HCA IPO seen strong despite debt and reform risks
HCA, the biggest U.S. for-profit hospital chain, plans to go public on Wednesday, and analysts expect strong demand even though its private equity owners saddled it with a massive amount of debt.
Much is at stake for this IPO, which could raise up to $3.7 billion to become the biggest private-equity backed public offering ever. It will set the tone for a slew of similar exits from investments made at the height of the credit bubble in 2005 to 2007.
A newly public HCA could also generate more investor interest in the hospital sector. It may even turn into a major acquirer, possibly drawing it into Community Health Systems'
The offering by owners including Bain Capital and KKR
Investors hope that hospital company profits will benefit from an improving economy. Only a handful of U.S. hospitals are publicly traded, and their shares suffered as they cared for rising numbers of uninsured patients in the economic downturn. Paying patient visits were down as more people put off non-emergency visits and elective surgeries.
A U.S. healthcare law extending insurance coverage to some 30 million more Americans could also benefit the group over the long-term.
With the industry now writing off between 15 percent and 20 percent of revenues as bad debt and charity expense, even a modest boost in patients with insurance coverage would help the bottomline for hospital operators, said Jessica Bemer, analyst with Snow Capital Management.
The sheer size of HCA could also make more investors interested in hospitals, Bemer added.
Adding one that is larger than all of them should bring more attention to the space, she said. Snow Capital Management owns shares of hospital operators Community Health, LifePoint Hospitals
Not everyone is convinced that the health law will prove a cure-all for hospitals. The Affordable Care Act also phases in Medicare payment cuts to hospitals and will make it harder to negotiate reimbursement rates, said Morningstar analyst Michael Waterhouse.
Our opinion is it's really not worth investors taking that kind of risk, Waterhouse said.
HCA's shares are expected to begin trading on the New York Stock Exchange on Thursday under the symbol HCA
BIG DEBT
HCA has substantial financial risk, too, including more than $26 billion of debt, even after the company uses proceeds from the stock offering to pay off borrowings. HCA's debt exceeds the value of the assets on its books by more than $12 billion.
But after a series of successful IPOs this year, investors may be willing to ignore those potential wrinkles.
Investors are looking past healthcare, looking past some of the risks that come with this company and it will maybe ride the momentum generated by recent deals, said Bill Buhr, IPO strategist at Morningstar.
Over the past few weeks, consumer measurement company Nielsen Holdings
Toys R Us
If HCA, which involves more risks than Nielsen and Kinder Morgan, prices its IPO at the top of the range, many more IPOs from private equity firms will likely follow, Buhr said, highlighting Toys R Us as an example.
The market is clearly enamored for these types of deals and the window could not be more open than now.
HCA was taken private in November 2006 in a $21 billion deal excluding debt that involved Bain, KKR, Bank of America Corp
Underwriters on the offering are led by Bank of America Merrill Lynch, Citi and JPMorgan Chase
(Editing by Michele Gershberg, Dan Wilchins and Bernard Orr)
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