Private equity firms offer to buy Triad Hospitals in $6.4 billion deal.

Byline: Tim Christie The Register-Guard

Triad Hospitals Inc. would be sold to two private equity firms in a deal company officials said should have no effect on operations of Springfield's McKenzie-Willamette Medical Center - or on plans to build a replacement hospital in north Eugene.

Under the proposed $6.4 billion deal announced Monday, the private firms would turn what is now a public company with stock traded on the New York Stock Exchange into a privately owned venture. Triad's executive team, including CEO James "Denny" Shelton, would remain.

Shelton said Triad will press ahead with its plans for building a new hospital in north Eugene.

Two New York private equity firms, CCMP Capital Advisors and GS Capital Partners, have agreed to pay cash for all the outstanding shares of Triad common stock at $50.25 a share, a 16 percent premium above the stock's closing price on Friday. The deal, subject to shareholder and regulatory approvals, includes taking on $1.7 billion of debt.

News of the merger sent Triad's stock up $6.38 per share to close at $49.65.

Texas-based Triad is the nation's third-largest for-profit hospital chain. It bought McKenzie-Willamette, then a financially struggling, independent nonprofit community hospital, in January 2003 and promised to build a replacement hospital in the metro area. Since then, it struggled to find a site, settling eventually on a parcel north of the Delta Highway/Belt Line interchange. Neighbors are fighting that choice, and McKenzie-Willamette so far has failed to win approval from the city and the Oregon Department of Transportation.

CEO Shelton said in an interview that by going private, with partners who understand and support its mission, Triad escapes Wall Street pressure to turn profits every quarter.

"These guys have a longer term view of return on investment," he said. In the health care industry, "it's not reasonable to expect that you're going to get instantaneous returns on projects that take some time to develop."

Triad owns 54 hospitals in 17 states. As it did with McKenzie-Willamette, the company has taken over struggling community hospitals and pumped new capital into them. That often has involved building new facilities and adding equipment.

"In the face of industry headwinds, we've been doing a lot of projects," Shelton said. "We spent a lot of money. We've got a number of shareholders with the view, 'The industry is in trouble, so stop spending money on capital projects that we don't know you're going to get a return on.' ''

Such investments don't offer immediate returns, Shelton said.

"We know we're getting a return, but most of the projects are in an infancy stage and still in development," he said.

Triad's stock has slumped since mid-2005. In December, its largest shareholder at nearly 9 percent, hedge fund TPG-Axon Capital Management LP, accused Triad of ``remarkably poor financial analysis and controls'' and failing to clearly state how it would improve financial performance. A hedge fund is a private investment pool for wealthy investors.

TPG-Axon, formed by another buyout firm, Texas Pacific Group, and a former Goldman Sachs executive, also threatened to run candidates for Triad's board.

Shelton said the sale wasn't a response to TPG-Axon's pressure. TPG declined to comment on the sale.

The fact that the two equity firms were willing to pay a premium for Triad stock validates what the company is doing and shows that they believe the projects will pay off, Shelton said.

"We got a lot of high fives around here today," he said from the company's Plano headquarters.

Adrian Jones, managing partner with GS Capital Partners, said in a statement that the equity firms "fully support" Triad's growth plan and purchases of nonprofit hospitals.

McKenzie-Willamette spokeswoman Rosie Pryor said hospital employees on Monday asked about the deal, but she didn't detect much concern.

"We have been through so much change as an organization in the past five years," she said. "I think people are taking this latest change in stride."

Sheryl Skolnick, an analyst with CRT Capital Group, said the private-equity groups valued Triad because it has relatively light debt and strong real estate holdings and hasn't made much of an effort to control costs.

Another analyst, Michael Wiederhorn of CIBC World Markets, said in a research note quoted by MarketWatch that he was not surprised by the deal because Triad has been "more candid than its peers in discussing the possibility of going private in order to increase shareholder value."

He added that Triad had fueled speculation about a buyout when it changed the severance terms for management in December and canceled a presentation at a large health care conference last month, MarketWatch reported.

The deal has been approved by Triad's board of directors, based on a recommendation from a special committee made up of disinterested directors.

Under the terms of the merger, Triad officials can try to strike a better deal with third parties during the next 40 days. If Triad is able to find a better deal, it would have to pay a $20 million break-up fee to CCMP Capital and GSCP and reimburse up to $20 million of their out-of-pocket expenses.

Triad officials said they intend to solicit offers of a better deal. They are not obligated to tell CCMP and GSCP about such deals, and do not have to offer the companies a chance to match a better deal.

Shelton said Delaware corporate law requires Triad, a Delaware corporation, to fulfill its fiduciary responsibility by seeking out a better deal. But he said it would be difficult for a different company to come up a more attractive offer.

The drop dead date for the deal is Sept. 30, but Shelton said he expects it to close by midsummer.

CCMP Capital Advisors formerly was a buyout and growth equity arm of J.P. Morgan Partners that launched last year with $10 billion in assets and investments in about 375 companies, according to Hoovers.com.

GS Capital Partners makes private equity investments on behalf of Goldman Sachs and others, backed by a $8.5 billion fund, according to Hoovers.com.

The Associated Press contributed to this report