HCA Officers Disclose Plans to Bid $3.3. Billion for Chain
The top managers at Hospital Corp. of America announced Thursday that they intend to make an offer to buy the giant hospital owner and operator for about $3.3 billion.
The news sent HCA’s stock soaring and boosted other hospital stocks, some of which analysts say have been undervalued as the industry slowly recovers from a long slump. Hospital occupancy rates, for instance, have held steady for the past two years after a decade-long decline and cost-cutting measures are boosting profits, these analysts say.
“The business is getting better more quickly than analysts and investors have recognized,” said John F. Hindelong, who follows the health-care industry for the investment firm Smith Barney, Harris Upham & Co.
In a brief statement, apparently prodded by heavy trading in its stock earlier this week, HCA said that its chairman, Thomas F. Frist Jr., other managers and an unidentified third party intend to offer about $47--mostly in cash--for each HCA share. The group would purchase the company in a leveraged buyout, in which the money borrowed to finance the deal will be repaid from the company’s future earnings or from the sale of parts of the business.
HCA, which is based in Nashville, Tenn., and owns or operates about 400 hospitals worldwide, said a special committee of outside directors would consider an offer when it is officially made. The company declined to comment on when a formal proposal might be made or how financing may be arranged.
The company rejected a similar offer by three Texas executives in 1987. “I wonder about how come management is making an offer that they rejected a year ago,” said Edwin Gordon, an industry analyst at Tucker, Anthony & R. L. Day, a New York investment firm. “The offer does not take into account the future earnings of the company adequately.”
The company earned $158 million in the first six months of the year on revenue of $2.69 billion.
But most analysts said the bid was above their expectations. Jerry E. Fuller, who covers the company for Duff & Phelps, a Chicago brokerage firm, said HCA would gain more time and freedom by going private under a leveraged buyout. “You can go in and slash staff and you don’t care what the world thinks,” he said. “It also buys you time; you can restructure over a longer period of time.”
Fuller said HCA management might have been encouraged by the better-than-expected performance by a group of 104 hospitals recently spun off by the company. “They were considered the dogs of the company,” Fuller said. “But they have done much better than expected, and it’s given them confidence for this type of method.”
“It wouldn’t surprise me if (the offer) was bumped up a little bit,” said Smith Barney’s Hindelong. He noted that the company’s cash flow is sufficient to cover debt service for a leveraged buyout, and the chain does not need to undertake any costly expansions. “The object is to maximize profitability,” Hindelong said. “The risk are greater, but the rewards are also greater.”
In New York Stock Exchange composite trading, HCA shares jumped $6.625 to close at $43.75 on heavy volume of 3.27 million shares. News of the proposal boosted shares in other hospital companies. Humana Inc. rose 62.5 cents to $26.50, while National Medical Enterprises gained $1.25 to $21.625.
Industry observers noted that leveraged buyouts have become increasingly common in the hospital management industry. “This is not the first,” said Thomas G. Goodwin, spokesman for the Federation of American Health Systems, which represents 1,400 for-profit hospitals. “There is a lot of it going on.”
Charter Medical Corp., the nation’s fifth-largest for-profit hospital chain, is in the midst of a leveraged buyout, Goodwin said. Three years ago, Republic Health Corp. of Dallas also reverted to a privately owned company.
In Southern California, Beverly Hills-based American Medical International has laid off employees in an effort to cut costs by $36 million annually and will spin off 37 hospitals to an employee stock ownership plan. (In addition, the company’s former chairman, Walter L. Weisman, resigned last month after the company’s four largest shareholders demanded that he step down.)
During the past decade, hospitals have been hit hard by government and corporate efforts to cut medical expenses. As a result, occupancy rates of for-profit hospitals fell to about 50% from about 75% in the late 1970s and hospitals were forced to slash costs and restructure their organizations.
After hitting bottom, occupancy rates of for-profit hospitals have held steady the past two years, according to analysts, “In the last six months, hospital managements have also got costs under control,” said health-care analyst Leonard S. Yaffe at Montgomery Securities in San Francisco. Hospitals report increased demand for profitable ancillary services, such as X-rays and pharmaceuticals. “The more ancillary services you use, the more profitable it is for the hospital,” he said.
And in the long run, Yaffe said, hospitals stand to benefit from an aging population with increasing needs for medical care.
Other analysts, however, do not see a recovery anytime soon. Fuller, for example, does not see the government or corporations easing up on their cost-cutting measures. “That is going to keep revenue growth low while at same time costs are increasing,” said Fuller, citing the rising salaries for nurses, who are in short supply.
