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HCA is the largest non-governmental hospital operator in the US, providing about 4% of all US hospital services. The company was previously publicly traded before it was bought out for $33 billion in 2006 by Bain, KKR and Merrill Lynch. Now it is returning to the public markets in an estimated $3.5 billion offering, which would eclipse Kinder Morgan's recent $2.8 billion deal to become the largest-ever private equity-backed IPO on a US exchange. HCA plans to sell 124 million shares (29% from selling shareholders) at a price between $27 and $30; BofA Merrill (NYSE:BAC), Citi (NYSE:C) and JPMorgan (NYSE:JPM) are the bookrunners on the offering. At the midpoint of the range, the company will have a $16 billion market cap. HCA is on the IPO calendar for the week of March 7th.

Business

HCA operates 158 general acute care hospitals and 106 freestanding surgery centers in 20 US states, mostly in the South and Southwest, and the UK. Texas and Florida together account for just over half of revenue. The company's hospitals, which have just over 40,000 beds, admitted 1.6 million patients in 2010, resulting in revenue of $31 billion and adjusted net income of $1.3 billion. Revenue is generated from managed care and other private insurers (53%), Medicare (31%), Medicaid (10%) and the uninsured (6%).

Evolving industry

The impact of healthcare reform on the industry is uncertain. On the one hand, it is expected to insure at least 30 million currently uninsured Americans, which should improve hospital admissions, and it should reduce bad debt expense for hospitals given wider coverage. On the other hand, Medicare reimbursements will be negatively impacted by the new rules and overall pricing could fall if there is a shift away from employer-sponsored insurance. Additionally, budgetary concerns have led several states, including Texas, to consider Medicaid cuts. Despite the current uncertainty, HCA believes that its better-than-average quality of care scores (CMS composite score of 98.4% vs. the 95.3% national average) and margins (21% adjusted EBITDA margin compared to 12-18% for other publicly traded peers) position it well to weather the new regulations and other industry changes.

Debt level

Bain, KKR and Merrill are each selling about 11% of their stake and will collectively own about 55% of the company following the IPO. In addition, they received over $4 billion in dividends in 2010, which required the company to take on additional debt. Following the IPO, the company expects to have $26 billion in outstanding debt (4.4x adjusted EBITDA). While investors may take a negative view on the debt level, particularly since some of it was used to fund insider dividends, we note that adjusted EBITDA was 2.8x interest expense in 2010, which gives the company a reasonable buffer. Going forward, the company's strong cash flow ($1.8 billion in 2010 free cash flow) should help it either delever or grow through further acquisitions.

Outlook

HCA will be the third multibillion private equity-backed IPO this year, following Nielsen (NYSE:NLSN), which raised $1.6 billion, and Kinder Morgan (NYSE:KMI), which raised $2.9 billion. Both of those deals priced above their proposed range and traded up, as investors were attracted to their industry-leading positions, stable business models and strong cash flow. While the evolving healthcare industry may make investors a little more wary of HCA's outlook, the company's large size, attractive cash flow and experienced management team should still support investor interest in this blockbuster IPO.

Source: HCA Holdings: Despite Healthcare Uncertainty, Expecting Blockbuster IPO