HCA Holdings, Inc. (HCA) seeks to price the largest ever U.S. private equity backed IPO this week with a $3.53B offering. HCA is offering 124 million shares (87.7M primary and 36.3M secondary) at an indicated range of $27.00-30.00, for an implied market cap of $14.68B at the midpoint. The lead underwriters of the offering are BofA (BAC) Merrill Lynch, Citi (C) and J.P. Morgan (JPM). HCA is the largest non-governmental health care system in the U.S. The HCA network consists of 164 hospitals (with approx 41,000 beds), and 106 free standing surgery centers across 20 states throughout the U.S. and England. This network also includes 35k affiliated physicians and 6 NFP joint venture partnerships. The primary selling shareholder is Hercules Holdings II LLC, which is held by a private investor group that includes affiliates of Bain Capital, KKR, and BAML Capital Partners (formerly Merrill Lynch Global Private Equity), and the HCA founder Dr. Thomas F. First Jr. Post offering Hercules Holding will own approx 73.3% of the common stock outstanding. They acquired HCA back in Nov. 2006, for $33B ($21.3B plus assumed debt of $11.7B).
HCA has operations in 14 of the 25 fastest growing MSA’s with population greater than 500k. It is either the #1 or #2 operator in their key markets, with market share ranging from 20-40%. It provides 4-5% of all the U.S. hospital services, and one of 22 emergency room visits in the U.S. is to an HCA hospital. HCA also has an industry leading adjusted EBITDA margin (as a percentage of cash revenue) of 20.9% for 2010. Its adjusted EBITDA for 2010 of $5.9B was greater than the other the other U.S. public hospital companies combined [including Health Management Associates Inc. (HMA), Universal Health Services Inc. (UHS) , Tenet Healthcare Corp. (THC), Community Health Systems, Inc. (CYH), and LifePoint Hospitals, (LPNT)].
For 2010, HCA generated $30.7B of revenue ($28B of cash revenue, which is revenue less provision for doubtful accounts), $5.9B of adjusted EBITDA, $3.1B of cash flow from operations, and $1.2B of net income. Post offering, assuming the midpoint of the range, the company will have a pro forma Debt / adjusted EBITDA of 4.4x. On a trailing twelve month EV/adj EBITDA the company is coming at approximately 6.83x (based on the assumed midpoint price of $28.50 resulting in an EV of $40.27B). This compares with the comp group (HMA, UHS, THC, CYH and LPNT) average of 8.03x.
Some of the primary risks that are being associated with the HCA offering are the high debt load (approximately $26B of debt post offering), and the uncertainty surrounding the U.S. Health Reform Law. The company notes that it had about $1.45B of cash flow for deleveraging or other corporate purposes in 2010 (after the $1.3B in capex and $350M to minority interests). While it does indicate the possibility of a reduction in Medicaid and Medicare reimbursements, it also believes that the reform may result in expanded coverage and reduction of uninsured by approximately 32-34 million people. Medicare and Medicaid represent 61% of their payer mix, with 32% from managed care or other insurers and 7% uninsured.
While 2010 was an overall tough year for PE backed IPOs, early 2011 has been a boon for many of these firms eager to cash out on investments they made back in ’06 and ’07 before the market collapsed. Just last month, Kinder Morgan Inc. (KMI) floated a successful offering of $2.87B, which at the time was the largest U.S. PE backed IPO in history, and was up 3.5% in the first day of trading. That was on the heals of two other large PE backed deals in Nielson Holdings’ (NLSN) $1.63B offering and American Asset Trust’s (AAT) $564M offering, up 8.7% and 3.66% respectively on their first day of trading. While we will have to wait till Thursday to see how HCA trades on day one, early indications are this will follow suite, as early demand is heavy.