Given the expectations that hospital operator HCA would file an S-1 to go public any day now, it’s a surprising development that PE owners KKR, Bain Capital and Merril Lynch Private Equity today took a $1.75 billion dividend on the company. Why add leverage to a company before shopping it to the public market? KKR did something similar when it took Dollar General public, paying itself a $200 million dividend as part of the company’s $750 million IPO.
The dividend, announced today, pays its backers $1.75 billion and increases HCA’s leverage to 5x; it would have been 4.7x without the dividend. HCA was levered 6.4x when KKR, Bain and Merrill Lynch Private Equity took it private for $31 billion in 2006.
While HCA hasn’t formally filed an S-1, an IPO seems inevitable. For one thing, the company is too big to exit any other way. Secondly, the IPO window is open, and HCA is one of KKR and Bain’s strongest portfolio companies. Lastly, preparations for the IPO have been reported in too many articles to count. So why take the big ugly dividend now, and risk the market rejecting a slightly more leveraged company?
The number one reason a buyout firm would take a dividend recap right now—a time when debt terms for such transactions are not ideal—does not apply to KKR and Bain. Most liquidity events today are fundraising-driven. Buyout firms want a homerun before asking LPs to throw down for the next fund. Makes sense, but that’s not the case here. Bain Capital is currently investing from Bain Capital Fund X, a $11.5 billion pool which closed in 2008.* I don’t have exact figures about how much of that is deployed, but one can assume the answer is “not much,” since deal volume hasn’t exactly blossomed in the past 18 months.
The same is true for KKR, which is sitting pretty with $6.1 billion left in its most recent U.S. buyout fund, as of May 2009. The firm is about to raise money, but not from the people who care so much about home run exits.
KKR’s upcoming listing on the NYSE will be the firm’s first time marketing itself to public market investors, and judging by KKR’s recent ubiquity in the press, the firm understands that that requires an entirely different kind of marketing. Which is why it seems rather bold to me that the suddenly media-conscious firm would take an egregious dividend on a highly levered company. Didn’t KKR learn anything from the New York Times’ elaborate demonization of dividend recaps last fall? When Simmons, a mattress company THL Partners had taken a dividend recap on, went bankrupt, the media attacked private equity so, we may as well call their coverage of the situation Dividend-Gate. (And, for the record, I agree that dividend recaps are rarely beneficial to the company.)
My theory is that the IPO process for HCA isn’t going so hot. After all, the company did come under fire by the SEC last fall for allegedly manipulating its books. Between that and uncertainty regarding the future of healthcare reform, HCA’s IPO may not be as inevitable as we suspected. But if neither firm is seeking a big exit for fundraising purposes, why the rush?
*This story has been updated from a previous version which incorrectly stated Bain Capital’s latest fund closed in 2006. The fund closed in 2008.