May 23, 2007, 8:30 pm


As always analysis pieces on ipos are available in subscriber section of site before offering dates.

SKH - Skilled Healthcare

SKH - Skilled Healthcare Group plans on offering 19.1 million shares(assuming over-allotments) at a range of $14-$16. Insiders are selling 10.8 million shares in the deal. Credit Suisse is lead managing the deal, with eight firms co-managing. Post-ipo SKH will have 37.4 million shares outstanding for a market cap of $561 million on a $15 pricing. IPO proceeds will be used to repay debt.

Onex, a Canadian conglomerate, will own 47% of SKH post-offering. Onex will control SKH through a separate share class. Onex is the primary selling shareholder in this deal. Onex brought EMS public in 12/05. Post-ipo Onex owned 77% of EMS, they currently have an approximately 27% stake. EMS has nearly tripled since ipo debut.

Onex formed SKH in 12/05 by merging together two nursing/assisted living companies. They owned one and completed a leveraged buyout of the other on the merge. Post-merger Onex owned 95% of the combined entity. It also appears as if there was a roughly $100 million dividend payout to Onex in there as well. The result is that SKH was heavily leveraged after the merger. Even after paying off debt on ipo, SKH will still have significant debt on the book of $414 million. Keep in mind that one of SKH's predecessor's filed for bankruptcy in 2001.

I would much prefer to see Onex withhold selling shares on ipo here to allow SKH to offer more shares themselves and help the balance sheet.

From the prospectus:

'We are a provider of integrated long-term healthcare services through our skilled nursing facilities and rehabilitation therapy business. We also provide other related healthcare services, including assisted living care and hospice care.'

As of 4/1/07, SKH owned or leased 64 nursing facilities and 13 assisted living facilities comprising 8,900 beds. SKH owns 75% of their operated facilities which are located in California, Texas, Kansas, Missouri and Nevada. SKH focuses on urban and suburban locations with 67% of locations in non-rural areas.

Higher reimbursed non-Medicaid patients comprised 70% of patients the first quarter of 2007. Medicare patients accounted for 38% of 2006 revenues, while Medicaid patients accounted for 30% of revenues. Medicare patients are reimbursed at a pre-determined rate adjusted for inflation. SKH is seeing downward reimbursement pressure on Medicaid patients due to rapid Medicaid spending growth and slower state revenue receipts. Currently Medicaid is reimbursed at lower rates then Medicare, a trend SKH foresees continuing. Both Medicare/Medicaid tend to be reimbursed at lower rates then private insurance.

Roll-up - SKH has grown via the acquisition route, making 30 nursing home and/or assisted living purchases over the past 4 years. Count on SKH to continue to grow by purchasing(or leasing) additional facilities going forward. I would expect SKH to mimic the 7 1/2 facility per year acquisition pace of the previous four years.

Sector - The US nursing home market is a $120 billion annual business. Growth is being driven by the aging of the US population coupled with longer life expectancies. The annual growth rate of those in the US 65 years of age or older is expected to be 2% over the next decade. The market is highly fragmented and consists of approximately 16,000 facilities with 1.7 million licensed beds. The top 5 operators run only 10% of these facilities. This is a prime consolidation niche and companies such as SKH plan on growing via the consolidation/acquisition route.

Organic growth - In addition to future acquisitions, SKH is constructing two new facilities: a nursing facility in the Dallas/Fort Worth area and an assisted living center in the Kansas City, MO area. The Kansas City location will add 45 beds by 9/08 while the Dallas location will add 385 beds by 4/09.

53% of revenues are derived from facilities in California, 32% from Texas. Occupancy percentage in SKH facilities has been 85%-86% the past few years. 85% of all revenues are derived from SKH's nursing facilities.

Medicare/Medicaid - Approximately 70% of SKH's annual revenues come from Medicare/Medicaid. An ongoing risk for this type of business is the annual budgeting process. In the current budget proposal, there is a 'freeze' on Medicare nursing home payments as well as reduce payments for hospice services. The same budget including a proposed $25 billion cut in Medicaid over the next five years. SKH expects Medicaid/Medicare cost containment measures for nursing homes to be an ongoing issues for them into the future.

Referral Network - SKH relies on a hospital referral network for a portion of their new business. SKH believes forming alliances with leading medical centers improves their ability to attract high-acuity patients to their facilities because an association with such a medical center typically enhances SKH's reputation. Current alliances include Baylor Health Care System in Dallas, Texas, St. Joseph’s Hospital in Orange County, California and White Memorial in Los Angeles, California.


Debt is the issue here, $414 million post-ipo. Nearly a third of this debt is at a rather high interest rate of 11%. Debt servicing in 2007 will be $40 million, approximately 50% of operating profits. That is substantial and more then I'm comfortable with.

Negative book value post-ipo.

