TPG Checks Into Iasis Healthcare Recap –

In its second major healthcare exit this year, JLL Partners held a recapitalization of its hospital platform, Iasis Healthcare, in a roughly $1.4 billion deal. Texas Pacific Group will take over as the control investor of Iasis, but JLL will maintain a stake in the company following the deal. The transaction needs to clear regulatory hurdles before it can be completed, but it is expected to close by the end of June.

JLL Partners formed Iasis as an acquisition platform targeting acute care hospitals and other healthcare facilities in urban and suburban markets. The company launched the business with industry veteran Wayne Gower at the helm, and in 1999, the company made its first acquisitions in the space, buying 15 hospitals from Paracelsus Healthcare Corp. and Tenet Healthcare. The deals totaled roughly $840 million. JLL committed $200 million of equity from its $1 billion Joseph Littlejohn & Levy III LP fund, which had closed a year earlier. Other investors included J.P. Morgan Capital, CIBC Capital Partners, GE Capital Commercial Finance and Triumph Capital, which together chipped in another $100 million of equity.

JLL has targeted the healthcare sector heavily in the past, and in the first quarter of this year launched a rural hospital platform, Attentus Healthcare. Other investments include OrNda Healthcorp, which was sold to Tenet in 1997, and AdvancePCS, a pharmacy benefits manager, that reaped approximately 6.5x JLL’s original equity investment when it was sold Caremark Rx last year.

About a year after the Iasis acquisition, the company replaced Gower with David White as CEO, who had been the chairman of the Iasis board. Gower, meanwhile, assumed the role of chief operating officer. The move came in conjunction with the release of disappointing performance numbers, as the company’s net income sank from $983,000 in fiscal 1999 to a net loss of $40.1 million in 2000. JLL Senior Managing Director Jeffrey Lightcap noted that it was always part of the plan for White to assume the CEO role, but the firm just had to wait out a non-compete clause he had signed with LifeTrust, where he previously served as president and CEO.

In 2001, with the company’s performance on the mend, JLL had considered floating Iasis in an IPO, although the firm eventually pulled the offering in December of that year, citing market conditions. The company was one of six healthcare concerns that quarter that had intended to go public, but ultimately backed off. “Hospital stocks had been very strong in late 2000, but by the time we were ready to go to market, in the fourth quarter of the following year, they had traded down by 25% to 30%, and the market conditions just weren’t right at the time,” Lightcap said.

In January of this year, though, Iasis was again reported to be weighing its options about a possible IPO, but this time, the company also had a Plan B in place, in the form of a potential sale. The firm tapped Goldman Sachs & Co. as its advisor and ultimately decided to pursue a recap.

“We are very positive on the company and its growth prospects,” Lightcap said. “We’ve been in the deal for around four and half years, and were confronted by the necessity to bring more capital into the company. For that reason a recapitalization represented good opportunity for us to take money of f the table, present a nice return for Fund III and allow us to reinvest through Fund IV.”

Fund III will see a return of 2.3x its $200 million equity investment, and according to Lightcap, most of the minority investors will take their money off the table through the transaction. JLL had held a stake of more than 66% in the company prior to the recap, which will be chipped down to a minority stake at its conclusion.

For TPG, the deal represents a return to the healthcare space, with past investments including Oxford Health Plans and Quintiles Transnational. The firm was unable to comment on the deal as of to press time, but in a statement, Jonathan Coslet, a partner at the firm, cited the company’s “consistent, strong growth” and its positioning in “attractive urban and suburban markets” as draws to doing this deal.

Meanwhile, with the new capital infusion, Iasis intends to continue pursuing select acquisitions, while focusing on improving its existing hospitals through additional investment. The company has been showing steady growth since the initial hiccup immediately following the JLL acquisition, and most recently reported a 31% jump in its second quarter net revenue and a 22% gain in the company’s corresponding EBITDA. In the 2003 fiscal year, Iasis’ EBITDA grew by 13.5% to $147.6 million, while, net revenue jumped more than 14% to $1.1 billion. The company also announced the acquisition of the Lake Mead Hospital Medical Center in February, adding to its other 14 locations throughout Utah, Arizona, Florida and Texas.

To finance the transaction, TPG has arranged a combination of bank debt and high yield bonds, to supplement the equity provided by TPG and JLL. Bank of America is leading the banking syndicate. TPG is currently investing out if its recently raised, $5.3 billion TPG Partners IV, while JLL has said it will use equity from its $750 million JLL Partners Fund IV LP, raised in 2002.