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Surgery Care Affiliates (NASDAQ:SCAI), a national operator of surgical facilities with principal offices located in Deerfield, Illinois, plans to raise $220 million in its upcoming IPO. The firm will offer 9.8 million shares, including 20% insider shares mostly from the TPG Funds, the major shareholder, at an expected price range of $21.00-$24.00. If the offering reaches the midpoint of that range at $22.50 per share, SCAI will command a market value of $860 million. The firm filed under the name ASC Acquisition LLC.

  • SCAI filed on September 5, 2013.
  • Joint Bookrunners: J.P. Morgan, Citi, BofA Merrill Lynch, Barclays, Goldman Sachs, Morgan Stanley
  • Co-Managers: BMO Capital Markets, Suntrust Robinson Humphrey, TPG Capital BD

Summary

SCAI is a national provider of surgical care for physicians, health systems and payers. The firm operates a network of outpatient surgery facilities that spans 34 states and includes 167 ambulatory surgery centers, five surgical hospitals and a sleep center comprised of 11 locations. The firm owns and operates facilities in partnership with 42 leading health systems and approximately 2000 physician partners.

The large scale of SCAI's operations allows it to provide a comprehensive suite of services to its clients and partners; in addition to its network of low-cost ASCs, SCAI offers tools and systems for clinical benchmarking, clinical best practices, operating efficiency, care coordination and supply chain management.

Valuation

SCAI offers the following figures in its S-1 balance sheet for the six months ending June 30, 2013:

  • Total Net Operating Revenues: $388,500,000
  • Net Income: $42,200,000
  • Total Liabilities: $1,098,800,000
  • Total Equity: $318,400,000

SCAI has seen stable growth in recent years. System wide net operating revenues grew by 16.4%, 17.0% and 5.6% in calendar 2012, 2011 and 2010, respectively. Adjusted net income increased from $23.8 million in 2010 to $32.4 million in 2012, representing a 16.7% CAGR.

Conclusion

SCAI looks to be a promising buy in a healthcare environment that currently emphasizes cost-cutting alternatives to traditional methods; though the medical merits of ambulatory surgery centers as compared to in-house surgical departments may be debatable, the pricing superiority of the centers is not. The firm's sustained revenue growth and profitability indicate competent management and an ability to exploit the opportunities presented by the increasing popularity of ASC's.

We rate this IPO a buy if it prices in the $20 to $22 range and neutral if it prices above $22.

Business

The current focus in healthcare on cost reduction and containment should play in the favor of firms like SCAI that offer a significantly less costly alternative to in-house surgery. That said, the transition to the Patient Protection and Affordable Care Act will have wide-ranging and not entirely predictable consequences on the American healthcare system as a whole, and it's difficult to say whether SCAI will be a beneficiary or victim of the law.

SCAI must compete with other firms that offer ambulatory surgery center partnerships, some of which are better capitalized or have superior resources. Competitors include Kaiser Permanente, Amsurg Corp (NASDAQ:AMSG), Symbion Healthcare, HCA Holdings (NYSE:HCA), and Ambulatory Surgical Centers of America.

Management

President and CEO Andrew Hayek has served in those roles since 2008. Mr. Hayek previously served as the President of VillageHealth and as President and COO of Alliance Healthcare Services Inc. Mr. Hayek also previously worked for KKR Capstone, an affiliate of private equity firm Kohlberg Kravis Roberts & Co. and for The Boston Consulting Group, a strategy consulting firm. He is also a member of the board of Senior Home Care, Inc. and a member of the board of advisors of Sg2.

Source: Surgery Care IPO Operates Successfully