HCA (NYSE: HCA) returned to the publicly traded stock market in dramatic fashion earlier this month, thanks to the largest private-equity-backed IPO ever on a U.S. exchange, and there has been much rejoicing by shareholders since. Let's take a closer look at the implications for both the for-profit hospital space and the private equity market.
HCA has had an "on again off again" relationship with the stock markets, with its latest IPO actually being its third. It was most recently taken private in 2006 for a price of $33 billion. With the new offering, HCA managed to hit the top end of its range and then added another 3% by the close of its first day of trading. Since then, shares have climbed an additional 10%, significantly outperforming smaller competitors Tenet Healthcare (NYSE: THC), Community Health Systems (NYSE: CYH), and Lifepoint Hospitals (Nasdaq: LPNT).
I believe this outperformance is partially due to HCA's size. Even when it was private, HCA was the big dog of the industry. Its revenue dwarfs its competitors, coming in at more than double its next closest competitor, Community Health. As the true blue chip in the industry, HCA should attract extra investor interest. The for-profit hospital space could be set up nicely thanks to the cost-cutting and consolidation encouraged in 2009's contentious health-care reform law. HCA's size should give it an advantage over smaller and not-for-profit operators.
Not everything is roses, though. One of HCA's challenges over the next several years will be to slowly whittle down the massive $28 billion of debt on its balance sheet. It's that significant debt burden, of course, that made this whole thing possible. The private equity group made up of KKR, Bain Capital, Bank of America (NYSE: BAC) and Citigroup (NYSE: C) only put up $5.5 billion in cash, leveraging up HCA in the process.
This deal was exciting news for private equity. Its success paves the way for more IPOs in what is already starting out as a very strong year for raising capital. Already, $12.5 billion has been raised. The explosion of activity could be pent-up demand as companies that put their IPOs on hold during the financial crisis now finally feel it's safe to dip their toes in the water. Either way, it should be an interesting year from here out.
As for HCA, I suggest you put it on your watchlist and keep track of its return as a public company.
