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.
Rival HCA buys hospitals in Florida
HCA Holdings Inc (NYSE:HCA), or Hospital Corporation of America, which operates about 163 hospitals and 109 freestanding surgery centers, had initially shown interest in acquiring Health Management Associates Inc (NYSE:HMA). Instead the company has purchased from IASIS Healthcare three hospitals located in the Tampa Bay, Florida area. The hospitals will join HCA’s West Florida division and add 691 beds. With the purchase, the West Florida division expands to 19 hospitals and 16 ambulatory surgery centers and should attract patients located in Tampa Bay and St. Petersburg.
HCA Holdings Inc (NYSE:HCA)’s results in the second quarter were better than its competitors with revenue of $8.45 billion, up 4.2% from $8.11 billion in the second quarter of 2012. Second quarter net income per diluted share came in at $0.91 compared to $0.85 in 2012. The hospital operator’s same facility admissions for the quarter increased 1.3% and same facility equivalent admissions rose 1.1%.
My Foolish conclusion
The three companies mentioned have approximate five-year growth rates between 10% and 12%. With the changes expected next year and brought on by the Affordable Care Act, it may be wise to sit on the sidelines and watch how these companies navigate through this new regulatory environment. It will also be interesting to see the outcomes and resolution of the legal matters affecting CHS and Health Management Associates Inc (NYSE:HMA). The hospital chains that achieve positive results may warrant a purchase near the second half of 2014.
Eileen Rojas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Ready for Obamacare, Hospital Chains Join Forces originally appeared on Fool.com.
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