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HCA shareholders approve leveraged buyout

HCA Inc. entered a new phase last month, becoming a privately held company on November 16 after shareholders approved one of the largest leveraged buyouts in history.

As part of the buyout, shareholders were to receive $51 for each HCA share they hold.

HCA, which operates 172 hospitals and 95 free-standing surgery centers and facilities, begins its second reincarnation as a privately held company, going back down a path it took nearly 20 years ago.

Industry analysts are waiting to see if other healthcare companies will consider a leveraged buyout similar to HCA’s model.

Shareholders owning some 320.3 million registered shares participated in voting at the special shareholders’ meeting in Nashville. Of those, 283.5 million shares, or 72.9 percent of HCA’s total outstanding voting shares, voted in favor of adopting the merger agreement.

As a result of the agreement, HCA becomes a wholly owned subsidiary of Hercules Holding II LLC, the company set up by the buyer group, which represents a consortium of private investment funds including KKR, Bain Capital Partners LLC and Merrill Lynch Global Private Equity.

The sizeable margin in favor of the deal appears to put to rest a shareholder lawsuit, the resolution of which depended on majority approval of the merger agreement with Hercules Holding. Under the resolution, the acquisition group would have received only $220 million in termination fees if the merger had not been approved, instead of the $500 million in the original LBO agreement.

HCA has said it expects to complete the deal by year’s end.

The total value of the buyout was set at $21.3 billion to repurchase HCA equity from shareholders. The purchase of HCA also involves the assumption of $11.7 billion in existing debt, as well as borrowing $16 billion in new debt. In terms of equity purchase, the deal is second only to the $25 billion RJR Nabisco LBO of 1989; it exceeds the value of that buyout when assumed debt is included.

While HCA will be able to adjust financial strategies so that it doesn’t have to show quarter-by-quarter earnings results to investors, it now will be able to focus cash flow on meeting debt service payments on its nearly $28 billion in borrowings.

Going private is not new for HCA. In the 1980s under the name Hospital Corp. of America, it operated 463 facilities at its height, owning 255 and managing 208. It spun off 104 hospitals to HealthTrust in 1987 and went private in a $5.1 billion leveraged buyout the next year. HCA re-emerged as a public company in 1992.

There’s been a rise in interest in leveraged buyouts, especially among healthcare and technology companies, said Dan Williams, a principal with Montgomery & Co., a San Francisco-based investment banking company.

“One of the top reasons is there’s a ton of private equity capital that’s been raised, and these funds have to put this money to work,” Williams said. “Also, a lot of these industries are maturing.”

Recent industry estimates suggest that private equity firms have announced $425 billion in leveraged buyouts so far this year.

Williams said he expects consolidation and maturation will lead to consolidation of healthcare and healthcare technology companies, and that can generate the cash flow needed to sustain payments on large borrowings, such as those now being borne by HCA.

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