Health Management Associates Inc. (HMA), facing a leadership change and potential pressure from its biggest shareholder, is becoming one of the hottest subjects of merger speculation among U.S. stocks.
The operator of rural American hospitals surged 25 percent last week, more than almost every Russell 3000 Index stock and enough to drive Health Management’s price-earnings ratio to a level last seen in 2009, according to data compiled by Bloomberg. The rally came amid optimism shareholder Glenview Capital Management LLC may spur a sale and after Health Management said its chief executive officer will retire.
The CEO shift amid government investigations could lead to a sale of the $3.6 billion company, Royal Bank of Canada said. Both RBC and shareholder Snow Capital Management LP see Community Health Systems Inc. (CYH), which said last week that it’s open to friendly mergers, as the most logical suitor. At Susquehanna International Group LLP’s estimated price of about $18.50 a share, a deal would be the biggest in the health-care-services industry since 2006, data compiled by Bloomberg show.
“HMA’s CEO resigned and their board needs to do something for shareholders,” Joshua Schachter, a money manager at Sewickley, Pennsylvania-based Snow Capital, said in a telephone interview, referring to Health Management by its stock ticker. Snow Capital oversees more than $3 billion, including shares of Community Health and Health Management. “Shareholders of HMA would really welcome a deal to be with the good management team of Community.”
MaryAnn Hodge, a spokeswoman for Health Management, declined to comment on whether the company would be open to a sale or had held conversations with potential buyers. Scott Tagliarino, a spokesman for New York-based Glenview, declined to comment on whether the investor would support a deal.
Last month, shareholder Glenview Capital began reporting its 14.6 percent stake on a form 13D, a U.S. Securities and Exchange Commission document usually reserved for activist holdings. In a May 24 filing that mentioned the shift, Health Management said it adopted a takeover defense because the investor had sought regulatory approval to purchase as much as $2.2 billion of stock -- at the time, about a 75 percent stake.
Glenview responded on May 28, saying it had “no present intention or future plan” to purchase that much stock. Glenview also said it hoped to continue private discussions with Health Management.
The stock jumped 6.9 percent on May 28 after the statements from Health Management and Glenview as well as a report from Lazard Capital Markets LLC that said the investor may desire a sale of the company. After the market closed that day, Health Management said Gary Newsome will retire as CEO and leave the board on July 31, fueling even more gains for the stock -- which rose 25 percent between May 24 and May 31.
It was the 10th-biggest weekly increase in the Russell 3000 Index during the period and also Health Management’s biggest advance since 2009, data compiled by Bloomberg show.
Today, the shares rose 2 percent to $14.19 at 9:56 a.m. New York time, climbing for the ninth straight day. That’s the longest streak of gains since 2009, data compiled by Bloomberg show. The rally has pushed Health Management’s price-earnings ratio to greater than 20, the most expensive valuation in more than three years, the data show.
“The market obviously thinks the company is in play,” John Ransom, an analyst at St. Petersburg, Florida-based Raymond James Financial Inc., said in a phone interview. “You had the poison pill and then you had the CEO resign in rapid succession.”
Community Health is the most logical suitor for Health Management, said Schachter of Snow Capital. Community Health owns, leases or operates 135 hospitals with about 20,000 beds and posted $13 billion of net revenue in 2012.
The Franklin, Tennessee-based hospital operator is interested in buying complementary companies of a “decent size,” though it probably wouldn’t pursue hostile deals, Chief Financial Officer W. Larry Cash said at a conference last week.
Tomi Galin, a spokeswoman for Community Health, didn’t respond to a phone message or e-mail seeking comment.
Health Management “would significantly add to earnings for Community,” Schachter said in a phone interview. A combination would be “a perfect fit.”
Also, their operations don’t significantly overlap geographically, said Gary Lieberman, a New York-based analyst at Wells Fargo & Co.
Chris Rigg, a New York-based analyst at Susquehanna, said in a report last week that Health Management could fetch about $18.50 a share in a takeover.
That would give the company an enterprise value of $8.4 billion, making a deal the fourth-biggest on record for a health-care-services provider, data compiled by Bloomberg show. It would be the largest purchase since a group of private-equity firms purchased HCA Inc. in 2006 for more than $30 billion, the data show.
Private-equity firms could also be tempted to bid on Health Management, lured by the opportunity to cash in on an influx of newly insured patients from the U.S. Patient Protection and Affordable Care Act, said Frank Morgan, an analyst at RBC.
“If you’re a private-equity investor, you might look at HMA as an investment vehicle to get a really big portfolio of assets in one fell swoop,” Morgan said in a phone interview.
HCA Holdings Inc. (HCA), as HCA is now known after its 2011 initial public offering, and Tenet Healthcare Corp. (THC) could be interested in Health Management to expand their footprints in Florida, said Whit Mayo, a Nashville, Tennessee-based analyst at Robert W. Baird & Co.
“You can get better leverage, better pricing,” Mayo said in a phone interview. “There are some strategic reasons why this would make a lot of sense.”
Ed Fishbough, a spokesman for Nashville-based HCA, and Rick Black of Dallas-based Tenet declined to comment on whether their companies would seek to buy Health Management. The two companies have market values of $18 billion and $4.9 billion, respectively.
Still, Health Management may not be interested in selling, Mayo said. Also, potential legal costs or the prospect of business disruptions stemming from Health Management’s government investigations could deter buyers, said Sheryl Skolnick, a Stamford, Connecticut-based analyst at CRT Capital Group LLC.
Health Management said on May 2 that the SEC was reviewing its accounting procedures, including payments from Medicare and Medicaid, the U.S. health programs for the elderly and poor.
“HMA is highly problematic as a takeout candidate” because of the inquiries, Skolnick said in a phone interview.
Community Health, which has faced its own government investigations, may not be turned off by Health Management’s potential legal issues, Schachter of Snow Capital said.
“That’s part of the business and being in this industry,” he said.
With Health Management juggling both the investigations and a CEO search, now could be the time for the company to evaluate options including a sale, RBC’s Morgan said.
“There are not many portfolios of this size that come to market very often,” he said. “To the extent that that’s one of the options they explore, certainly there would be people that would absolutely look at it.”
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