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Health Management Seen Succumbing to Lone Bid: Real M&A

Health Management Associates Inc.’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, didn’t return a phone call seeking comment.

Board Overhaul

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.

‘Wild Card’

“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.’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.

‘Distressed Seller’

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 Glenview.

“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.

Difficult Turnaround

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 Community Health.”

Standalone Prospects

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.’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 a transaction.”

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