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VOL. 35 | NO. 9 | Friday, March 4, 2011

HCA raises $3.79 billion in 3rd IPO

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The owners of hospital chain HCA Holdings Inc. found investors eager for its stock as the company sold more shares in its initial public offering than it expected - and at the top of the expected range.

The deal was a success even as some investors and analysts said the company's debt load isn't as healthy as they would like.

Demand was high for HCA's third initial stock offering, even though the company owes $28.2 billion to creditors. Adding to its challenges, its revenue growth has slowed, and the company, the largest hospital chain in the U.S., can't say for sure how the health care overhaul passed nearly a year ago will reshape its business.

The company said late Wednesday that it sold 126.2 million shares at $30 apiece to raise $3.79 billion, more than the $3.53 billion the company expected. HCA previously said it would sell 124 million shares for $27 to $30 each. HCA is selling 87.7 million shares, while selling stockholders are selling 38.5 million, more than the 36.3 million originally expected.

The offering surpassed records set earlier this year. Consumer ratings company Nielsen Holdings NV raised $1.9 billion in an IPO in January, then a record amount for a U.S. company taken public by a private equity firm. Pipeline operator Kinder Morgan Inc., also a private-equity backed deal, busted that record last month, raising $2.86 million after expanding its offering because demand was so heavy. HCA stock is expected to begin trading Thursday.

HCA bided its time since announcing that it wanted to go public last May. That may have been the right prescription for success. The IPO follows two other large private equity-backed deals and it comes after six months of gains for U.S. stocks and in the hospital sector. As investors grow more comfortable with the impact of the health care overhaul, more companies are going public. Health care-related IPOs have made up 26 percent of all IPOs this year, according to data provider Dealogic, the highest proportion since 2001.

Stocks of hospital companies, Community Health Systems Inc., Health Management Associates Inc., Tenet Healthcare Corp. and Universal Health Services Inc. have risen by about two-thirds, on average, since the end of August. The stocks rose as details emerged on the first few provisions of health care reform and investors started to believe that 2010 earnings expectations were achievable. The Standard & Poor's 500 index has risen about 26 percent in that time.

"Last year (HCA) couldn't come out. Had Kinder Morgan or Nielsen not worked, I think there would be minimal demand, and quite likely this deal may not even have come," said Scott Sweet, the owner of IPOBoutique. He said investors have demanded far more shares of HCA than are currently available for sale.

HCA first went public in 1969, was taken private in 1989 and held a second initial stock offering in 1992. Between 2000 and 2003, HCA paid $1.7 billion in criminal and civil penalties to resolve allegations that it paid physicians kickbacks and overcharged Medicare, Medicaid and Tricare, the military health care program. It was then the largest health care fraud case in U.S. history, addressing problems the government said began in the late 1980s. Only Pfizer Inc. has faced a bigger penalty — $2.3 billion — to settle charges that it promoted the pain killer Bextra, and other drugs, for unapproved uses.

HCA was taken private in a $21 billion leveraged buyout in 2006 by private equity firms and members of the Frist family, who founded the hospital in 1968. At the time, the company was struggling with weak hospital admission rates and was getting stuck with unpaid bills from uninsured patients.

The company said in a filing with the Securities and Exchange Commission that since then, it has invested in cost-saving improvements and added new medical services to its hospitals. It has managed to increase cash flow every year since the buyout.

Moreover, HCA says that its size will allow it to serve a growing patient population while keeping costs low. It operates 164 hospitals and 106 surgery centers in 20 states and in England. The aging U.S. population and health care reform, which is expected to add insurance coverage for more than 30 million people, will increase demand for its medical services and reimbursements, HCA says.

Most skeptics focus on the company's debt. The $2.63 billion HCA will collect from the IPO — its private equity backers and Frist family members will get about $1.15 billion — will reduce its debt by less than 10 percent. Even the company says its debt may hinder its ability to grow and exposes it to risk from rising interest rates. Morningstar analyst Michael Waterhouse said HCA's debt is a big risk, and he doesn't think the company's profitability will be sustainable. Revenue growth also has slowed, rising 2.1 percent last year to $30.7 million after climbing 5.9 percent in 2009.

There are other concerns. Some analysts aren't sure HCA will benefit from the health care overhaul, and HCA itself, in its filing, warned about lower payments from government programs. Medicaid already offers reimbursement that falls far short of what commercial insurers provide. Erik Gordon, a professor at University of Michigan's Ross School of Business, predicts that Medicaid rates will drop even further, putting pressure on margins for health care providers.

Despite the negatives, many investors are expected to jump in. But some won't make it a long stay.

"This is one of the hotter names for 2011," said Doug Martin, an investment analyst for Kitano Capital in Dallas. He said he had asked the underwriters for more than 600,000 shares, and is confident of a big return — at least in the stock's debut. Because of HCA's debt load, Martin said that he doesn't plan to hold onto the shares for more than a day.

The company won't receive proceeds from shares sold by the selling stockholders, which include Bain Capital, Kohlberg Kravis Roberts & Co. and Merrill Lynch Global Private Equity, now part of Bank of America Corp.; and members of the Frist family. Two of the Nashville company's founders are the father and brother of former Senate Majority Leader Bill Frist.

-- Associated Press

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