Markets & Finance

Buyout Firms Check Into Triad Hospitals


Shares of the healthcare outfit surged Monday after news of a $6.4 billion takeover deal

CCMP Capital Advisors and GS Capital Partners are buying Triad Hospitals (TRI) for $6.4 billion, including assumption of the $1.7 billion of debt that had been choking the hospital operator. The announcement takes place after Triad's top shareholder had publicly pushed Triad to spend less aggressively and think more about profit.

"The decision to take the company private is the culmination of a strategic planning process initiated several months ago to explore the various options available to the company to enhance shareholder value," said CEO James D. Shelton in a press release Feb. 5.

The Plano (Tex.)-based Triad has grown in recent years by gobbling other companies, such as the not-for- profit hospital manager Quorum Health Services in 2001. Now Triad operates 51 hospitals and 10 ambulatory surgery centers in 16 states -- but growth came at a hefty price. Triad's long-term debt burden has more than tripled from $537 million in 1999, when Triad was spun-off from the health systems and hospitals operator HCA.

Meanwhile, Triad's profits have fallen in recent months. Sometimes when patients go to the hospital, get treatment, and later discover that they can't afford to pay the bill, the hospital ends up footing part of it instead. Such situations are happening more often now, as increasing numbers of people go without health insurance in the U.S. Triad said Feb. 5 that it will have earnings per share of 42 cents to 44 cents during the three months ended Dec. 31, on revenue of around $1.4 billion. The mean analyst forecast had been for 55 cents EPS on revenue of $1.43 billion, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

Triad's largest shareholder, TPG-Axon Capital Management, had been pushing for change. The investment firm's founder Dinakar Singh wrote a letter to Triad on Dec. 12 saying Triad should focus on making itself more efficient instead of keeping a war chest for acquisitions. "To our astonishment, management has been unable to produce any level of thorough analysis regarding margins, bad debt, and most of all, Return on Investment," Singh wrote in the letter filed with the Securities and Exchange Commission, adding "the quickest way towards death for a company is to spend money recklessly without careful and rigorous analytical controls."

Morningstar analyst Curt Morrison said in a note Jan. 4 that Singh may mount a proxy battle for control of Triad. "We think Triad's shareholders will benefit from TPG's activism whether Singh gains control of the company or not," Morrison wrote at the time.

Shareholders did fine after the news Feb. 5, when investors bid up Triad's shares 15.3% to $49.89 per share in early trading on the New York Stock Exchange. Under the recent agreement, affiliates of CCMP Capital and GSCP will acquire all of the outstanding shares of Triad common stock for $50.25 per share in cash. Standard & Poor's Equity Research Services upgraded the stock to hold from strong sell, noting the recently proposed acquisition. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)

"Triad is an exceptional company, with a clear vision and a strong commitment to its patients, physicians and employees," Stephen Murray, Managing Director with CCMP Capital, said in the press release Feb. 5.

As part of its agreement with CCMP Capital and GSCP (the private equity arm of Goldman Sachs [GS]), Triad can still solicit other offers during the next 40 days. But if the company accepts a different bid, it will have to pay a $20 million break-up fee to CCMP Capital and GSCP and reimburse up to $20 million of their out-of-pocket expenses.

"Denny and his team have built a superb company over the past seven years, and have developed an innovative growth plan, including partnerships with not-for-profit hospitals, that we will fully support," Adrian Jones, Managing Director with GSCP, said in the press release.


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