Hospital operator HCA Holdings Inc.'s record-setting return to the New York Stock Exchange is expected to encourage more private equity firms to look to public markets for a return on their investments.
The Nashville, Tenn., company's offering raised $3.79 billion Wednesday in an initial public offering of more than 126 million shares, even after warning potential investors that it carried a high debt load and that it wasn't sure how the massive health care overhaul passed last year by Congress will ultimately affect its business.
Morningstar IPO strategist Bill Buhr said the offering's popularity surprised him, especially considering the challenges HCA faces and because it operates in a business known for tight profit margins.
"In terms of what it means for other deals, I think it's an absolutely positive catalyst," he said. "The IPO window in general has not been this open in a long time and particularly around privately sponsored deals."
Private equity firms have been waiting for market conditions to improve in order to recoup their investments on companies taken private before credit markets essentially froze and put an end to the leveraged buyout boom. A 2009 study by business professors from the University of North Carolina estimated the deal value of company buyouts between 2004 and 2007 at $535 billion.
Until recently, the picture had been mixed. Stocks of nearly half of the private equity-backed companies that went public last year priced below the ranges underwriting banks had set. However, shares of those companies are trading an average of 37 percent above their offering prices. The success of deals like HCA's is another positive sign.
These developments are helping investors gain more confidence in companies brought to market by buyout companies such as Kohlberg Kravis Roberts & Co., the Carlyle Group and Bain Capital, said Standard & Poor's analyst Richard Petersen. As the outlook for the U.S. economy improves and the stock market's climb continues investors seem more willing to overlook the sluggish growth and heavy debt loads that often characterize the companies.
Owing billions to creditors can impair a company's ability to grow in the future as it funnels its cash flow into paying down debt. But with interest rates still historically low, companies are able to service the debt, Peterson said.
Buhr said HCA's debt, which totals more than $28 billion, was a concern, but not an "outrageous" amount for the company's size, and he noted that the company's profitability improved after it went private.
HCA operates 164 hospitals and 106 surgery centers in 20 states and in England. It made $1.21 billion, or $2.76 per share, last year on $30.68 billion in revenue.
Private equity-backed companies have had a warm reception so far in 2011, raising $10.86 billion. That compares to $15.21 billion for all of last year.
Before HCA, consumer ratings company Nielsen Holdings NV raised $1.9 billion in a January IPO that, at the time, set a new record for private equity-backed offerings. Pipeline operator Kinder Morgan Inc. then surpassed that last month by raising $2.86 billion.
Buhr predicts that HCA probably will be the largest IPO this year, but several other sizeable offerings are expected. Toys R Us Inc. could be next. KKR, Bain and Vornado Realty Trust took Toys R Us private in 2005. The company said it was planning an $800 million IPO back in May 2010.
"Any buyout shops that have a portfolio company ready to go public ... are dusting them off and getting them ready," Buhr said. "You have to strike while the iron's hot."
HCA offered more than 87 million shares, and selling stockholders offered about 38 million in the company's third public offering since it first went public in 1969. Underwriters also have a 30-day option to buy an additional 18.9 million shares from selling stockholders.
BofA Merrill Lynch, Citi and J.P. Morgan are acting as lead underwriters.
The company sold its shares for $30 apiece in the offering, the top end of its expected range. The stock began trading Thursday under the "HCA" ticker symbol.
Shares climbed 3.7 percent, or $1.12, to $31.12 in Thursday afternoon trading, while broader trading indexes tumbled.