HCA, the biggest hospital operator in the US, has filed the largest ever private equity-backed initial public offering, raising $3.79 billion by selling 126.2 million shares at $30 each. The offering surpassed the February public offering of energy pipeline operator Kinder Morgan, which sold 95.5 million shares at $30 per share and raised $2.9 billion.
The capital raise beat out the company’s own expectations, outlined in the share offering filed with the US Securities and Exchange Commission. HCA expected to raise $2.4 billion, assuming shares would sell at $28.50 each.
The company’s stock was trading at $31 a share by mid-afternoon Thursday.
HCA’s owners, including Kohlberg Kravis Roberts, Bain Capital, Bank of America’s private equity unit and the founding Frist family, sold 36.3 million shares. The owners took HCA private in 2006 in a $33 billion deal, including $11.7 billion in debt, that at the time was the largest LBO on record, surpassing the RJR Nabisco deal KKR struck in 1989.
The sponsors put down $4.9 billion of their own equity, according to the Wall Street Journal. Prior media reports have suggested the private equity firms had received roughly $4 billion via dividend recaps since purchasing the company.
Investors flocked to the offering because HCA, under private ownership, experienced a lot of operational turnaround, said Dan Mendelson, chief executive officer and founder of Avalere Health, which provides consulting, due diligence and policy guidance for industry and government.
As of 31 December, HCA's EBITDA had climbed from $4.4 billion in 2008 to $5.4 billion last year. The company also carries a $28 billion debt load.
The capital raising puts HCA in a strong position to take advantage of the “strategic” healthcare environment, Mendelson said, with hospitals increasingly “integrating” small specialist practices like oncology or radiology groups.
One healthcare investor said HCA has been “far out ahead” of the industry in terms of managing costs, including owning their own physician practices.
“They've been for-profit for a long time so the've kind of figured it out,” the investor said. “They've been managing costs aggressively for a long time so I think the rest of the market is going to have to catch up to them.”
A large portion of HCA's “patient volume” comes from government programmes like Medicare and Medicaid, and about 40 percent of the company's revenues is derived from those programmes, the company said in its public filing.
“Changes in government health care programmes may reduce the reimbursement we receive and could adversely affect our business and results of operations,” the company said.
The state of the healthcare industry is still uncertain under reforms initiated by US President Barack Obama. One thing that is certain is millions of people — an estimated 30 million — will be added to the US healthcare system under the law.
HCA's tightly managed costs and “integrated” structures in terms of owning its own medical groups will put it in good position to thrive under reform, sources said.
“There are strong linkages between medical groups and hospitals,” Avalere's Mendelson said. That sort of “integration” of services will be accelerated under Obama's healthcare reform, he said.
“HCA will be dominant in a lot of communities … [the company] will be very well positioned strategically going into reform,” he said. “They’ll be able to do more acquisitions when they want to, take on more debt when they need it” as a public company.
For private equity, healthcare reform will be a “battle between regulation and innovation”, said Randolph Friedman, founder of Friedman Capital, which focuses on investments in the healthcare sector. “Private equity can provide the capital and the vision to assist in the development of innovative solutions.”
HCA's IPO has sent a signal to the market that healthcare-related companies can be attractive targets for private equity as long as they have systems in place to manage costs, according to one private equity investor focused on the space.
“There's going to be increased demand for as far out as anybody can see,” the investor said. “Show me another market that's got 5 to 10 percent inherent growth going forward. If you have good revenue, you have a lot of flexibility.”
HCA was the third private equity-backed IPO this year. Nielsen Holdings, a television ratings and research company, debuted in January at $23 per share and quickly jumped to $25 per share, raising $1.9 billion for its controlling investment consortium that included KKR, Thomas H. Lee Partners, The Carlyle Group and The Blackstone Group. Nielsen was trading at $26 by Thursday mid-afternoon.
In February, Kinder Morgan sold 80 million shares at a maximum price of $29 per share, raising $2.9 billion. The company, backed by Goldman Sachs, Highstar Capital, The Carlyle Group and Riverstone Holdings, was trading at $30.60 at mid-day Thursday.
Dealogic, a data provider, anticipates a pipeline of 21 private equity-backed IPOs worth a combined $9.7 billion, based on IPOs filed in the last six months and still pending. The $9.7 billion represents 54 percent of all expected US-listed IPO volume, according to Dealogic.
Graham Winfrey contributed to this report.