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Hospital Giant HCA Agrees to Buyout

A $21.3-billion deal for the largest hospital chain shows optimism about the industry.

July 25, 2006|Daniel Yi | Times Staff Writer

Monday's announcement that the country's largest hospital chain agreed to be acquired by private investors shows long-term optimism about an industry that has been battered by bad news in recent years, analysts said.

Nashville-based HCA Inc. -- which owns 276 hospitals and surgery centers, including nine facilities in California -- agreed to be bought for $21.3 billion. The proposed buyers include private equity firms, HCA's management and the chain's founding family.

Industry analysts said the buyers were betting that HCA and the industry could capitalize on the aging of the population and other long-term trends, overcoming recent sluggish growth and rising costs that have driven the company's stock price lower in the last year.

"Compared to other industries, hospitals are a stable business," said Jason Gurda, an analyst with Bear, Stearns & Co. in New York. "The U.S. population is getting increasingly older, obesity is a problem and there could be more diabetes cases.... All that suggests that we will continue to use more hospital services in the future. That doesn't mean next year, or in three years, but in the long run it is a fair assumption."

Hospitals have been hurt by lackluster growth in admissions and rising costs associated with caring for the uninsured and underinsured. U.S. hospitals last year admitted about 37 million patients, a figure that hasn't changed much in nearly five years, according to the American Hospital Assn.

The explanations vary. Improvements in medical technology may mean that patients don't need to be hospitalized as often or as long. There also is growing competition from ambulatory clinics and urgent care facilities that specialize in less serious illnesses. And care for which hospitals aren't compensated eats away at hospitals' bottom lines.

HCA's second-quarter profit released Monday tumbled 27.2% compared with the same quarter last year, due in part to nonpaying patients.

"The industry has been suffering from lack of sick people, or more precisely, sick people who have insurance and can pay," said Sheryl Skolnick, an analyst with CRT Capital Group in Stamford, Conn.

By taking HCA private, its new owners would be immune from short-term swings in the stock market's view of the company's operations.

And being privately owned would mean the company could focus more on long-range planning than short-term gain in share prices.

Before starting to rise sharply Thursday on first word of the buyout, HCA's stock was down about 25% from its level of mid-2005.

It closed at $49.48 on Monday, up $1.61, or 3.4%, in heavy trading, and up 13% from Wednesday's close.

The company's buyers are likely to take it public after its market value increases, analysts predicted.

"I'd be disappointed if they didn't," Skolnick said.

Consumer advocates, however, expressed concern about whether the deal would benefit patients. Anthony Wright, executive director of consumer group Health Access California, said that the transaction was more about profits than patient care.

"Profits is the primary motivator," he said. "And now that they are privately owned, there will be even less transparency."

Analysts were divided as to whether the buyout presaged similar moves among other companies in the industry. Some predicted more leveraged buyouts, but others said the strategy was particular to HCA, which has gone down this road before.

The company, co-founded in 1968 by Thomas Frist Sr. and Thomas Frist Jr. -- father and brother of Senate Majority Leader Bill Frist (R-Tenn.) -- was a public company for the first two decades. Then management took it private with the help of outside investors in 1989. It went public again three years later.

The company's California hospitals said they expected no change in their operations.

"We are very busy, let's put it that way," said Victoria Emmons, a spokeswoman for HCA-owned Regional Medical Center of San Jose, which is undergoing a $160-million renovation.

Three other HCA hospitals in California -- Riverside Community Hospital in Riverside, West Hills Medical Center in West Hills and Los Robles Medical Center in Thousand Oaks -- have been in tense labor negotiations for weeks. The talks are continuing as scheduled, both sides said Monday.

Under the buyout agreement, which must be approved by shareholders this year, the investment group would pay $51 in cash for each share of HCA common stock. The group includes private equity firms Bain Capital and Kohlberg Kravis Roberts & Co., investment bank Merrill Lynch & Co., HCA's current management and the Frist family.

The transaction includes the assumption of HCA's $11.7 billion in debt. The total of equity and assumed debt -- $33 billion -- tops the $31.4-billion record set by the 1989 leveraged buyout of RJR Nabisco.

HCA officials issued a statement praising the agreement Monday, but declined requests for interviews. So did the members of the investment group.

The company is credited with creating the for-profit model of national hospital chains. Before HCA, hospitals were mostly run by local charitable organizations. In California, about a quarter of hospitals are for profit.



Big buyouts

Largest leveraged buyouts, by value including debt assumption

(In billions)

HCA* : $33

RJR Nabisco: $31.4

Kinder Morgan*: $21.8

BAA : $19

Vodafone Group Japan* : $16.3


Source: Bloomberg News

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