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Monday, July 24, 2006

Why is HCA Selling For $51.00?


These headlines and summary stories this morning on this HCA buyout are alarming on more than one front.

"HCA in Largest Private Equity Deal Ever"

"HCA Stockholders to Receive $51 per Share; Transaction Valued at $33 Billion"

Bain Capital, Kohlberg Kravis Roberts & Co., and Merrill Lynch Global Private Equity announced today the execution of a definitive merger agreement under which affiliates of the private equity sponsors and HCA Founder Dr. Thomas F. Frist, Jr. will acquire HCA in a transaction valued at approximately $33 billion, including the assumption or repayment of approximately $11.7 billion of debt. HCA stockholders will receive $51 in cash for each share of HCA common stock they hold, representing a premium of approximately 18% to HCA's closing share price on July 18, 2006, the last trading day prior to press reports of rumors regarding a potential acquisition of HCA.

It is true that this is a premium of that size compared to the $44 level before this was announced. BUT...................

Why on earth would management be so eager to be acquired for LESS THAN THE STOCK WAS VALUED 2-YEARS AGO??????????????????? HCA traded at over $55 just over 12 months ago, and this values it much less. There is the debt assumption that will "go away" but that does not highly reward shareholders. This could EASILY be met with shareholder scrutiny as not enough of a premium, although they will probably just crumble and not even bother voting as they normally do.

This is very puzzling and it seems odd. There are a myriad of reasons that a public company would go private, but for the industry leader it is very out of character. It is unknown if the company wants to avoid stock option probes, or if this is tied to old billing issues, or what reason on earth they would agree to such a cheap buyout. Maybe there are massive golden parachutes. It isn't yet known. All you can do is speculate on why they would accept a 6% to 7% final premium, despite the fact that it was higher than when talk of this first emerged.

HCA is the Holy Grail for hospital systems. It closed out with a $19.5 billion market cap Friday and traded with a 15.15 P/E. It was a tad on the cheap side of other hospital systems. With $11 Billion in debt, this is truly leveraged.

How does this shore up with other hospital systems? For starters this chews up much more of the total funds, and implies that private equity funds have raised so much cash that they have to do Super-sized deals to get rid of the capital. This is feeling as though the private equity group is getting to the point where they need to commit size to put their funds to work.

Company Mkt Cap P/E ROE % Debt/Eqty Px/Book
HCA Inc. 19.53B 15.154 28.1 2.483 4.289
Health Mgmt. 5.02B neg neg 0.512 2.132
Community Health Sys. 3.64B 18.989 12.943 0.871 2.066
Triad Hospitals 3.54B 14.19 8.449 0.563 1.164
Tenet Healthcare 2.87B neg -44.366 4.371 2.607
Universal Health Services 2.81B 13.333 8.353 0.484 2.242
Lifepoint Hospitals 2.02B 22.766 9.29 1.138 1.513
Magellan Health Services 1.60B 12.69 21.537 0.085 2.407
AmSurg Corp. 707.10M 20.343 12.767 0.454 2.303

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