U.S. hospital chain Community Health Systems Inc (CYH.N) said it reached a deal to buy smaller Health Management Associates Inc HMA.N for $3.9 billion, but quickly faced opposition from major HMA investor Glenview Capital Management over the price.
Community Health said it aims to expand its geographic reach to better capitalize on an overhaul of the U.S. healthcare system under President Barack Obama's reform law.
Community Health said it was prepared to do so despite a widening federal investigation into HMA's practices for admitting patients. Shortly after the deal was announced on Tuesday, HMA disclosed that it had received additional government subpoenas in the case and named a new chief executive.
HMA's troubles have attracted the activism of Glenview, which owns a 14.6 percent stake and could complicate the Community Health deal. Glenview said in a statement it would forge ahead with efforts to replace HMA's board of directors and set the company on a better course.
Glenview said the Community Health offer for HMA "establishes an important floor value" that should serve as a basis for seeking greater value to HMA shareholders.
CRT Capital Group analyst Sheryl Skolnick said Glenview's move may not ultimately scuttle a deal, but agreed that HMA might have other options if it revamped its operations.
"There is no other bidder who I think is out there in the wings," she said. "Maybe if the company is cleaned up in a year, yes, or two or three."
Community Health and HMA did not immediately respond to requests for comment on Glenview's statements. To close a deal, Community Health would need 70 percent of HMA's investors to approve the deal.
HMA shares closed down nearly 11 percent at $13.30, below the $13.78 in cash and stock offered by Community Health. Under terms of the team, HMA shareholders would own a 16 percent stake in the new company and get an additional contingent value right worth up to $1 per share, depending on the outcome of the government's probe. Community Health shares dropped 3.5 percent.
A TOUGH TIME FOR HOSPITALS
An HMA acquisition, which the market had been anticipating, would be the second big merger announced in the sector in as many months. Faced with declining patient admissions and rising bad debts, companies are struggling to shore up their finances as they await an expected influx of newly insured patients beginning next year under healthcare reform.
Both companies' hospitals are primarily in smaller cities and rural areas. HMA has a strong presence in the U.S. Southeast, including Florida. Community Health is the second largest for-profit chain behind HCA Holdings Inc (HCA.N), mostly spread across the Southeast, Midwest and Southwest.
The combined company would have 206 hospitals across 29 states. "They are in different markets that give us a chance to expand into new communities," Community Health Chief Executive Wayne Smith said on a conference call.
Glenview, which in a June letter to the hospital operator said HMA's financial performance had fallen short for more than a decade, on Tuesday said the weak results and legal issues made it hard to determine the company's true value.
"As the sitting board has entered into a sale agreement concurrent with management vacancy, disappointing results and a reduced outlook, it is difficult to assess whether the value offered in the Community proposal represents full and fair value or represents the price offered by an opportunistic acquirer to a distressed seller," Glenview said in a statement.
HMA on Tuesday forecast weaker-than-expected second-quarter earnings of 10 cents to 11 cents a share due to lower hospital admissions. It disclosed additional subpoenas from the U.S. Department of Health and Human Services about emergency room operations and from the Office of the Inspector General on physician relationships.
HMA also is being investigated by the U.S. Securities and Exchange Commission over accounts receivable, billing writedowns, contractual adjustments, reserves for doubtful accounts and revenue. In December, it was the subject of a story on the "60 Minutes" CBS television program that claimed it used aggressive policies to boost admissions. Health Management denied the assertions.
Health Management CEO Gary Newsome was due to retire at the end of the month. On Tuesday, the company said John Starcher would be interim president and CEO.
Last month, No. 3 hospital chain Tenet Healthcare Corp (THC.N) said it was buying Vanguard Health Systems Inc VHS.N for $1.73 billion.
Community Health, based in Franklin, Tennessee, reported a drop in second-quarter profit on Monday due to weak admissions and a rise in bad debt. Earlier this month, it said it had received an additional subpoena related to a Justice Department investigation of short-stay admissions from emergency departments.
"This industry is having a very difficult time, if you haven't noticed, in terms of our earnings," Community Health's Smith told analysts.
Community Health said it expects to achieve breakeven earnings in the first year after the HMA deal closes and would cut costs between $150 million and $180 million annually within two-and-a-half years.
Deutsche Bank analyst Darren Lehrich said the acquisition could potentially add 20 percent to 30 percent or more to Community Health's earnings per share in 2015.
Bank of America Merrill Lynch and Credit Suisse are financial advisers to Community Health.
(Additional reporting by Jessica Toonkel in New York; Editing by Michele Gershberg, Jeffrey Benkoe, Lisa Von Ahn and Bernard Orr)