HCA Steals Crown From RJR

Target: HCA Inc.

Sponsors: Bain Capital; Kohlberg Kravis Roberts & Co.; Merrill Lynch Global Private Equity

Sellers: HCA Shareholders

Purchase Price: $33B ($51 per share)

Financial Advisors: Sponsors: Merrill Lynch & Co., Banc of America Securities, Citigroup Global Markets, JPMorgan; Sellers: Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. Inc

Legal Counsel: Sponsors: Simpson Thacher & Bartlett LLP: Sellers: Shearman & Sterling LLP, Bass Berry & Sims PLC

Four years ago, few would’ve guessed that the record breaking buyout of RJR Nabisco would ever be topped. Today, it has become inevitable. In a deal scheduled to close in the fourth quarter, Bain Capital, Kohlberg Kravis Roberts & Co. and Merrill Lynch Global Private Equity have agreed to acquire hospital operator HCA Inc. for a approximately $33 billion, a price that includes $11.7 billion of debt.

The transaction stands to dethrone KKR’s fabled, $25.1 billion buyout of RJR Nabisco Inc. (circa 1989), as the largest PE-backed deal ever, and comes on the heals of a several other announced investments with swelling purchase prices, such as the proposed $22 billion Kinder Morgan take private, and the $14 billion carveout of General Motor’s GMAC unit.

The HCA price works out to $51 per share, an 18% premium to the stock’s closing price on July 18, 2006, which is the last full day of trading before reports were published stating that the company was in play.

HCA Founder Dr. Thomas Frist, Jr., brother of Senate Majority Leader Bill Frist (R-Tenn.), and members of the company’s senior management team have agreed to roll over portions of their equity into the deal. In all, HCA’s directors and officers own a combined 6.7% of the company.

Assuming the investors apply a typical 30%/70% equity-to-debt ratio and the equity stake is split three ways, that means each firm will commit an unprecedented $2 billion in equity to close the deal. The lofty figure implies that additional co-investors could be brought in.

The debt financing for the transaction has been committed by Bank of America, Citigroup Global Markets, JPMorgan and Merrill Lynch Capital Corporation.

Per terms of the agreement, HCA has a 50-day period in which it is permitted to try and attract a higher price, and the company’s board “intends to actively solicit superior proposals during this period,” according to a statement released by HCA.

Nashville, Tenn.-based HCA, through direct and indirect subsidiaries, owns and operates 176 hospitals and 92 freestanding surgery centers and facilities that provide outpatient and ancillary services. The Company’s facilities are located in 21 states, England and Switzerland.

“The key catalyst for the transaction is the difficult industry operating environment, lack of organic growth at HCA, depressed valuations and a history of prior LBO transactions,” according to a research note written by Lehman Brothers FCA Adam Feinstein.

The transaction values HCA at 7x Lehman’s 2007 EBITDA estimate, which somewhat lower than the historical industry average of 7.6x EBITDA. Because of that, Feinstein further suggested that the buyers are using a model that aims for a potential “25%+ IRR for the investor group.”

Recent PE-backed hospital deals include GTCR Golder Rauner’s $555 million sale of LifeCare Holdings to The Carlyle Group in July 2005 and Welsh, Carson, Anderson & Stowe’s $2.3 billion take-private of Select Medical Corp. earlier that same year.

HCA’s board of directors has approved the buyout and will recommend that HCA’s stockholders adopt the agreement. Pending shareholder approval, regulatory approval and satisfaction of customary closing conditions, the transaction is scheduled to be completed in the fourth quarter of 2006.

Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Inc. are serving as sell-side financial advisors to HCA, while Merrill Lynch & Co., Banc of America Securities, Citigroup Global Markets and JPMorgan acted as M&A advisors on the buy-side.

For legal counsel, HCA is using Shearman & Sterling LLP and Bass Berry & Sims PLC. Simpson Thacher & Bartlett LLP is acting as legal advisor to the private equity consortium.

Comment from Bain, KKR and Merrill Lynch Global Private equity was not immediately available. —A.N.