AP Features, February 5th, 2007
Triad Hospitals Inc. said Monday it agreed to be taken private in a $4.7 billion sale to an affiliate of Goldman Sachs and a JPMorgan Chase & Co. spinoff.
The hospital industry is struggling with flat volume and rising numbers of unpaid bills from uninsured patients. But analysts said hospital companies generate huge amounts of cash, making them attractive buyout targets.
The Triad announcement comes on the heels of hospital giant HCA Inc.'s $21.3 billion sale to private owners.
Triad agreed to be purchased for $50.25 per share, a 16 percent premium over Triad's closing stock price on Friday. The buyers, affiliates of CCMP Capital Advisors and GS Capital Partners, will also assume $1.7 billion in debt.
Shares of Triad rose $6.38, or 14.7 percent, to close at $49.65 on the New York Stock Exchange.
In an interview, Triad Chairman and Chief Executive James D. Shelton called the price "a very, very healthy premium to our shareholders" and said it shows support for the company's strategy of selling management services to nonprofit health care organizations. He said doctors, nurses and patients should see no changes.
Triad's stock has slumped since mid-2005. In December, its largest shareholder at nearly 9 percent, hedge fund TPG-Axon Capital Management LP, accused Triad of "remarkably poor financial analysis and controls" and falling to clearly state how it would improve financial performance.
TPG-Axon, formed by another buyout firm, Texas Pacific Group, and a former Goldman Sachs executive, also threatened to run candidates for Triad's board.
Shelton said the sale wasn't a response to TPG-Axon's pressure. TPG declined to comment on the sale.
A deal had been considered likely since October, when Shelton told analysts he was "having some good conversations" with "two or three" private-equity firms.
Analysts said there could be another bid for the company, either from another private-equity group _ Blackstone Group is believed to be interested _ or a rival hospital operator.
Triad has 40 days to solicit better offers, and it would pay a relatively light $40 million penalty for walking away from CCMP, which spun off from JP Morgan's private-equity arm, and the Goldman Sachs affiliate.
Shelton said he wasn't talking to other potential bidders, but if anyone else comes along, "we'll be helpful in providing them the same information" Triad gave the current buyers.
Triad postponed its annual meeting and said it would hold a special meeting to let shareholders vote on the sale, which is also subject to regulatory approvals.
Standard & Poor's Ratings Services dropped Triad to two notches below investment-grade and warned it could downgrade again. Moody's Investors Service, which has Triad debt three steps below investment-grade, put Triad under review for a possible downgrade until it can study the amount of debt used to complete the deal.
Triad was spun off from HCA in 1999 and grew by snapping up smaller hospital operators, mostly in smaller cities in the West and Southwest. It operates 53 hospitals and 13 outpatient surgery centers with nearly 10,000 beds.
Sheryl Skolnick, an analyst with CRT Capital Group, said the private-equity groups valued Triad because it has relatively light debt, strong real estate holdings and hasn't made much of an effort to control costs.
"From the private-equity point of view, that's low-hanging fruit," she said. "They can cut overhead costs without compromising patient care, one hopes."
Skolnick said the offer would look good to most Triad shareholders, since it comes after the company warned of disappointing fourth-quarter results. One group that won't be happy, she said: Those who bought newly minted stock last summer at $53 per share.
Whit Mayo, an analyst with Stephens Inc., said the buyers probably believe the hospital industry will fare better in the next few years.
"They see through the near-term challenges this industry faces," he said. "The private-equity people also see that these companies throw off a tremendous amount of cash flow."
Cowen and Co. analyst Kemp Dolliver said LifePoint Hospitals Inc. and Community Health Systems Inc. could also fall in private hands. The shares of all three have slipped recently after strong run-ups.
"As someone at (one of the buyout firms) told me, 'We like to buy companies when the public market doesn't want them anymore,'" Dolliver said. "There could be more."
Triad said Monday that fourth-quarter earnings from continuing operations would be 42 to 44 cents per share on revenue of $1.4 billion. Analysts were expecting 55 cents per share on $1.43 billion in revenue, according to a survey by Thomson Financial.
Admissions in facilities open for more than a year grew about 3.1 percent, and revenue per admission at those locations rose about 4.1 percent from a year earlier.
Triad raised its estimated allowance for doubtful accounts _ bills it doesn't expect patients will pay _ about $34 million before taxes. That will cut earnings from continuing operations by about 24 cents per share, the company said.
For the year, the Plano-based company expects earnings from continuing operations of $2.36 to $2.38 per share on revenue of about $5.5 billion.
