Buyout Firms Return as Select Medical Readies IPO

By Jason Kelly, Cristina Alesci and Michael Tsang

Sept. 24 (Bloomberg) -- The owners of Select Medical Holdings Inc. may almost double their money when the hospital operator goes public tomorrow as leveraged buyout firms take advantage of the steepest stock market rally in 70 years.

Welsh Carson Anderson & Stowe and Thoma Cressey Bravo LLC will hold a stake valued at more than $1 billion if Select Medical fetches $12 a share, the midpoint yesterday for its initial public offering price. The private-equity firms invested $617 million in cash when acquiring the Mechanicsburg, Pennsylvania-based company in February 2005, according to a regulatory filing.

Buyout firms are lining up IPOs to repay debt used to purchase companies and return profits to their investors. KKR & Co., Silver Lake and Fortress Investment Group LLC are among those planning share sales amid a 57 percent gain by the Standard & Poor’s 500 Index since March 9.

“In an environment in which private-equity performance has suffered, the ability to demonstrate cash-on-cash returns by exiting investments at an attractive valuation is compelling and may help firms raise future funds,” said Andrew Wright, a partner at law firm Kirkland & Ellis LLP in New York.

Select Medical plans to sell 33.3 million shares today at $11 to $13 apiece, raising as much as $433.3 million, according to a U.S. Securities and Exchange Commission filing. The stock is set to begin trading tomorrow on the New York Stock Exchange.

KKR’s Pair

Bankers arranged about $1.5 billion in financing for the Select Medical purchase by New York-based Welsh Carson and Thoma Cressey of Chicago, which subsequently split into two firms. The transaction was valued at $2.1 billion including assumed debt, according to data compiled by Bloomberg.

The firms will use IPO proceeds mostly to reduce Select Medical’s debt, they said in the filing. Officials didn’t return phone calls seeking comment.

KKR, based in New York, and Menlo Park, California-based Silver Lake, took Avago Technologies Ltd. public last month in a $745 million deal. The Singapore-based semiconductor maker has gained 16 percent since it began trading in early August. KKR subsequently filed an initial public offering for discount retailer Dollar General Corp. of Goodlettsville, Tennessee.

RailAmerica Inc., a Jacksonville, Florida-based railroad operator owned by Fortress, said Sept. 22 it increased the size of its IPO to $450 million from $300 million. New York-based Fortress bought the company in February 2007.

‘Pent-Up Supply’

Private-equity firms bought a record $1.4 trillion of companies in 2006 and 2007, the height of the leveraged-buyout boom. The global credit crisis brought dealmaking to a halt and prevented firms from selling companies they already owned.

“There is a pent-up supply of portfolio companies, many of which will go public,” said Jay Ritter, a professor of finance at the University of Florida. “During the last year, exits had ground to a halt.”

Companies are selling shares after the S&P 500 climbed in six straight months, restoring about $4.9 trillion to U.S. equity markets. The advance since the gauge fell to a 12-month low in March represents the steepest rally since the Great Depression, according to data compiled by Bloomberg.

Health-care stocks are the third best-performing industry behind household-product makers and technology companies in the S&P 500 since it climbed to a record 1,565.15 on Oct. 9, 2007.

Eleven companies may sell shares to the public this month, the most since January 2008, Bloomberg data show. The deals may raise $4.15 billion, the most since March 2008, when Visa Inc.’s $17.9 billion IPO accounted for almost all the money raised.

Cerberus Windfall

Five companies, including KAR Holdings Inc., a vehicle- auction company based in Carmel, Indiana, and Houston-based Cobalt International Energy Inc., an energy-exploration firm, filed this month to raise as much as $1.82 billion.

Among the biggest scheduled IPOs this month is Talecris Biotherapeutics Holdings Corp., the drugmaker controlled by private-equity firm Cerberus Capital Management LP and Ampersand Ventures, which plans to raise $850 million on Sept. 30, according to data compiled by Bloomberg.

The Research Triangle Park, North Carolina-based maker of protein therapies derived from blood plasma said in its Sept. 10 filing that it seeks to sell 44.7 million common shares at $18 to $20 apiece.

At $19 a share, Cerberus and Ampersand would reap a profit of $300 million for their investors selling 15.8 million shares. After the IPO, the private-equity firms will own 60.5 percent of Talecris, valued at $1.38 billion based on a $19 IPO price.

No More Dividends

Peter Duda, a spokesman for New York-based Cerberus, declined to comment, as did Becky Levin, a spokeswoman for Talecris, citing the quiet period before the IPO.

Cerberus and Ampersand of Wellesley, Massachusetts, created Talecris after buying Bayer AG’s plasma business in 2005. At the time, the purchase was valued at $590 million, with the private- equity firms investing a combined $125 million in cash.

Talecris has paid its owners at least $833.2 million in dividends since then, mainly funded by a $1.35 billion loan. Including the payouts, Cerberus and Ampersand are set to earn 20 times their initial cash investment in the company.

The company will use its share of IPO proceeds to pay down debt. It doesn’t plan to pay shareholder dividends after the IPO, using all earnings to finance operations, according to its prospectus.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Cristina Alesci in New York at Calesci2@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.