Health Management Associates Inc. (HMA)’s
$7.4 billion takeover offer from Community Health Systems Inc.
may be the best shareholders are going to get.
Two weeks after Health Management agreed to the deal, the
entire board was replaced with activist investor Glenview
Capital Management LLC’s nominees and tasked with determining if
the cash-and-stock offer is too low. While Glenview claimed the
bid set a “floor value” and the board overhaul brought hope
for negotiating a higher price, Community Health valued the
hospital chain at more than the industry’s median takeover
multiple, according to data compiled by Bloomberg.
No rival bidders have emerged, and analysts are forecasting
a 16 percent profit drop when Health Management reports third-quarter results. That will boost the odds of Health Management
investors voting for the deal, UBS AG said. Without the
takeover, Health Management owners risk seeing the stock plunge
as much as 37 percent, Susquehanna International Group LLP
estimates. Shareholders should take the money and run because
Health Management faces a challenging turnaround, according to
CRT Capital Group LLC.
“Shareholders were interested in having this new board
take a second look” at the deal terms, A.J. Rice, a New York-based analyst at UBS, said in a phone interview. “But when push
comes to shove, I think people will see that it’s in their
interest to put these two companies together.”
MaryAnn Hodge, a spokeswoman for Naples, Florida-based
Health Management, declined to comment on the new board’s plans.
Tomi Galin, a spokeswoman for Franklin, Tennessee-based
Community Health (CYH), didn’t return a phone call seeking comment.
The May announcement that Health Management’s chief
executive officer was retiring triggered speculation the company
would be bought as hospital operators gear up for an influx of
new customers in 2014 when more people have access to health
insurance. Health Management runs 71 mostly rural hospitals, a
third of which are in Florida.
Glenview, the largest shareholder in both hospital chains,
proposed ousting Health Management’s board in June, criticizing
its “substandard strategic and financial approach.” On Aug.
16, after Health Management had already agreed to the deal with
Community Health, all eight of the hedge fund’s independent
board nominees were elected.
“One reason investors voted in the new board was to see if
there was any perspective they could come up with that might be
able to drive a better deal with Community Health,” Thomas Gallucci, a New York-based analyst at Lazard Capital Markets
LLC, said in a phone interview. “There’s a big wild card here:
Is the new board going to come up with anything?”
The deal would exchange each Health Management share for
$10.50 in cash and 0.06942 of a Community Health share.
Investors may receive an additional payment of as much as $1 a
share, based on the outcome of certain legal matters.
In July, Health Management said it had received subpoenas
regarding certain emergency room operations that supplement ones
from 2011, as well as a subpoena regarding physician
relationships. CBS Corp. (CBS)’s “60 Minutes” TV show also has aired
a segment claiming Health Management pressured its doctors to
keep hospital beds filled to boost revenue and profits.
The cash-and-stock portion of Community Health’s offer,
including net debt, valued Health Management at 9.8 times its
earnings before interest, taxes, depreciation and amortization
in the prior 12 months, according to data compiled by Bloomberg.
That tops the median multiple of 8.6 for U.S. hospital deals
larger than $1 billion, the data show.
The offer equated to $13.78 a share the day it was
announced, a 7.6 percent discount to Health Management’s stock
price the previous day. As Community Health shares have fallen,
the value of its offer dropped to $13.18 a share as of
yesterday. Health Management closed yesterday at $12.77.
Today, shares of Health Management rose 0.2 percent to
$12.79. Community Health climbed 4.6 percent to $40.32, the most
since July 29.
It’s difficult to assess whether the bid was fair or
represents a price offered “by an opportunistic acquirer to a
distressed seller,” according to a July 30 statement from
“Several months from now, with greater board and
management engagement and greater transparency, Glenview and
other shareholders will consider the Community proposal with an
eye towards maximizing shareholder value and positioning HMA to
best serve the healthcare needs of its local communities,”
Glenview said in a statement Aug. 12. Katrina Allen, an external
spokeswoman for New York-based Glenview with ASC Advisors LLC,
declined to comment further.
Health Management is estimated to report earnings next
month. Net income for the quarter may be $34.7 million, a 16
percent decline from the same period last year, analysts’
estimates compiled by Bloomberg show. The profit drop may sway
investors to approve the sale, even if the board can’t persuade
Community Health to sweeten the terms, Rice of UBS said.
The new board may decide to support the current agreement,
according to Sheryl Skolnick, a Stamford, Connecticut-based
analyst at CRT Capital.
“They’ll figure we better take the money and run because
the intrinsic value of the company is a whole lot less than what
Community Health’s offering,” Skolnick said in a phone
interview. While earnings expectations are already low, the
results are likely to help “drive home just how difficult a
standalone turnaround would be without being under the wing of
Susquehanna’s Chris Rigg agrees that the current bid is
fair and sees the stock falling to as low as $8 absent a deal,
about 37 percent less than yesterday. While it’s possible that
Community Health may boost the offer to ensure approval, any
increase will be modest, “likely cents not dollars,” the New
York-based analyst wrote in a report Sept. 6.
Community Health needs investors representing 70 percent of
Health Management’s shares outstanding to vote in favor of the
transaction. That’s a higher threshold than other deals this
year such as Smithfield Foods Inc. (SFD)’s sale to Shuanghui
International Holdings Ltd., which requires only a majority.
If Community Health does end up improving the terms, it
will probably be an increase to the contingent value right
payment if the legal hurdles are met, rather than a bump in the
amount of stock or cash upfront, Skolnick of CRT Capital said.
While the deal would still be attractive for Community
Health at a higher price, that doesn’t mean the company is
willing to pay more, said Gallucci of Lazard.
“It’s a little bit of a showdown because Community Health
has a deal on the table, and so they would have to debate the
odds of shareholders actually rejecting it,” he said. “Based
on what we know today, investors would likely have a bias toward
To contact the reporter on this story:
Tara Lachapelle in New York at
To contact the editor responsible for this story:
Sarah Rabil at