HMA Loses Florida Corporate Roots
Nashville-based Community Health Systems acquires Naples-based hospital operator in historic deal
NAPLES – The honeymoon wasn’t over for Bayfront Medical Center, a century-old independent hospital located in downtown St. Petersburg. And only 35 days had passed since the Southeast Volusia Hospital District Board of Commissioners, after years of vacillating between suitors, had started exclusive negotiations toward a lease agreement for the 112-bed Bert Fish Medical Center in New Smyrna Beach.
For both hospitals, plus the three rural Shands Healthcare facilities that had been acquired for $21.5 million in 2010, it made plenty of sense to tie the knot with Health Management Associates Inc. (NYSE: HMA), a Naples-based hospital operator that had been on a spending spree acquiring struggling hospitals.
In late March, Fortune magazine had named HMA among the World’s Most Admired companies in Health Care: Medical Facilities for the second consecutive year and fifth time in seven years. HMA had also been named the leading company for two subcategories in 2012: Use of Corporate Assets and Social Responsibility.
Yet soon after HMA CEO Gary Newsome announced plans in May to retire to instead preside over a Uruguay mission with the Church of Jesus Christ of Latter-day Saints, rumblings swept through Wall Street that fiscally struggling HMA might be the target of a takeover.
In a May 31 note to investors, Chris Rigg, an analyst with Susquehanna Financial Group, was cautiously optimistic that Community Health Systems (Nasdaq: CYH) might be pursuing HMA, estimating the Franklin, Tenn.-based hospital operator could acquire the company for $18.50 a share, a premium to HMA’s shares that had recently traded near $14.
“We would be surprised if a transaction were announced in the very near-term,” he noted. “We don’t believe CEO Gary Newsome would be leaving the company in July if a formal auction process, which we expect HMA would conduct, were currently underway. That being said, we believe Community is the best-positioned name in the hospital group to operate HMA rural focused hospital assets.”
On July 30, in a power play reminiscent of the 1987 blockbuster movie, “Wall Street,” the news became official: Community Health Systems (CHS) announced plans to acquire HMA for $3.9 billion in a deal valued at $7.6 billion that would create the nation’s largest for-profit hospital chains in terms of number of facilities.
“This is the second biggest hospital deal announced this summer,” said healthcare industry consultant George Paul, antitrust partner with White & Case. In June, Dallas-based Tenet Healthcare Corp. (NYSE: THC) announced its acquisition of Nashville, Tenn.-based Vanguard Health Systems (NYSE: VHS) in a pact valued at $4.3 billion.
“This deal is part of a growing wave of hospital consolidation, as hospitals seek ways to diversify and lower costs in anticipation of a sea change occurring in the healthcare industry with the implementation of the Affordable Care Act, uncertainty over how states will handle Medicaid coverage and reimbursement, and Medicare changes,” he said.
Paul emphasized that under Obamacare, scale will matter greatly as hospitals seek to cope with reimbursement changes and as consumers become increasingly price sensitive. “Insurers will pressure hospitals to become more efficient than ever, and as a result, it’s not surprising to see these two companies merge,” he added.
With a similar focus on non-urban locations, CHS leases, owns or operates 135 hospitals around the country. With HMA’s 71 hospitals, CHS would have 206 acute-care hospitals, with a much larger footprint in Florida.
The antitrust review will focus on highly localized markets, Paul pointed out.
“While the two parties overlap in 29 states, it doesn’t appear that they have substantial overlaps on a localized level,” he explained. “The Federal Trade Commission (FTC) will focus on how many patients in an area would likely view the two operators as substitutes for each other in terms of location, quality and specialties. Where the two are close substitutes, the FTC could seek divestitures if it were to find that patient choice may be limited.”
The new CHS would be rivaled only by its across-town neighbor, Hospital Corporation of America (HCA), which has fewer hospitals (162), yet reports higher revenue. Last year, HCA raked in $33 billion; CHS and HMA had a combined $18.9 billion.
“This compelling transaction provides a strategic opportunity to form a larger company with a diverse portfolio of hospitals that is well-positioned to realize the benefits of healthcare reform and to address the changing dynamics of our industry,” said CHS CEO Wayne Smith. “Our complementary markets and the ability to form networks in key states, along with the synergies that will be available to us, can create value for the shareholders of our companies, the communities we serve, our employees and medical staffs.”
Both companies’ boards of directors unanimously approved the definitive merger agreement, with CHS paying HMA $3.9 billion in cash and stock and assuming $3.7 billion of debt. The deal would give HMA shareholders a 16 percent stake in the new company. Before the market opened on July 30, HMA shares fell 6.9 percent to $13.89; CHS stock rose 2.4 percent to $48.35.
The relationship between HMA and its largest shareholder (14.6 percent), Glenview Capital Management, a hedge fund managed by billionaire Larry Robbins, had soured in recent months. Glenview, a private investment management firm established in 2000 with more than $6 billion in assets, also owns nearly 10 percent of CHS. Robbins had been critical of HMA’s sluggish financial results and “unconstructive” executive behavior, pointing to HMA CFO Kelly Curry. Glenview had tried to replace HMA’s entire board of directors with eight candidates in a Fresh Alternative campaign to revitalize the company. In June, Glenview had written HMA about “significant room for improvement,” which it said had fallen short in its financial performance for more than a decade.
“Under the supervision of the sitting board, HMA lacks the financial acumen to deliver on its projections,” Glenview released in a July 30 statement. “Unfortunately, this continues to be the case.”
Another Nashville, Tenn.-based hospital group, LifePoint Hospitals (NASDAQ: LPNT), had also expressed interest in acquiring HMA.
The Next Step
Until the merger is completed – the target deadline is March 31 – John Starcher Jr., president of HMA’s Eastern Group with 23 hospitals in seven states, will step up as HMA interim CEO.
HMA’s projected second-quarter earnings show a drop of .05 percent in net revenue to $146 billion, attributing the discouraging fiscal picture to low admissions, increases in observation stays, higher bad debt, a reduction in surgeries, and the federal government’s sequestration. Same-hospital admissions were predicted to fall 6.7 percent, compared to the second quarter of 2012.
In its first-quarter financial filing, HMA reported it had received a subpoena from the U.S. Securities and Exchange Commission (SEC) for documents involving accounts receivable, billing write-downs, contractual adjustments, reserves for doubtful accounts, and revenue. In May and June, HMA received three more subpoenas from the HHS’s Office of Inspector General related to the process by which the company admits people from its emergency department. The new subpoenas supplemented ones the company received in 2011. Another subpoena was issued on physician relationships. In December, a CBS “60 Minutes” segment focused on HMA’s aggressive policies aimed at increasing admissions and “disgruntled former employees.” No stranger to the federal pressure-cooker, CHS recently received a new subpoena for similar allegations from the Department of Justice.
Competing hospital chains and medical schools in Florida, including the Florida Medical Association, declined to comment on the July 30 CHS-HMA announcement.