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Based in Nashville, Tennessee, Vanguard Health Systems (proposed VHS) is scheduling a $550 million IPO with a market capitalization of $1.6 billion at the price range mid-point of $22 for Thursday, June 23, 2011. The full IPO calendar includes five IPOs.

SUMMARY -- VHS is an acute hospital company growing by acquisition.

In the last 18 months leveraged buyout shareholders paid themselves $775 million. And VHS has committed to spending another $850 million -- which is a lot of money for a company with weak financials and an over leveraged balance sheet – to upgrade the recent purchase of the Detroit Medical Center.

VALUATION -- VHS has weak financials: 0.2% profit margin in the March 2011 quarter, when interest took 86% of operating profits. The annualized P/E ratio of 169 is high relative to the sector.

VHS is the most expensive of the hospital group in terms of P/E ratios and price-to-book value.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing March 9 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Vanguard Health (NYSE:VHS)

$1,573

0.3

169

5.4

-2.6

35%

COMPARE

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

Gross

Annualized March '11 nine mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

Profit %

Vanguard Health (VHS)

$1,573

0.3

169

5.4

-2.6

85%

Tenet Healthcare (NYSE:THC)*

$2,890

0.3

24.4

1.6

4.0

84%

Universal Health (NYSE:UHS)

$5,080

0.8

18.5

2.4

-10.1

82%

HCA Holdings (NYSE:HCA)

$17,480

0.6

17.1

-2.0

-1.3

84%

Community Health Sys (NYSE:CYH)

$3,820

0.3

14.3

1.7

-2.1

86%

Health Mgt Assc (NYSE:HMA)

$2,620

0.4

12.4

4.4

-8.2

86%

*THC: P/E eliminates $1mm tax credti in the September 2010 quarter

VHS Valuation Metrics

BUSINESS -- As of March 31, 2011, VHS owned and operated 26 hospitals with a total of 6,280 licensed beds, and related outpatient service facilities complementary to the hospitals in San Antonio, Texas; metropolitan Detroit, Michigan; metropolitan Phoenix, Arizona; metropolitan Chicago, Illinois; and Massachusetts, and two surgery centers in Orange County, California.

As of March 31, 2011, VHS also owned three health plans with approximately 242,300 members.

WEAK NINE MONTHRESULTS -- During the nine months ended March 31, 2011, revenue growth was limited by significant challenges including less demand for elective services, some of which related to a weaker general economy, and a shift from services provided to managed care enrollees to uninsured patients or those covered by lower paying Medicare or Medicaid plans.

LEVERAGED BUYOUT -- VHS was a Blackstone sponsored leveraged buyout that is 83% pre-IPO owned by Blackstone (NYSE:BX) 66% & Morgan Stanley (NYSE:MS) 17%.

On September 23, 2004, VHS Holdings LLC and Health Systems Acquisition Corp., a newly formed Delaware corporation, The Blackstone Group, together with its affiliates acquired securities representing a majority of VHS’s common equity.

DETROIT MEDICAL CENTER -- VHS has committed to spending another $850 million, which is a lot of money for a company with weak financials and an over leveraged balance sheet.

Effective January 1, 2011, VHS purchased assets of The Detroit Medical Center, a Michigan non-profit corporation with assets consisting primarily of eight acute care and specialty hospitals with a combined 1,734 beds in the Detroit, Michigan, metropolitan area and related healthcare facilities. VHS paid cash of $368.1 million

VHS committed to spend $350.0 million during the five years subsequent to closing for the routine capital needs of the DMC facilities and an additional $500.0 million in capital expenditures during this same five-year period. DMC generated total revenue of $2.1 billion during its most recent fiscal year.

DIVIDEND POLICY -- On January 26, 2011, paid dividends to equity holders of $444.7 million in the aggregate. On January 29, 2010, repurchased 14,458,646 shares (adjusted to give effect to the expected stock split) of common stock from stockholders for a purchase price of $300.6 million in the aggregate. In summary VHS has paid out $775 million to shareholders since January, 2010.

USE OF PROCEEDS -- VHS expects to net $512 million from the sale of 25 million shares. The proceeds are allocated to repay debt

Source: IPO Preview: Vanguard Health Systems