the price of their shares, such as HMAs one-time dividend.
Triads new owners have agreed to pay $4.7 billion in cash and take on $1.7 billion in debt. The deal requires shareholder approval. Triad retains the right to solicit superior offers for the next 40 days. The private equity firms are CCMP Capital Advisors and GS Capital Partners. CCMP was formed in August 2006 by former members of the buyout group at J.P. Morgan Partners, the private equity division of J.P. Morgan Chase & Co. GS Capital Partners is the private-equity arm of investment bank the Goldman Sachs Group.
Triad, again like HCA, coupled the announcement of a go-private deal with bad news on bad debt. The company said that its fourth-quarter results will be hit by three charges related to bad-debt expense. Triad said the charges will total $68 million, trimming earnings to 42 cents to 44 cents per share. The average of stock analysts estimates was for earnings of 55 cents per share. Triads fourth-quarter results were boosted by a pretax reduction of $25 million in its medical malpractice reserves. In light of the buyout, Triad said it will not make a separate release of earnings and will not discuss the results on a conference call. Triad will report earnings more fully in its annual 10-K filing with the Securities and Exchange Commission, which Triad said will be filed by March 1. Triad owns or operates 53 hospitals and 13 ambulatory surgery centers in 17 states.
Triad wasnt the only investor-owned hospital company to report on its earnings last week.
In its first quarterly earnings report since going private again in November, Nashville-based HCA said declines in surgeries and emergency room visits led to soft patient volumes for the fourth quarter and the year ended Dec. 31, 2006, which combined with costs associated with its $33 billion leveraged buyout to depress profits in both periods. HCA said it earned $122 million for the fourth quarter, down 62.5% compared with profits of $325 million in the fourth quarter of 2005. Revenue was up 5% to $6.49 billion.