Recently, Community Health Systems (NYSE:CYH) announced that it would acquire Health Management Associates Inc (NYSE:HMA) at $13.78 per share, with the total transaction of around $7.6 billion, including the assumption of around $3.7 billion in debt. The deal would be done via $10.50 per share in cash and 0.06942 of Community Health Systems (NYSE:CYH)’s shares for each of the Health Management Associates Inc (NYSE:HMA)’s share.
The decent growth of Community Health and Health Management
Health Management Associates Inc (NYSE:HMA) seems to have an attractive hospital portfolio, operating 71 facilities with more than 11,000 beds in 15 states. With the non-urban focus in the southeastern U.S., it was considered a complementary geographic fit with Community Health Systems (NYSE:CYH). After the deal, Community Health Systems (NYSE:CYH) would expand its hospital footprint to around 206 facilities across 29 states in the U.S., which could allow the business to enhance economies of scale and improve operating efficiencies.
Historically, Community Health Systems (NYSE:CYH) has grown via acquisitions. Since 1996, the number of hospitals has grown from 36 to 135. In the future, the company would like to develop its integrated network further, focusing on clinical excellence to be successful in the ongoing healthcare reform.
Both Community Health Systems (NYSE:CYH) and Health Management Associates Inc (NYSE:HMA) have experienced significant historical grow. Health Management has managed to deliver 11.5% compounded annual growth in Earnings Before Interest, Taxes Depreciation and Amortization (EBITDA), from $623 million in 2008 to $963 million in 2012, while the EBITDA of Community Health has also been on the rise, from $1.52 billion to nearly $1.98 billion during the same period. The pro-forma EBITDA might come in at nearly $2.95 billion in 2012.
Potential synergies but highly leveraged deal
Community Health expects to realize as much as $150-$180 million in annual synergies within around 2.5 years, with more than 40% being realized in the first year. A further $150-$180 million in annual synergies could be realized via reducing overhead expenses and improving supply management, case management and revenue cycle management. The firm estimated that this transaction would be break-even in the first year. Investors might be worried about the high pro-forma leverage level at as much as mid-5 times debt/EBITDA. However, the company committed to de-leverage the balance sheet to return to the current level within 12-18 months after the deal was closed.
The highest valuation among its peers
At $13.78 per share, Health Management is valued at around 8.2 times its trailing EBITDA. The offering price values Health Management a bit higher than the current valuation of Community Health. Community Health is trading at $45.60 per share, with a total market cap of more than $4.2 billion. It is valued at around 7.6 times its trailing EBITDA.
One of their peers, HCA Holdings Inc (NYSE:HCA), is even cheaper.. It is trading at $39.10 per share, with total market cap of $17.44 billion. The market values HCA Holdings Inc (NYSE:HCA) at only 7.36 times its trailing EBITDA. HCA Holdings Inc (NYSE:HCA) has a diversified portfolio of assets with around 162 hospitals, 32,000 affiliated physicians and 202,000 employees. HCA Holdings Inc (NYSE:HCA) has just recently affirmed its full year 2013 guidance. The company expects to generate around $3.00 to $3.30 per share in adjusted Earnings Per Share (EPS) while producing around $33.50 to $34.50 billion in revenue.
Among the three, HCA Holdings Inc (NYSE:HCA) seems to be the most profitable company with the highest return on assets at 5.12%, Health Management ranked second with 6% return on assets while the return on assets of Community Health was the lowest, at only 1.66%. However, HCA Holdings Inc (NYSE:HCA) also has the weakest balance sheet of the trio, with negative equity of more than $(9.3) billion and the interesting bearing debt of as much as $28.6 billion.
My Foolish take
The Health Management acquisition will really give Community Health a lot of economies scale with more efficient operations. However, Glenview might vote against the deal because they think the Health Management could be acquired at a higher price. According to Glenview, Community Health’s offer has “established an important floor value”, which could be used for seeking higher value for Health Management.
However, with the higher valuation and tough macro environment for hospital operators, I do not think Health Management could be a good play at its current price.
The article Should Investors Participate in This Hospital Operator Acquisition? originally appeared on Fool.com and is written by Anh HOANG.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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