Barbarians back at the gate with $33bn US deal

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The Independent Online

A consortium of financial investors including Kohlberg Kravis Roberts (KKR) and Merrill Lynch has unveiled the world's biggest-ever private equity deal, a $33bn (£18bn) takeover of America's largest chain of hospitals.

The size of the acquisition of HCA, agreed yesterday, surpasses for the first time the iconic Eighties takeover of RJR Nabisco by KKR, which became the subject of the book and film Barbarians at the Gate. The deal underscores the revived financial clout of the private equity "barbarians", able to make increasingly audacious approaches to public companies because of the availability of cheap debt.

HCA, originally known as Hospital Corporation of America, was set up in Nashville, Tennessee in 1968 by the father and brother of the senior Republican politician Bill Frist, the Senate majority leader. Senator Frist himself sold his stake in the business last year in the weeks before a profits warning, a transaction still being investigated by the Securities and Exchange Commission, Wall Street's watchdog.

The Frist family is staying with the business, reinvesting $750m of its $900m-plus proceeds of the acquisition back into the new vehicle, whose management team will continue to include Thomas Frist, Senator Frist's brother.

The private equity consortium comprises Bain Capital, with Kohlberg Kravis Roberts and Merrill Lynch. They will make a $5.5bn equity investment, but the rest of the deal will be funded with debt, some $15bn of it lent by banks. HCA's 168 hospitals and surgical centres provide the sort of low-risk and steady income that banks require to lend money on that scale.

Private equity firms are awash with cash, handed to them by institutional investors who are desperate for a slice of the outsize returns generated by the industry in recent years. Earlier this month, Blackstone raised the world's largest-ever private equity fund, totalling $15.6bn, while investment banks such as Merrill Lynch and Goldman Sachs are increasingly investing their own money into private equity deals.

Goldman Sachs and others were rumoured to be considering whether they could assemble a rival consortium to bid for HCA, which has promised to look for a higher offer before agreeing the Bain-led takeover.

The acquisition stoked fears of a bubble in leveraged buyouts. Wilbur Ross, the veteran private equity investor, who sold his New York-based company to the London-listed Amvescap yesterday, said he believed it was already late in the cycle and private equity buyers seem to be paying higher prices than ever before.

"The trouble with putting larger amounts of leverage on higher valuations is that it truncates your margin for error, and that will inevitably lead to more defaults."