2006 was SKH's first year of operations as a combined entity. SKH was kind enough to 'back in' acquisitions as if they occurred 12/31/05, as well as take into effect alterations based on ipo. Essentially the following 2006 numbers take into account how the company will look post-ipo. All numbers then are pro forma, but a better indication of public SKH then the actual numbers. Revenues for 2006 were $564 million. Gross margins were 25%. Operating margins were 14%. Debt servicing is the killer here eating up substantial operating profits. Net margins after debt servicing and taxes were 4%. Earnings per share were $0.56. On a pricing of $15, SKH would be trading 27 X's 2006 earnings.


SKH is adding 500 beds just in time for the 2nd quarter of 2007. Following numbers take that into account but do not take into account any future acquisitions in 2007...of which I've no doubt there will be a few.

2007 revenues should be in the $625 range, an 11% increase over 2006. Gross margins should be in the same 25% ballpark as 2006. Operating margins also should be in the 14% range. Debt servicing will still be in the $40 million ballpark, but due to greater operating earnings, it will be less a % which will help net margins slightly. Debt servicing is still hefty here, make no doubt. I believe debt servicing in 2007 will ear up close to 1/2 of all operating profits. I would anticipate net margins in the 4 1/2% range. Earnings per share should be in the $0.75 range. On a pricing of $15, SKH would be trading 20 X's 2007 earnings.

Competitors include Manor Care(HCR) and Sun Healthcare(SUNH). In the same general sector is 2005 IPO Brookdale(BKD). BKD focuses more on senior living and senior communities but does also operate low to mid acuity assisted living centers. SKH and BKD are not 'apples to apples' comparables as BKD is not nearly as reliant overall on Medicare/Medicaid as SKH. BKD has done well, even though they came public heavily leveraged.

BKD - $4.5 billion market cap


Pretty simple business model. This is a rather low margin business with very little gross/operating margin improvement potential. 70% of revenues come directly from Medicaid/Medicare and if margins look a little high, they'll slash reimbursements next cycle. Also we're currently in a budget deficit with both the Executive/Legislative branch looking for places to cut. The 30% non direct Medicare/Medicaid is often indirectly linked to Medicare rates. Pretty much any way you look at it this is not a business in which gross/operating margins are going to improve much. To lay more money on the bottom line, facility operators are looking to acquire and consolidate what is a very fragmented sector. That is the SKH plan, to grow through acquisition as well as constructing new facilities in key areas.

Thus far that plan is working for them SKH is on pace to have a strong operational 2007. The issue here for me is the debt. I'm not comfortable with the debt levels here, particularly in a sector that had a rash of bankruptcies just 6-7 years prior.

The pluses: SKH appears well managed and operationally should put together a strong 2007. This ipo is being brought public by Onex, which also brought public EMS. EMS is up 3 fold since 2005 debut. Also in the same general 'senior living' sector, another heavily leveraged ipo BKD has performed quite well over the past 1 1/2 years. 20 X's 2007 earnings here is not unreasonable at all considering SKH growth patterns.

The negatives: The debt. Debt servicing will eat up nearly 50% of 2007 operating revenues. Also should something occur to slash either Medicare/Medicaid funding, the drag on SKH's cash flow could potentially cause repayment issues. Also current debt levels could slow future growth.

Without the debt, this would be a strong recommend in range. I can't recommend a company leveraged this much. I like the niche and I like the business and growth plan. In range I think this deal works. However keep in mind this is a heavily leveraged company, and it doesn't take too much bad news before a leveraged operation runs into trouble.

May 14, 2007, 2:58 pm

ACM - Aecom Technology

Disclosure. At date of posting to blog(5/14/08), does have a position in ACM from 21.2 avg.

ACM - Aecom Technology

ACM - Aecom Technology Corporation plans on offering 35.2 million shares at a range of $18-$20. Insiders are selling 15.3 million shares in the deal. Morgan Stanley, Merrill Lynch and UBS are lead managing the deal, Goldman Sachs, Credit Suisse, and DA Davidson are co-managing. Post-ipo, ACM will have 92.4 million shares outstanding for a market cap of $1.76 billion on a $19 pricing. approximately 1/2 the ipo proceeds will be used to repay debt, 1/5 to fund employee stock plan and the rest for general corporate purposes.

Note that ACM is paying off essentially all debt on offering. For a company that has made numerous acquisitions the past decade, a clean balance sheet gives them a nice competitive advantage.

ACM's own retirement and trust plan will own 20% of ACM post-ipo. this is a bit unusual and is a result of Aecom beginning life as an independent entity from an employee buyout in 1990.

From the prospectus:

'We are a leading global provider of professional technical and management support services to government and commercial clients on all seven continents. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities and power transmission and distribution. We also provide facilities management, training, logistics and other support services, primarily for agencies of the United States government.'

