Pegging HCA IPO Pricing (HCA, BAC)

HCA Holdings Inc. (NYSE: HCA) is coming public this week in what is expected to be roughly a $3.5 billion IPO.  The sale is for about 124 million shares in a price range of $27.00 to $30.00 per share. This will be another huge private equity-backed IPO, and this actually will be the third time HCA has been public.

HCA was most recently taken private at the peak of private equity buying in 2006 for $32 billion.  The value was $21.3 billion plus the assumption of an additional $11.7 billion in debt at the time.

HCA is the largest U.S. private hospital system with 164 hospitals and capacity of more than 40,000 beds and 104 freestanding surgery centers across 20 states.  The new entity has about $26 billion in debt.

Private equity sellers want to exit their positions and its underwriting syndicate is huge. Some of the underwriters are BofA-Merrill Lynch, Citigroup, JPMorgan, Credit Suisse, Deutsche Bank, Barclays, Goldman Sachs, Wells Fargo, and Morgan Stanley.

In 2009, revenues were $30.052 billion, and net income was $1.054 billion.  About 97% of HCA is owned by Hercules Holding II, an entity owned by Bain Capital, KKR, and the private equity arm of Bank of America Corporation (NYSE: BAC).  The founding Frist family is also still an owner.

Barron’s pointed out last weekend that many investors may overlook or not consider as much as they should.  It noted that there are some 383 million more shares that will become eligible for resale after the six-month IPO lock-up expires.  We know that not all of those shares will come on the market, but some certainly will and that will affect the share price.

So, there are some things to consider for the formal pricing on Wednesday night.  Demand has reportedly been good on this, but we are not looking for a premium price based upon the latest information.  The recent market turmoil from the Middle East and northern Africa has likely taken away at least some of the demand that would have been there for a highly leveraged private equity-backed IPO.  The new debt levels are higher and the new environment for healthcare is one which investors are still trying to grasp for the years ahead.

Our take is that HCA will price in the middle of the range based upon the data we have seen today.  If market sentiment suddenly turns sharply higher or sharply lower, then that may change the pricing.  We’ll throw out a price of $28 to $29 for a pricing as of today’s available information.

JON C. OGG