Usually, when a hospital company is said to take a market-based approach, the reference is geographical. For HCA, the reference is to the types of securities the company issued the last two years and plans to issue this year.
Looking for a return
Equity funds, Frists could reap $1.55 billion in IPO
As the company revealed more details last week about its planned initial public offering, securities filings from 2006 through last week tell the story.
In 2009, HCA sold three bond offerings totaling $3.05 billion and used the proceeds to pay down term loans due in 2012 and 2013. The company followed that up with two issues totaling $2.95 billion in 2010. Proceeds from the first offering of $1.4 billion went to pay down term loans.
Between those term loans and bonds maturing, HCA has $9.15 billion in debt coming due in 2012 and 2013, according to a securities filing.
The second offering, of $1.53 billion, helped fund a $2 billion distribution to shareholders, the third and largest of three distributions, or dividends, that HCA made to shareholders in 2010. The distributions totaled $4.25 billion.
“The IPO market wasn't that good last year, especially for healthcare IPOs,” said Re-Jin Guo, an associate finance professor at the University of Illinois at Chicago. The company took advantage of the strengthening bond market to repay its investors, Guo said. “Now, the IPO market is open to them.”
Pointedly, HCA's amended IPO filing states the company does “not intend to pay dividends on our common stock for the foreseeable future following completion of the offering.” HCA needed to state that to reassure the investors it hopes to entice to the IPO, Guo said. Otherwise, given that the private-equity firms and the Frist family will still control nearly 70% of the company after the IPO, potential public investors would be concerned that the controlling shareholders would pay themselves more dividends, she said.
The offering is expected during the week of March 7, with trading to begin on the New York Stock Exchange under the symbol “HCA,” according to numerous published reports.
For the investors that took HCA private in November 2006, the dividends and the proceeds from the IPO could more than repay the $5.3 billion in equity they put up in the go-private deal. The private-equity funds—Bain Capital, Kohlberg Kravis Roberts & Co. and the private-equity arm of Merrill Lynch—put up $4.5 billion in equity financing, according to a 2006 securities filing. However, they offset this commitment in two ways, according to another securities filing. They allotted $180 million of that commitment to entities controlled by the Frist family, making the family's total commitment $980 million. The private-equity firms further reduced their equity commitment with investments of $400 million from Citigroup and $200 million from Bank of America Corp. Bank of America now owns Merrill Lynch.
The private-equity firms and the Frist entities own their 96.8% stake in HCA through a holding company, Hercules Holding. If the IPO is priced at $30 and the investment banks underwriting the issue take full advantage of their option to buy 18.6 million additional shares, the private-equity firms will clear about $1.53 billion.
The Frist entities are selling far fewer shares and will take in a maximum of $22.1 million in proceeds (See chart). Hercules Holding's share of the 2010 dividends was about $4.11 billion. So in the best-case scenario, the total return to the private-equity firms and the Frist entities is $5.67 billion after the IPO. Future offerings are likely to allow the private-equity firms to cash out the remainder of their investment, Guo said.
Under the best-case scenario, HCA's proceeds would be about $2.63 billion. The company will use the proceeds to pay down debt, most likely the 2012 and 2013 term loans, although the amended IPO filing notes that it might use the proceeds on its revolving credit facilities. HCA would be able to redeploy those facilities later to pay off the term loans.
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