The initial public offering of nursing home owner Skilled Healthcare Group Inc next week bucks the trend of many health care services companies, which have been ducking out of the stock market to escape the glare of investors.
IPO activity in the health care services sector has been dormant in the past two years, according to Dealogic. They show no offerings for services such as hospitals and nursing homes in 2007 and one IPO, AdCare Health Systems Inc, which raised $6.7 million in the only nursing home offering in 2006.
At the same time, a slew of companies have gone private, a trend that took off after hospital giant HCA Inc went private in a management-led leveraged buyout for $22 billion last year. Skilled Healthcare joins Continental Resources Inc, an independent oil and natural gas exploration and production company, among US initial public offerings slated for next week.
Genesis HealthCare Corp, which owns about 200 nursing and assisted living centres, is the target of a take-over battle by two competing private equity groups. And Manor Care Inc, the biggest US operator of nursing homes with 500 facilities, recently hired investment bankers to explore strategic options.
Still, Skilled Healthcare, with about $564 million in 2006 operating revenue, excluding acquisitions, has a price-to- earnings ratio that suggests better earnings expansion potential compared with its peers, according to Francis Gaskins of IPO Desktop.
Multiples for two companies in the sector, Manor Care and Sun Healthcare Group Inc, are almost double that of Skilled Healthcare, he said. "It's possible that Skilled Healthcare could have multiple earnings expansion compared to Manor and Sun," Gaskins said.
Last month, Foothill Ranch, California-based Skilled said it planned an initial public offering of 16.7 million Class A common shares for between $14 and $16 per share.
The company plans to sell 8.3 million shares and stockholders plan to sell another 8.3 million shares, according to an amended offering document filed with the US Securities and Exchange Commission. Its stock will be listed on the New York Stock Exchange under the symbol "SKH".
Skilled runs more than 70 nursing homes and assisted living facilities in five states, including California and Texas. The underwriters, led by Credit Suisse, UBS Investment Bank and Banc of America Securities LLC, will have the option to buy another 2.5 million shares from selling shareholders to cover over-allotments.
Its largest shareholder, Onex Corp, will hold a 77.9 percent stake after the IPO, or 74.6 percent if all the underwriters' allotment is exercised. A call into Onex for comment was not returned.
Skilled Healthcare emerged from bankruptcy in 2003 and was bought by Onex in 2005 in a leveraged buyout for about $745 million. The purpose of the IPO is for Onex to sell some of its shares and to pay down debt, according to Standard & Poor's analyst David Peknay. It expects to net about $113 million from the sale.
"Most of the proceeds will be used to pay down debt, which is not such a good sign. I'd rather see them use that to expand," said Josef Schuster, of IPOX Schuster LLC, a financial services firm that tracks IPOs. "Nevertheless, it looks like they have fairly predictable earnings," he said, suggesting it will be less volatile than some recent IPOs.
The US nursing home industry went through a tumultuous period during the late 1990s, when several large companies went bankrupt. Providers blamed erratic reimbursement from major payers, including the government Medicare and Medicaid insurance programs, although government auditors said bad management played a role.