With the Affordable Care Act set to take effect, hospitals are scrambling to buy up rivals that complement their businesses. One of the latest mergers involves Health Management Associates Inc (NYSE:HMA) and Community Health Systems (NYSE:CYH). Community Health Systems, or CHS, is a leading operator of general acute care hospitals with more than 135 hospitals in 29 states and about 20,000 beds. Health Management runs 71 hospitals in 15 states with approximately 11,000 beds. The company has a strong presence in the Southeast, one-third of the company’s hospitals are in Florida. By purchasing Health Management, CHS will expand its presence in Florida.
Major shareholder disapproves of so-called cheap deal
Glenview Capital Management is a major shareholder of Health Management Associates Inc (NYSE:HMA) and owns 15% of the company’s stock. The firm is asking for more time to review the details of the deal, finding the offer to be a “floor value” for the company. The price offered reflects 8.3 times trailing cash flows. Health Management shares have risen about 43% this year, but fell 11% on July 30 to close at $13.30. Analyst Sheryl Skolnick, of CRT Capital Group, told Bloomberg the acquisition is “realistic” for shareholders, finding the company’s fundamentals to be bad enough to warrant a below market price.
Consolidation expected to help hospitals in a challenging environment
Both CHS and Health Management Associates Inc (NYSE:HMA) have been targeted by federal investigators for a variety of issues, such as physician referrals, medical necessity of emergency room tests, and admissions practices. Both companies have also been dealing with lower admissions – Health Management predicts admissions for 2013 to drop between 3% to 4.5% and CHS reported lower same-store admissions in the second quarter by 5.7% and lower adjusted admissions by 2.6% compared to last year. After the merger finalizes in the first quarter of 2014, a neutral effect is expected on EPS during 2014, followed by an accretive effect on earnings.
Health Management Associates Inc (NYSE:HMA)’s preliminary net revenue for the second quarter is expected to range between $6.8 billion and $7 billion with diluted EPS of $0.59 and $0.70 per share. Net revenue is expected to decline by $74 million due to lower adjusted admissions from shifts in payors mix, reduced number of surgeries, higher bad debt, a greater number of observation stays, and the effects of sequestration.
Second quarter net income attributed to CHS dropped by 64% to $29.8 million, or $0.32 per share, compared to $83.4 million, or diluted EPS of $0.93, in the second quarter of 2012. The period also had a 5.1% decrease in total admissions and a 1.8% decrease in total adjusted admissions. CEO Wayne T. Smith commented on the company’s ongoing challenges of weak patient volume in May and June, high levels of bad debt, and a declining payor mix. The company is focused on managing expenses and implementing volume initiatives.