A government engineering and construction contractor focusing on general building, transportational and environmental markets. Quite similar in project scope to 2006 ipo KBR. ACM is large, in fact they're the largest general architectural and engineering design firm in the world. ACM has grown via acquisitions with over 30 acquisitions over the past 10 years. Interestingly, while ACM absorbs these acquisitions under the ACM 'umbrella' nearly all of them continue to operate under their original names and keep much of their organizational structures intact. The result is that ACM operates subsidiaries all under different names.

ACM operates under two business segments, Professional Technical Services and Management Support Services. Professional Technical Services is ACM's higher margin growth driver in which they've a worldwide leadership role in their target markets. Management Support Services is ACM's low margin employee intensive government fulfillment segment.

Professional Technical Services

81% of revenues, this is the business driving segment. planning, consulting, architectural and engineering design, and program and construction management services to government, institutional and commercial clients worldwide. Current projects include 2012 London Olympics, Pentagon Renovation, JFK airport in New York, and a Russian Independent Power Project. Private sector accounts for 45% of revenue, public sector 55%. Public sector breakdown is 31% US state and local, 11% direct US federal and 13% non-US government.

A quick look at ACM's core Professional Technical Services end markets:

Transportation - ACM's prime growth driver includes design and construction management of airports, seaports, bridges, tunnels, railway lines and highways. Domestically this is a direct play on the aging US infrastructure.

General Building - Includes the construction of commercial buildings, office complexes, schools, hotels and correctional facilities.

Water, Wastewater and Environmental - Projects include water treatment facilities, water distribution systems, desalination plants, solid waste disposal systems, environmental impact studies, remediation of hazardous materials and pollution control.

Energy/Power - Revitalizing energy and power transmission and distribution systems in the United States.

Management Support Services

19% of revenues. Facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. Clients include Department of Defense, Department of Energy and the Department of Homeland Security. Projects include managing and maintaining Camp Arifjan Army Base in Kuwait, Fort Polk Training Center and operating for the Department of State an international civilian police force.

ACM 25 largest worldwide projects accounted for 14% of 2006 revenues. ACM operates in 60 countries worldwide. Backlog was $3.1 billion as of 3/31/07. Overall a little over 60% of revenues are derived from government contracts.


$3 a share in cash post-ipo. This takes into account the small amount of debt on the books after offering. What impresses me here is the lack of debt on the books post-ipo. Fully expect ACM to use the clean balance sheet and cash on hand to aggressively acquire smaller operations first year public.

Dividends - ACM does not plan on paying dividends.

4 X's book value on a $19 pricing.

ACM's fiscal year ends 9/30 annually. FY '07 will end 9/30/07.

FY '07

Revenues appear on track to grow 24% to $4.2 billion for the year. Much of this growth is due to acquisitions. Gross margins are in the 26% range.

Operating margins are 3.3%. Note that ACM has much stronger gross margins then similarly sized recent government contractor ipos SAI/KBR. While this is in part due to nearly 40% of ACM's revenues being derived from non-government sources, it also appears to be in part an accounting function of employee costs. The operating margins of the three are the apples to apples comparison. Based on recent quarters, operating margins of the three look like this:

ACM 3.3%

KBR 2.7%

SAI 6.8%

Note that SAI has a much lower employee intensive business then ACM/KBR. KBR is a closer pure comparable to ACM.

Net margins for FY '07 look to be in the 2% range. Earnings per share look to be in the $0.90 range. On a pricing of $19, ACM would be trading 21 X's FY '07 earnings.

A quick glance at ACM/KBR

KBR - $3.7 billion market cap, trading 0.4 X's revenues, 2 X's book value and 19 X's FY '07 earnings. Note KBR is expecting a significant revenue decrease in FY '08 due to splitting of Iraq contracts.

ACM - $1.76 billion on a $19 pricing. Would be trading 0.4 X's revenues, 4 X's book value and 21 X's FY '07 earnings. Difference here is that ACM is growing revenues to the tune of 24% in FY '07. ACM fueled with IPO cash and a clean balance sheet should be able to grow revenues double digits in FY '08 through acquisitions as well.

ACM is much strong then KBR simply due to their ability to grow revenues(and the bottom line) going forward.

Conclusion - ACM has a very nice revenue mix from government contracts and private contracts. They rank #1 or #2 in US companies in engineering and consulting services for the following sectors: Mass Transit and Rail; Airports; Marine and Ports; Highways; Bridges; Educational Facilities; Government Offices; Correctional Facilities; Sewage & Solid Waste. That is one impressive list. Factor in the clean balance sheet post-ipo and the strong cash position and this is an easy recommend in range.

Note - With 35 million shares(15 million from insiders) in the offering this is a bulky deal. It is also a low margin business. While ACM has enough going for it to make this a very easy 'recommend' in range, I'm less constructive the higher the pricing/open. This is not the type of company or offering you want to pay way up for, however ACM ipo does offer a nice mid-term risk reward opportunity in pricing range.

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