HealthSouth Corp.’s recent deal to sell its surgery center division makes it two down and one to go as the company continues to quickly shed segments that aren’t part of its new focus on inpatient rehabilitation.
Last week, Birmingham, Ala.-based HealthSouth agreed to sell its network of 139 outpatient surgery centers and three surgical hospitals to TPG Capital, a private equity firm headquartered in Fort Worth, Texas, for about $920 million and the option to have a stake in the new business. The news follows the late-January sale of HealthSouth’s outpatient rehabilitation segment to Mechanicsburg, Pa.-based Select Medical Corp. for $245 million. The outpatient rehabilitation deal is expected to close in the second quarter, and the surgery center division in the third. Diagnostics is the last segment the company plans to divest under a plan it unveiled in August of last year.
As part of the purchase price of the surgery center division, TPG said it would assume $18 million in debt. HealthSouth would have the option of buying an equity interest in the new company. Jay Grinney, HealthSouth’s president and chief executive officer, said the equity interest is “in the form of an options package that gives us the opportunity to buy into the company, presumably when the company is brought to an” initial public offering. In a news release, HealthSouth said the interest might be worth $25 million to $30 million within five years.
In early March, HealthSouth reported annual net operating revenue of $737 million for the surgery center segment compared with $755.5 million in the year-earlier period. Revenue in the segment for the fourth quarter of 2006 was $182.4 million compared with $177 million in the same period in 2005; net operating earnings increased to $25.8 million in 2006 from $13 million the previous year.
TPG officials said they are eager to take on the unit. “When you have a chance to buy an industry leader and separate the business and focus on the business, good things can happen,” said Todd Sisitsky, a principal with TPG. “It has a very solid set of facilities with an excellent group of doctors who are partners and nonpartners. The team has done a nice job stabilizing the business after some tough years.”
As part of the transaction, HealthSouth and TPG said Mike Snow, HealthSouth’s chief operating officer, and Joe Clark, president of the surgery division, will join the new company’s senior leadership team. The division’s 6,000 employees are also expected to be part of the new business, which will remain headquartered in Birmingham. HealthSouth will provide certain corporate services—such as accounting and administration—to TPG for an interim period.
Frank Morgan, an analyst with Jefferies & Co., said the deal is significant because it shows HealthSouth is working to achieve the goals it announced last year. “They are just executing on what they said they would do—to de-leverage the company and reduce the balance sheet,” Morgan said, adding that HealthSouth is getting “good valuation on these businesses that they don’t deem core to their strategy.”
Morgan also said TPG knows healthcare. The company acquired Iasis Healthcare for about $1.4 billion in 2004. It also invests in Oxford Health Plans as well as a variety of other industries, including financial services, technology, airlines, consumer franchises, media and retail.
“We view this as a growth opportunity because it meets three critical needs: (it) maintains high quality, reduces costs, and more and more people are going to be needing screening and procedures, and we want to be involved in it,” said Leonard Schaeffer, a senior healthcare adviser at TPG since April 2006 and a former chairman and CEO of the HMO giant WellPoint.
Next on the auction block for HealthSouth is its diagnostics segment, which Grinney said has been a more challenging division to operate.
“We replaced a lot of billing and collection systems and moved to a new IT platform, and that caused significant deterioration in our bad debts,” Grinney said. “The segment had negative (earnings before interest, taxes, depreciation and amortization) in 2006. The parties who are interested understand that it’s a turnaround division.” Grinney said there are “several” parties interested in that unit, and that the company still expects to make an announcement about the divestiture early in the second quarter.
The HealthSouth transaction was announced the same week two other potential deals involving for-profit providers were unveiled. HCA, Nashville, and the University of Miami, Coral Gables, Fla., said they signed a letter of intent to negotiate the university’s purchase of HCA’s 350-bed Cedars Medical Center, Miami. The systems hope to complete a definitive agreement and close on the transaction this summer. Cedars would be the third Florida hospital sold by HCA since its leveraged buyout was announced in July 2006.
