Prof­itable deals

Ia­sis, Van­guard mak­ing pay­outs to their back­ers

Modern Healthcare - - The Week In Healthcare - Vince Gal­loro

In­vestor-owned hospi­tal com­pa­nies re­ported strong earn­ings through­out 2009, and now the pri­vate eq­uity back­ers of two of those com­pa­nies will reap the re­wards. Ia­sis Health­care and Van­guard Health Sys­tems have both an­nounced that they will make pay­outs to their in­vestors be­cause they have built up their cash re­serves and ex­pect that to con­tinue.

Nashville-based Van­guard is mak­ing a $300 mil­lion pay­ment to its in­vestor group, led by the pri­vate eq­uity firm Black­stone Group. The com­pany will use cash on hand and part of the pro­ceeds of a $950 mil­lion is­sue of eightyear notes to make the pay­out, which is the first since the com­pany was founded in 1997, said Van­guard spokesman Aaron Broad. The Black­stone-led in­vestor group re­cap­i­tal­ized Van­guard in 2004. “In­stead of hav­ing the cash just build­ing up, we de­cided to dis­trib­ute a por­tion of it as a div­i­dend,” Broad said. Van­guard re­ported cash and cash equiv­a­lents of $389.3 mil­lion as of Sept. 30, 2009.

The com­pany also will save in­ter­est on the debt that it is re­fi­nanc­ing. The new notes carry an 8% in­ter­est rate, but will be used to re­tire $575 mil­lion in notes due in 2014 that pay 9% in­ter­est and $216 mil­lion in notes due in 2015 that pay 11.25%.

Van­guard also re­vealed in a se­cu­ri­ties fil­ing that it will write down the value of its two Chicago-area hos­pi­tals by $43.1 mil­lion in a non­cash charge to earn­ings. The hos­pi­tals’ op­er­at­ing per­for­mance has not im­proved to the ex­tent the com­pany orig­i­nally thought pos­si­ble, ac­cord­ing to the fil­ing. Van­guard signed a non­bind­ing let­ter of in­tent in Novem­ber to buy two sub­ur­ban hos­pi­tals from Res­ur­rec­tion Health Care, Chicago. Van­guard wouldn’t be in a let­ter-of-in­tent “sit­u­a­tion with those other hos­pi­tals in Chicago if we thought it was a lost cause,” Broad said, re­fer­ring to the mar­ket.

Mean­while, Franklin, Tenn.-based Ia­sis said it will re­pur­chase $120 mil­lion of pre­ferred stock held by its in­vestor group us­ing cash on hand. Ia­sis re­ported cash and cash equiv­a­lents of $206.5 mil­lion as of the end of its fis­cal 2009, which was Sept. 30, 2009.

Carl Whit­mer, chief fi­nan­cial of­fi­cer of Ia­sis, said that the pre­ferred stock was ac­cru­ing in­ter­est at a rate of 11.75%, so re­pur­chas­ing them elim­i­nated that fu­ture li­a­bil­ity. “We still have good liq­uid­ity,” Whit­mer said. “We still have low lever­age on a rel­a­tive ba­sis. We can still do the things we want to do.” That in­cludes cap­i­tal in­vest­ments in its hos­pi­tals or new ac­qui­si­tions, he said.

The Ia­sis in­vestor group is led by three pri­vate-eq­uity firms: TPG, JLL Part­ners and Tri­maran Fund Man­age­ment. In 2007, the com­pany bor­rowed $300 mil­lion to re­pur­chase eq­uity. Since then, Whit­mer said, Ia­sis has re­duced a key lever­age ra­tio—which com­pares debt to earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion over the last 12 months—from 5.7 to 4.1, al­though this trans­ac­tion will in­crease that ra­tio by 0.4.

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