HCA Deal Would Be Biggest LBO Ever

The acquisition of the hospital management company would top the $31 billion Kohlberg Kravis shelled out for RJR Nabisco.
Stephen TaubJuly 24, 2006

In what would reportedly be the biggest leveraged buyout ever, a group of private equity firms have agreed to buy HCA Inc., a hospital-management company, in a deal valued at $21.3 billion.

If you factor in the deal’s $11.7 billion in debt, its total value would be $33 billion, making it the biggest LBO on record, according to published reports. In 1988, Kohlberg Kravis Roberts & Co. plunked down $25.07 billion and assumed $6 billion in debt when it bought RJR Nabisco.

Now Kohlberg Kravis is involved in putting together a deal that would top RJR Nabisco. Under the HCA deal, Bain Capital, KKR, and Merrill Lynch Global Private Equity will team up with HCA founder Thomas F. Frist, Jr. to shell out $51 in cash for each share of stock, representing a 6.5 percent premium to HCA’s closing price on Friday. Debt financing has been committed by Bank of America, Citigroup Global Markets, JPMorgan, and Merrill Lynch Capital Corp.

Thomas Frist is the brother of Senate Majority Leader Bill Frist. Last October, the Securities and Exchange Commission launched an investigation into Sen. Frist’s sale of HCA stock, The Washington Post recalled. Bill Frist’s spokespeople have said that he no longer owns any HCA stock, according to the newspaper. Thomas Frist reportedly owned 16.9 million shares valued at about $809 million as of April.

In their press release, the acquirers made a point of noting that the purchase price would be about 18 percent above HCA’s closing price last Tuesday, the last trading day before press reports of rumors regarding a potential acquisition of HCA appeared.

If the deal closes, members of HCA’s senior management team would reinvest a portion of their HCA equity into the acquiring entity. Under the merger agreement, the board must actively solicit a better price from third parties during the next 50 days.

The deal could tighten conditions for corporate capital-raising. Should it close, the new entity will need to tap the bond market to obtain permanent financing. That could crowd out other potential corporate buyers seeking to raise money.

The agreement on the HCA transaction also underscores the buying power of private-equity groups, which have been raising huge sums of capital in the past couple of years, many of them building funds exceeding $10 billion in capital.

Earlier this year, a consortium including company managers of the Kinder Morgan gas pipeline company, Goldman Sachs, American International Group, and Carlyle Group made a $13.5 billion bid for Kinder Morgan. Including about $8 billion in debt, the $20.4 billion deal, which is reportedly still on the table, was poised to become the largest-ever management buyout. That would no longer be true if the HCA deal is completed.

4 Powerful Communication Strategies for Your Next Board Meeting