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HCA stock sale could fund health startups (The Tennessean)

HCA stock sale could fund health startups (The Tennessean)
by Getahn Ward | Mar 08, 2011

A lot more is riding on HCA’s return to being a public company than raising a bunch of money to chip away at its hefty corporate debt as the hospital chain’s stock starts trading on Wall Street again this week.

The expected stock sale – probably the largest private equity-backed initial public offering in U.S. history – could have broader implications for the local and national health-care industries as it sparks the flow of tens of millions of dollars into the hands of corporate insiders and other investors cashing out a portion of their HCA holdings.

As executives turn private ownership stakes into stock that trades readily on the New York Stock Exchange, that wealth could help finance new startup health-care companies or even fuel the sale of some high-end homes if investors reap large enough profits.

Analysts expect HCA to make its publicly traded debut on schedule, with the stock to be priced as early as Wednesday night and trading to start the next day.

Nick Einhorn, a research analyst at IPO research firm Renaissance Capital, believes that the hospital chain has a decent shot at achieving its target price of $27 to $30 a share even in the face of recent volatility in the U.S. stock market linked to soaring oil prices. New stock issues generally are priced based on estimates of how much demand there is from big institutions to buy the newly issued shares.

In some cases, profits occur quickly as public trading for desired companies drives a stock’s price up even on the first day of trading. The stability of the HCA name should be a big plus.

“Investors are a little more willing to pay up for these kinds of higher-quality market leaders,” Einhorn said.

That’s not to say that HCA’s stock offering isn’t without risks.

Chief among those is uncertainty about the potential effects of federal health-care reform. That fast-shifting landscape is a double-edged sword. On one hand, reforms could make it easier for hospitals to collect what newly insured patients owe on their medical bills. But hospitals also may face deep reimbursement cuts as the federal government and states try to reduce how much they pay for services under Medicaid and Medicare programs for the poor and the old.

HCA hopes to net $2.4B
In a video pitching this week’s stock offering to potential investors, HCA Chief Executive Officer Richard M. Bracken sounds ready to deal with the challenges of health-care reform.

“Whatever way health-care reform goes … we believe cost-effective and well-managed systems with big footprints and market shares are going to be well-positioned – and that’s HCA,” he said.

Some skeptics, however, think the environment for quick profits, other spinoff investments or another wave of health-care deals after the HCA stock offering isn’t such a sure thing.

“The opportunities to do startup health services businesses were more apparent in the 1980s and ’90s than they are today,” said Jack Tyrell, HCA’s vice president of finance 30 years ago and now managing partner in Richard Ventures, a Nashville-based venture capital firm.

“There’s a lot of uncertainty where reimbursement (for) health care is going now, which puts somewhat of a damper on startup activity, especially in the facilities business,” including hospitals.

HCA expects to net $2.4 billion after the stock offering. It will use the money in large part to pay down some of its $28 billion in debt left mostly by the leveraged buyout deal that took it private in 2006.

The founding Frist family and the private equity partners who took the firm private more than four years ago, including Kohlberg Kravis Roberts & Co., Bain Capital and Bank of America, are expected to split more than $1 billion from selling a portion of their shares. They will retain a big chunk of their other HCA holdings, with an estimated value of $11 billion.

Paul Keckley, executive director with the Deloitte Center for Health Solutions, said that HCA should benefit from increased demand for hospital services fueled in part by about 76 million baby boomers becoming eligible for Medicare starting this year.

“There’s really no clarity about how the reform law is going to play out long-term, but there’s certainty about increased demand. So, that’s the reason you look at this and think it is a very logical step,” Keckley said of HCA’s stock offering.

Executives stand to gain
People making out well from this week’s stock offering will include the Frist family, whose $950 million contribution to the 2006 leveraged buyout, including the rollover of stock that they owned, has more than doubled in value since then.

Other beneficiaries will include Jack Bovender Jr., the former CEO of HCA, who could receive about $6.3 million from the sale of a portion of his stock and still own roughly 2.5 million shares.

Additionally, an estimated 1,400 HCA executives also received equity in the private company as a result of the 2006 leveraged buyout, and some of that could be turned into cash when shares sell on Wall Street starting this week.

How much of that ends up funding future startup ventures in the health-care arena remains to be seen. But HCA has historically been a catalyst for Nashville’s emergence as a major player in the for-profit health-care business nationwide.

In fact, when HCA went private in 1989 and then issued shares of stock on Wall Street again three years later, companies created by the wealth generated included Renal Care Group (once a major player in creating dialysis clinics) and several others.

Many of Nashville’s better-known entrepreneurs – such as R. Clayton McWhorter, Joel Gordon, Charlie Martin, Joe Hutts and Joey Jacobs – have their roots at HCA or with companies the firm later acquired or spun off. The Frist family also is known for supporting ventures launched by former employees.

“HCA going public will enable several other companies in Nashville to raise money and go public,” said businessman Gordon, who helped start General Care Corp., which HCA would later buy more than 30 years ago.

Potential acquirers also could use HCA’s public market value as a benchmark to help set the prices of other transactions.

“It will put a valuation on the major company, then you can make assumptions about what another company might be worth,” said John Burch, who owns Capital Market Advisors here.

Steve Fridrich, broker/owner with Fridrich & Clark Realty, said he is fielding calls from potential sellers of high-end homes in anticipation of HCA’s stock offering. They think a Wall Street payday for a number of company executives might create wealth that ends up seeking big, new homes to buy.

Fridrich said the same sort of thing happened when HCA issued new stock in the past and when other big deals occurred, such as Nissan North America’s headquarters move here and the recent sale of mental hospital chain Psychiatric Solutions Inc. to another company.

“Whenever there’s a jump in people’s net worth, one of the first things they evaluate is their housing,” he said. “When we have these liquidity events, we do see houses trade hands.”

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