Saturday, July 29, 2006

Return of the barbarians

The RJR Nabisco deal in the 80s was the largest LBO till recently. I have said a few times on this blog that we will see that record fall in this M&A surge. It finally happened.

Last week's $33 billion buyout of HCA beat the $30 billion RJR deal. If inflation is accounted for, we are still not close to that earlier deal, but we will see that tumble too before this buyout/merger wave is over.

In fact, I would wager that we will see this record beaten a few times over this year.

I do not own HCA. The stock looked expensive when I last looked at it, especially given the high debt-load. The tiny premium in this buyout seems to validate that. There were other, more bargain-priced, targets in this sector that the buyers could have gone after. Tenet Healthcare (THC), Health Management Associates (HMA), HealthSouth (HLSH), Medcath (MDTH) would have made for better bets for private equity investors. The HCA deal will likely be a money loser for the buyers - it appears to be a desperate attempt to put cash to work, cash that seems to pile up at an amazing pace with these groups.

There is already talk of a rival, higher bid from another consortium of private equity investors. If this turns into a serious bidding battle, expect a pyrrhic victory for the winner.

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