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What Investors Need to Know About the Surgery Partners IPO

By Eric Volkman - Sep 30, 2015 at 4:03PM

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The latest niche healthcare IPO will take place on Thursday.

The healthcare sector, it seems, never stops growing its presence on the stock market, having become the most active industry by far in terms of IPOs -- and it's serving up a new niche player at the end of this week: Surgery Partners, a company that operates short-stay surgery facilities throughout the country.

It's being taken public on Thursday, October 1, by its controlling owner, an affiliate of private equity concern H.I.G. Capital. Let's peek into the operating room to see what this company is about.

The doctor will see you now
Founded in 2004 and fattened by several acquisitions over the years, Surgery Partners' name succinctly describes its business. It operates and manages short-stay surgery facilities, typically in partnership with physicians and other healthcare providers

All told, the company offers its services in 94 ambulatory surgery centers and five surgical hospitals located across the U.S.

It's a growing business, though it's not a particularly profitable one. The two entities that comprise Surgery Partners -- the core Surgery Center Holdings and Symbion, a nearly $800 million acquisition that closed in late 2014 -- have both generally been loss-making over the past few years.

The former more than doubled revenue from 2011 to 2014, exceeding $400 million. But across that stretch it was positive on the bottom line only once, and posted an attributable net loss of $66 million last year. As for Symbion, in its last stand-alone fiscal year (2013) its revenue grew by 9% annually (to $536 million), but attributable net loss dipped to almost $13 million.

That type of struggle isn't unusual for the surgery facilities niche. The most prominent publicly traded company in the space, AmSurg (AMSG.DL), has a similar trajectory. Its top line nearly doubled from 2011 to 2014, landing at $1.6 billion. Net profit, though, was fairly thin, peaking at $73 million over that span of time.

A crowded waiting room
AmSurg isn't the only competitor Surgery Partners contends with. Several other companies operate in the same niche, and fighting over the same business holds down earnings potential.

Compounding this, Surgery Partners has to divvy up a good amount of the money it's paid -- that's one downside of having partners in the first place.

The take of these "non-controlling interests," as they're called in the company's accounting, has consistently eclipsed underlying profitability for both Surgery Center Holdings and Symbion, dropping overall bottom line into the red.

Meanwhile, Surgery Partners as a whole is deeply in debt. As of the end of this past June, Surgery Center Holdings had in excess of $1.3 billion in long-term debt, while the figure for Symbion was $484 million. The total debt load, then, far exceeds the combined revenue of the two entities.

So considering all of this, although Surgery Partners occupies a growing segment of the healthcare industry, competition is tough and it's not easy to make a buck. I'm not sure the stock will provide a lot of upside to investors.

Regardless, the company's IPO is slated to take place this Thursday, with the stock listing under the ticker symbol SGRY on the Nasdaq. Nearly 14.3 million shares will be sold at a price of $23 to $26 apiece. The lead underwriters are Bank of America Merrill Lynch, Goldman Sachs, and Leucadia National's Jefferies.

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