If the HCA dividend-to-IPO showed us anything, it’s that investors don’t mind PE backers taking money off the table before a (probable) public offering. The consensus at Buyouts West last week was that the HCA dividend recap was not an isolated case, with others to follow in the coming months.
But that just seems greedy, you say. Why do PE pros need a payday before an IPO, which essentially counts as a payday? Why don’t investors rail against this practice?
The answer is simple: If it doesn’t substantially increase the company’s debt, investors don’t care. Furthermore, most PE backers take very few shares off the table in an IPO; the returns come from follow-on offerings or private sales. They may remain in a company for three more years before fully exiting their position. Therefore, investors in an IPO don’t view a sudden dividend recap as a risk. PE backers would be working against their own interest if they took a large, risky dividend recap on a soon-to-be public company.
HCA’s owners, KKR and Bain Capital, are expected to sell a minority stake in the company’s public offering, a market observer said. Earlier this month, CNBC reported that the IPO could be worth $4.5 billion. The company was taken private for $21 billion.
In HCA’s late January dividend recap, the company paid its backers $1.75 billion. The deal increased HCA’s leverage to 5x; it would have had 4.7x without the dividend. Most of the capital for the dividend came from the company’s balance sheet, not from new debt issuance. Technically HCA hasn’t officially filed an S-1 yet, but may as well have considering the amount of chatter surrounding it.
There are other IPO candidates which market observers have named as candidates for dividend recaps. Those include Toys ‘R’ Us, acquired by KKR, Bain Capital and Vornado Realty Trust in 2005. There’s also Dunkin Brands, acquired by Carlyle Group, Bain Capital and THL Partners. The doughnut-maker’s sales have continued to grow at a steady pace throughout the downturn. Lastly, Bain and KKR’s Dutch semiconductor company NXP may be a candidate for a similar move.