It wasn't a good sign for Community Health Systems back in 2013 when analysts were telling the hospital operator's desperate acquisition target to "take the money and run." Community Health's $7.5 billion deal for Health Management Associates, completed early the following year, was effectively a take-under for some of HMA's shareholders and yet their best option at the time -- a "godsend" is how one analyst put it. For Community Health, it's been a case of "bad-dealitis".
History is repeating itself: Now Community Health is the one left exploring a sale to become someone else's problem. However, it might not wind up as lucky as HMA was. Good luck finding buyers willing to take on Community Health's mountain of debt and operational problems that arose following its ill-fated HMA acquisition.
Community Health is saddled with $15.4 billion of debt, much of which is tied to the purchase of HMA. That compares with a market value of only $1.3 billion after the shares dropped by about three quarters during the past year.
More troubling is Community Health's weakening operations. Buying HMA, which ran 71 hospitals in rural parts of Florida and the South, certainly made Community Health larger, increasing its number of beds by about 55 percent. But it's dragged down the company financially. Admissions have declined, as has revenue per admitted patient. Jason McGorman, an analyst at Bloomberg Intelligence, has written that while Community Health has been aggressively recruiting doctors, this probably won't translate into stronger admissions until next year.
Hospital operators are feeling less and less the benefits of the Affordable Care Act, which brought more Americans into the health-care system. And on top of that, Community Health is grappling with bad debt. That's the money it fails to collect from patients, who are either uninsured or have high deductibles that force them to pay out of pocket. According to Bloomberg Intelligence, Community Health's bad-debt-to-sales ratio of nearly 14 percent tops its peer group's average.
Speaking of peers, its three big, publicly traded counterparts are HCA Holdings (market cap of $29 billion), Tenet Healthcare ($2.3 billion) and Universal Health Services ($12 billion). It doesn't seem like any one of them would stomach a takeover of Community Health on their own. Instead, it's more likely that the target gets broken up, or that bottom-feeding financial suitors step in (though the debt makes that tough to envision). Some have suggested sale-leasebacks to a REIT as part of a restructuring. The company has already been making divestitures; in April it spun off Quorum Health, whose stock has lost 50 percent since.
So just like HMA, don't expect much of a premium for Community Health, even if it is officially in play now.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Funny enough, Tenet fought off a takeover bid from Community Health in 2011.
To contact the author of this story:
Tara Lachapelle in New York at firstname.lastname@example.org
To contact the editor responsible for this story:
Beth Williams at email@example.com