HCA will pay a special dividend of $1.75 billion to its private equity owners, KKR, Bain Capital and Merrill Lynch Private Equity. The Frist family will get a chunk of the dividend, paid from cash and a credit facility.
Private equity underwriters (PEU's) ponied up $5.5 billion in cash when it bought HCA in 2006. A 32% return from a special dividend? Not too shabby, especially since it includes borrowed money. Using credit to finance dividends renews an old practice. The big money boys have 2010 to load up on special dividends, before a potential change in "carried interest" taxation.
PEU's borrowed heavily to finance the HCA deal, nearly tripling interest expense. No new hospital was built, no new bed added, and no new high tech imaging device installed. Borrowing alone increased health care costs by $1.5 billion.
As for the Frist family split, how much will go to Tommy and how much to Dr. Bill? Oddly, Senator Frist's son Harrison works for The Carlyle Group. PEU's have targeted health care. HCA's latest move shows why. There's big money to be made.
Update: KKR shops an IPO for HCA, valuing the company at twice its cost. Also, Vanguard Health System paid a $300 million dividend to owners, including The Blackstone Group.