Triad Deal Makes Three

A buyout comes after the sale of HCA and a big dividend at HMA.
Author:
Publish date:

Triad

(TRI) - Get Report

found a miracle cure for its long-suffering shareholders.

Following the lead of hospital giant HCA, Triad agreed Monday to sell itself to private owners at a nice premium. Triad holders will get $50.25 a share from affiliates of JP Morgan and Goldman Sachs. That represents a 16% premium to Triad's closing price Friday.

Triad's stock rocketed 15% to a 52-week high of $49.85 on the news.

"The decision to take the company private is the culmination of a strategic planning process initiated several months ago to explore the various options available to the company to enhance shareholder value," Triad CEO Denny Shelton said when unveiling the deal on Monday. "CCMP Capital (a division of JP Morgan) and Goldman Sachs are experienced investors in the healthcare services, with a solid understanding of the opportunities and challenges that face Triad today.

"They will be supportive shareholders of the company, and we look forward to working closely with them in the years ahead."

Notably, Triad has indicated that its new owners will allow the company to move forward with its "innovative" -- and often expensive -- growth plan involving joint ventures with doctors and not-for-profit hospitals. Frequently, LBOs lead to significant cutbacks instead.

Still, Triad has left the door open for competing offers as well. The company has 40 days to shop for a superior bid and faces a relatively modest break-up fee, totaling no more than $40 million, if it accepts one.

"If not, $50.25 a share is fine," says Sheryl Skolnick, senior vice president of CRT Capital Group. "It's higher than Triad shareholders could have ever hoped for -- particularly given the awful and painful earnings report" just released by the company.

Like HCA, Triad announced its LBO plans along with miserable quarterly results. Despite solid volume growth, which allowed the company to meet revenue targets for the quarter, Triad weathered a big surge in bad debt expense that led to a bottom-line miss. Excluding special items, Skolnick estimates, Triad will deliver fourth-quarter profits of just 48 cents to 50 cents a share -- at least a nickel less than Wall Street had anticipated.

Of course, Skolnick notes, Triad shareholders are focusing on the LBO and their long-awaited returns instead. Skolnick, for one, sensed a major change coming several months ago. Indeed, she started recommending Triad's shares back in November in anticipation of a possible LBO.

Quite simply, with an activist shareholder pressuring the company, Skolnick felt that Triad had to make a move. She predicted that the stock, then languishing around $38 a share, could fetch $10 more from private equity buyers. In the end, the actual offer took longer, but brought more than she had originally expected.

UBS analyst Kenneth Weakley seemed a bit surprised by the high take-out price as well. Still, given fierce industry challenges -- and dramatic responses by HCA and, more recently,

Health Management Associates

(HMA)

-- Weakley had assumed that Triad could soon be in play.

"Our original thesis, the Push Back, continues to induce strategic change very much as expected," Weakley wrote on Monday. "The three deals announced thus far in the hospital space all point to the gradual realignment of economic incentives between (new) shareholders and hospital management."

Still, HMA shareholders could be feeling a bit shortchanged right now. They are set to receive a big one-time dividend -- which has failed to support the company's stock -- instead of a generous premium for their shares.

In the meantime, buyers could choose to snap up other hospital companies instead.

Skolinck points to

Community Health Systems

(CYH) - Get Report

as the most likely target, saying that the rural hospital operator could appeal to shoppers who miss out on the Triad opportunity. Meanwhile, she believes that

Universal Health Systems

(UHS) - Get Report

could sell itself tomorrow if its CEO -- who controls much of the company's shares -- felt like pursuing a deal.

The market seems to share Skolnick's outlook. Besides Triad itself, Community and Universal posted the strongest gains in the hospital sector on Monday. HMA was the laggard, inching up less than 1% to $19.67 a share