Stock Tickers: TRI, USPI, GHCI

Let’s forget about the hype around LBO’s, MBO’s, Private Equity, and hostile takeovers.  In a research call last week, which Jim Cramer also pointed to, Deutsche Bank said it expects a "major catalyst" and has noted it as a leveraged buyout candidate along with other analysts.  We have seen United Surgical Partners (USPI) agree to be acquired and Genesis Healthcare (GHCI) get an offer to be acquired.  HCA went private last year in one of the largest deals ever, again, and the street expects part of it to come public again.  The private equity boom has taken a bit of a breather compared to the torrent pace seen last year, but certain deals just make sense.

Triad Hospital (TRI-NYSE) makes financial sense as long as you don’t use the mother nature scare tactics on the business model.  The valuations are compelling and the absolute need for them to be public just doesn’t seem there.  If they were going to embark on a massive land grab no matter what the cost, that would not be the case; but this doesn’t seem in the cards.  There is plenty of room to leverage the balance sheet, particularly if Wall Street can resell the "goodwill, intangibles, and other" assets all over again.  I seem to be more strict on this than almost anyone I have encountered, but that is from evaluating things from the break-up and vulture days; so I am entrusting that Wall Street can resell the fluff on the balance sheet just like it always does.

The one issue that has to be dealt with is the charge-offs and write-downs of uncollected bills.  All facilities have to give some uninsured or underinsured discounts, but the key is for their doubtful accounts to not grow much more. If an organization can make these better then they could have a homerun on their hands.  The company has also not had to absorb any major weather event from a hurricane and subsequent flooding this last year in hurricane season, so the comparison to prior years may be more difficult.

TRI has $1.6 Billion in long-term debt and a market cap on last look of roughly $3.75 Billion.  It trades at 17-times 2006 estimates and if you take earnings lower than consensus for 2007 by another 3% that has already been lowered it generates a forward P/E of 16.35. They have just under $1.7 Billion in long-term debt.  If you give them the benefit of the doubt on current assets and look at the long-term investments and their properties and facilities owned, you’ll see the balance sheet is in good shape (and still in good shape if you are strict).  The only substantial argument is that goodwill is high at $1.3 Billion or more, and when you lump in "intangibles and other" there is more than $1.5 Billion of the $6.1+ Billion in total assets.  Still this is doable.  Now that the stock has gotten back within 10% of its 52-week highs it only feels cautionary; less than 2 years ago this was a $55 stock.

I stripped out everything I could on both sides of the balance sheet and income statements, thought about actual values on the balance sheet, and looked over the balance sheets of other comparable hospitals, care facilities, and treatment centers.  Before going further, what the bottom results were that this deal is doable even at $46.00 on the lower-end and at as high as $54.00 on a higher-end.  By "doable" it doesn’t mean that is a minimum offer price that could be implied nor that the maximum is the most anyone will pay, but the argument can still be easily made in that range.  If it was my hypothetical billions at stake I would start the offering negotiations at $45.00 and work up from there with a $50.00 cut-off.  There is a weather risk inherent to Triad because of coastal flat-land proximities, but I have also been more concerned about this than most buyers.

It’s a doable transaction, now we just have to see if the LBO speculation is real.  Its low price-to-book value is skewed because of the balance sheet structure and it could use some improvements on its margins and return on real equity, but to the right firm Triad could be a good fit to the portfolio.  There are also many other add-ons that can be rolled into the operations, and Triad would be an entirely new and fresh company.

It can also still absorb another $400 million to $500 million in structured long-term debt before getting top-heavy, and that could add close to 7% in a future dividend after acquisitions and remaining cash in the company for debt servicing.  This thought process and methodology requires part turn-around and part ‘established’ private equity to do the deal, but it’s very doable.  So this is an estimated pricing range of a deal, now we just have to see if the market talk is real.

Unfortunately this is far less detailed than most buyout pieces, but inquiries have been coming in on this particular case and many have been pondering that an offer may come sooner rather than later.

Jon C. Ogg
January 23, 2007

Jon Ogg is a partner in 24/7 Wall St., LLC and can be reached at [email protected] by email; if you wish to subscribe to our free email newsletter regarding BAIT SHOP buyout candidates, IPO’s and other special situation investments please send an email and title it SUBSCRIBE.  We value privacy and do not share our email lists with any outside parties.

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