Buyout barons may exit mega-LBOs with aplomb

By Rob Cox
May 9, 2010

By Robert Cyran and Rob Cox

If the planned initial public offering of HCA is any guide, the private equity industry may exit mega leveraged buyouts with aplomb. KKR <KKR.AS> and other backers are taking the U.S. hospital operator public in a deal that could nearly double their investment and chalk up annual returns of some 20 percent. Perhaps there’s a place for gigantic LBOs after all.

HCA’s enterprise value (equity and debt) was $33 billion at the time it was taken private in November 2006. Since then, revenue has steadily increased. The passage of healthcare reform has also removed a degree of uncertainty surrounding the industry, and will eventually increase the number of paying patients. So the hospital chain is probably worth more today.

How much more? Well, based on first-quarter results, the group should make around $6.3 billion of EBITDA this year. Its rivals trade at an average of about 6.75 times EBITDA, according to CRT Capital. At a 15 percent discount — which investors of newly public companies tend to demand — HCA’s enterprise value would be $36 billion. With debt nearly constant since the LBO, that’s a $3 billion increase in the value of HCA’s equity.

But wait, there’s more. When all is said and done, KKR, Bain Capital, Merrill Lynch and the Frist family will have paid themselves $2.25 billion in dividends as well. So for a $6.3 billion equity investment they are getting back $11.6 billion in cash and stock — a total return of some 80 percent.

Now, that may not sound like a grand slam. But it equates to annual returns somewhere in the neighborhood of 20 percent during three of the worst years in financial history. Moreover, HCA was among the biggest LBOs in history — so the investors were able to deploy relatively significant amounts of capital.

Of course, not all gigantic buyouts are in HCA-like condition. Several others from the era of the mega-deal still appear shaky, including power group TXU and media firms Clear Channel and Univision.

With markets shaky again and the economy rebounding sluggishly, getting out of these investments won’t be a cinch. But if they can manage exits anything akin to the one HCA looks set to experience, it’s a fair bet the mega-LBO will be here to stay.

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