For the past two years, private-equity firms have had little to celebrate in terms of big winnings. But finally, they've gotten some good news -- at least, KKR, Bain Capital Partners and Merrill Lynch Global Private Equity did. The firms will receive a juicy $1.75 billion dividend from HCA, the largest hospital operator in the U.S. The company went private in 2006 in a $33 billion transaction.This payout -- known as a "dividend recap" -- represents about a third of the total private-equity investment. There's also buzz that HCA will go public soon, possibly within the next few months. This would be another big windfall for the company's investors. According to KKR's latest financial report, the value of HCA has appreciated by about 70%.

So how did the the HCA deal become such a success, even though it was struck at the height of the buyout bubble? Let's take a look:

Deconstructing the HCA Deal


Back in 2006, HCA had an impressive footprint in the health care industry, with 172 hospitals and 95 freestanding surgery centers in 21 states. Annual revenues came to roughly $24.4 billion and net income was $1.4 billion.

However, there were some major issues at HCA. The company's growth was languishing and it would be difficult to ramp things up through acquisitions. While it was possible to spin off assets, this also had limited potential. Moreover, there were macro-scale problems affecting the whole industry, such as regulatory changes and debt-collection challenges because of the increasing numbers of uninsured patients.

In light of all this, how could HCA boost shareholder value? It seemed that the most viable alternative was a leveraged buyout. And, given the frothy credit markets, this was certainly doable even though HCA was massive.

Interestingly enough, HCA took a deliberative approach to the transaction. First of all, the company hired McKinsey & Company, a firm with extensive experience in the health care industry, to provide an independent analysis of the growth projections. Actually, these were lower than HCA's own estimates. In other words, the company's conservativism allowed for a more reasonable transaction structure.

Next, HCA's founder, Thomas Frist Jr., and the senior management team, retained a substantial stake in the company's equity. This "skin in the game" would certainly act as a great motivator.

Keep in mind that HCA's team was no stranger to leveraged buyouts. The company had struck a $5.1 billion deal in 1988 and took the company public again in 1992.

Lower Costs, Higher Revenues

Being private has given HCA much more flexibility in areas such as cutting expenses and laying off employees. Over the past four years, the company has reduced its debt load from $28.3 billion to $25.7 billion.

HCA has also been getting traction on the top-line, especially with improved volumes for inpatient, outpatient and emergency department visits. In the most recent quarter, revenues increased from $7 billion to $7.53 billion. During this time period, adjusted EBITDA has gone from $1 billion to $1.2 billion.

However, to pay the dividend, HCA will need to boost its debt again. Despite this, the company seems poised to continue cranking out strong cash flows. What's more, the banks are willing to provide more financing now, so why not take some profit off the table? After all, that's the main goal of private-equity investors.

Indeed, this payout could presage more dividend recaps ahead this year. In fact, in January there were $2.1 billion in payouts, including $550 million from Booz Allen Hamilton, and $300 million from Vanguard Health Systems.

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