Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

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". 

Debt Burden
Community Health's enterprise value is mostly made up of debt, much of which came from its 2014 takeover of Health Management. It paid more for that deal than the combined entity is worth today.
Source: Bloomberg

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. 

Turn for the Worse
Paging Dr. Deals. Community Health's stock looks sickly. The hospital operator is turning to a variety of deal options, such as a sale or more divestitures, in hopes of a recovery.
Source: Bloomberg

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.

Risky Territory
The yield has surged on Community Health's 6.875% coupon bonds due in 2022, which were issued following the HMA acquisition. S&P downgraded the company's credit rating to B last month.
Source: Bloomberg

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. 

Deal Woes
Since acquiring HMA, Community Health's admissions and the revenue it generates from them has lagged behind peers. This shows growth in same-hospital revenue per adjusted admission:
Source: Bloomberg Intelligence

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.

  1. 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 tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net