Random Ramblings: HCA, 3i & IPOs


Some very quick notes before I scurry off to a 10am meeting… 

*** HCA has released additional details of its buyout agreement, including confirmation that KKR, Bain Capital and Merrill Lynch are each on the hook for $1.5 billion equity checks. Each firm is allowed to syndicate up to 50% of its contribution, so long as they’re on the approved partner list that has been discussed in this space ad nausea. Two of those syndication partners were disclosed, with Citigroup committing a total of $400 million and Banc of America Securities committing $200 million (pro rata to the three firms). 

It’s also worth noting that it was the HCA special committee – not KKR/Bain/Merrill – that insisted on the approved buyer list. Steve Pagliuca of Bain explains: “We’ve come across [approved syndication lists] in larger deals when, in general, companies want to preserve the opportunity for two or three groups to be able to come in and make competing bids.” In other words, such lists aren’t needed in a sub-$3 billion deal, because there are so many firms capable of committing $500 million or so. When the per firm commitment rises to $1.5 billion, however, that group is significantly reduced, this necessitating artificial ways to preserve the possibility of competitive bids. 

*** The Financial Times suggested this week that 3i Group could be on the block, although it read more like idle speculation than shoe-leather reporting. The basic argument was that 3i could provide a mega-LBO firm with: (A) Entrée into the public markets, since much of 3i is listed; (2) A middle-market and upper-middle-market investment business/portfolio. 

I don’t really put much stock in the first part. If a firm like Blackstone needs 3i Group in order to go public, then there are serious problems at Blackstone (and the stock would therefore tank anyway). The second part, however, sounds a bit more likely. Why not PE market consolidation? You’ve seen some very small-scale examples already – Apax/SKM, Sequoia/Westbridge – and big buyout firms already are in diversification mode via real estate, hedge funds, etc. Why not add an asset like 3i? The outstanding questions are how LPs would react and how 3i managers would remain incentivezed, but those are both workable. 

*** Earlier this week, I noted that LBO-backed IPOs in 2006 are performing worse in the aftermarket than IPOs at large. Some asked if the same is true of VC-backed IPOs. The answer is yes, and it’s more pronounced. You can find specifics in Monday’s issue of PE Week, but here is a basic explanation: The public markets are becoming increasingly risk averse, particularly for new companies. The best-performing IPOs in 2006 are in sectors like retail and industrials, whereas the worst-performing are in telecom and healthcare. It is in this latter sandbox that most VCs play – linke Vonage and Iomai — and they are paying the price so far this year. 

*** Finally, pay special attention to today’s top news story. The backlash has begun…