Firms delayed in going public

Tumbling stock markets in late 2008 dragged down the
likelihood that two of the largest companies in Central
Pennsylvania soon could go public.

Select Medical Holdings Corp. of Cumberland County
and Graham Packaging Holdings Co. of York County each began the process of
going public in the summer, before the financial world collapsed. The two deals
are structured differently, but both are threatened by what experts call the
worst market in years for going-public transactions.

“By and large, the IPO markets are … if not dead, very near
dead,” said private-equity investor Mitchell Hollin, using the shorthand term
for an “initial public offering.” That’s the most direct way of going public.
Hollin is a partner at the Philadelphia
private-equity firm LLR Partners Inc.

Economic uncertainty and turmoil in the stock markets have
discouraged newcomers from trying to sell shares to the public. The first nine
months of last year saw 54 IPOs in the U.S., down from 195 in the same
period of the prior year, according to a survey by the accounting firm
PricewaterhouseCoopers. The fourth quarter of last year saw just a single IPO,
according to Ernst & Young, another accounting firm.

Delays in the going-public deals are holding up an
opportunity for new investors to buy into homegrown companies that have become
heavyweights. Graham Packaging is one of the nation’s largest makers of plastic
packaging, with 2007 revenue of about $2.5 billion. Select Medical operates
specialty hospitals and outpatient rehabilitation clinics and posted 2007
revenue of about $2 billion.

But the companies have staying power – they are backed by
major private-equity firms and are not new to the going-public game.

Select Medical was a public company until 2005, when a group
of investors led by the New York City-based private-equity firm Welsh, Carson,
Anderson & Stowe took the company private. Select Medical Chief Executive
Officer Robert Ortenzio said in an e-mail the company would keep its IPO filing
current so as to be prepared when the IPO market returns.

“When that is,” he added, “is anyone’s guess.”

Graham took the first steps toward an IPO in 2000 but
postponed the plans after a stock market swoon. Instead of going directly onto
the stock market this time, Graham in June 2008 announced it would sell a major
stake in itself to Texas-based Hicks Acquisition Company I Inc., a shell
company that already was publicly traded. The deal was valued at $3.2 billion,
including about $2.5 billion in debt. But Graham and Hicks missed a tentative
goal of completing the deal by the end of 2008, and on Jan. 28 they announced
their agreement had been amended to let both sides consider other deals and
walk away.

Spokesmen for Graham and Hicks said the companies would not
comment.

One reason for the delay might be that a plunging stock
market brings down company valuations, so a deal that was struck before the
autumn decline could now look too rich. Hicks is a so-called special-purpose
acquisition company, or SPAC. A SPAC is a firm that goes public with the sole
purpose of hunting for another company to acquire. Investors buy shares in the
SPAC because they believe that its leaders will be able to bag a good deal.
Before a deal can go through, the SPAC investors vote on it. If they refuse to
go ahead, they can get their money back, minus a haircut that covers the SPAC’s
expenses.

SPAC investors increasingly are balking, said Neil Danics,
president of research firm SPACanalytics.com.

“The problem is that it’s very difficult to get excited
about bringing a company public when the stock market’s doing so poorly,” he
said.

Graham last reported earnings in November, before the U.S. recession
took a turn for the worse. At the time, the company sounded upbeat. Graham
reported operating income of $51.3 million for the third quarter of 2008, up
from $44.2 million in the prior-year period.

“We are very pleased with our performance in the third
quarter given current economic conditions,” then-Chief Executive Officer Warren
Knowlton said in a statement. “These results are due to our ability to gain
operational efficiencies and reduce costs.”

Knowlton since has become executive chairman. He yielded the
CEO post to Mark Burgess, previously the chief financial officer.

Graham has told investors it has made significant progress
since Knowlton and Burgess took over in December 2006. For example, it improved
earnings before interest, taxes, depreciation and amortization, a key financial
measure.

Select Medical in July filed a document that begins the IPO
process. But Select did not disclose financial details of the transaction, nor
did it provide a timeline. The filing did say that Select would use the cash
from the IPO to pay down debt, to pay executives under a long-term cash
incentive plan and for general corporate purposes. Select Medical has about
$1.8 billion in total debt.

“(The IPO) would generally strengthen the company from a
balance sheet standpoint and ultimately provide more liquidity,” Ortenzio said.

The Standard & Poor’s debt-rating agency recently
downgraded Select Medical, citing concerns about high debt, a decline in
Medicare reimbursements and regulatory limitations on the company’s model of
operating its specialty hospitals within bigger hospitals. S&P added that
the outpatient division has shown recent weakness and that Select Medical could
face lower payments from commercial insurers given the economic slump.

Meanwhile, Select Medical’s earnings as calculated by its
banks must improve by at least 15 percent over the next year to meet covenants
with the lenders, S&P said. Such covenants often require a borrower to hit
certain financial targets.

Ortenzio said he could not comment on the S&P report.

-Staff writer Jim T. Ryan contributed to this report.