Community to Buy Health Management for $3.9 Billion

Community Health Systems Inc., the second-largest U.S. hospital chain, agreed to buy Health Management Associates for $3.9 billion in cash and stock in a deal that’s being questioned by an activist investor group that says its wants more time to review the details.

Glenview Capital Management LLC, the owner of about 15 percent of Health Management stock, said today investors should replace the company’s board with its nominated directors to build value into the Naples, Florida-based hospital system and investigate possible alternative proposals. Glenview has sought to oust the board because of its “substandard strategic and financial approach,” the group has said.

Under today’s agreement, Health Management holders will get $13.78 a share as well as a contingent value right that may add as much as $1 a share based on the outcome of legal matters, the companies said in a statement. Community Health would get control of about 206 hospitals in 29 states.

“As the sitting board has entered into a sale agreement concurrent with management vacancy, disappointing results and a reduced outlook, it is difficult to assess whether the value offered in the Community proposal represents full and fair value or represents the price offered by an opportunistic acquirer to a distressed seller,” Glenview said in a statement.

The Community Health proposal establishes an important floor value for Health Management shareholders to evaluate, Glenview said.

Deal Value

Including net debt, the purchase by Franklin, Tennessee-based Community Health is valued at about $7 billion, according to data compiled by Bloomberg that used average price for the last 20 days of trading to calculate the stock portion of the bid. The offer is equal to 8.3 times Health Management’s earnings before interest, taxes, depreciation and amortization for the last 12 months, the data show. Assumed debt is $3.7 billion, according to the statement from the companies.

Health Management fell 11 percent to $13.30 at the close in New York. The hospital company’s shares have gained 43 percent this year.

Glenview on June 25 proposed ousting the board and management of Health Management. The money manager nominated eight directors and urged that outside consultants Alvarez & Marsal Inc. be hired to serve as interim managers. Glenview said in an open letter to shareholders that it didn’t have a position on whether selling the business would be better than simply changing management. Health Management on June 28 urged shareholders not to respond to Glenview’s consent solicitation.

Since Glenview’s action on June 25, Health Management’s shares have fallen 14 percent.

Additional Subpoenas

Health Management also announced today that it received subpoenas regarding certain emergency room operations that supplement earlier ones from 2011. On June 12, the hospital chain received another subpoena regarding physician relationships. Community Health fell 3.5 percent to $45.58.

The acquisition “is going to be the only realistic option for shareholders,” said Sheryl Skolnick, an analyst at Stamford, Connecticut-based CRT Capital Group LLC. “To reject this deal means the stock is going to go down, the fundamentals are so bad. What will a knowledgeable buyer pay for your assets? You got the answer, less than the stock market.”

The companies said they expect to complete the transaction by the end of the first quarter of 2014. Scott Tagliarino, a spokesman for Glenview Capital, declined immediate comment.

Takeover Size

The takeover is the biggest of a hospital company since 2006, when HCA Inc. was acquired by buyout firms including KKR & Co. for about $33 billion including debt, according to data compiled by Bloomberg.

Late last year, Health Management began a review of all strategic options and everything was on the table, William Schoen, chairman of the board of directors, said in a conference call with analysts today. Discussions with Community Health started last year, he said.

“In my view, this is truly a case of the whole being greater than the sum of its parts,” he said.

The deal also reflects continuing consolidation in the hospital industry to meet the anticipated needs of millions of Americans expected to gain medical coverage under the U.S. health-care overhaul. State exchanges where the uninsured can obtain medical insurance are scheduled to open Oct. 1 for plans that take effect Jan. 1, when the Affordable Care Act requires most Americans to carry insurance.

Cost Squeeze

The deal will bring cost savings and growth during a time when the hospital industry is being squeezed by lower insurance reimbursements and other financial challenges, Wayne Smith, chairman and CEO of Community Health, said in a conference call today with analysts.

“This industry has been in a very difficult time,” Smith said, adding that health reform in 2014 should help bring relief. “It’s a great opportunity for us.”

Health Management runs 71 hospitals, about a third of which are in Florida, with about 11,100 beds. The company reported $5.88 billion in revenue last year. Community Health owns, leases or operates 135 hospitals with about 20,000 beds, and the company posted $13 billion in net revenue in 2012. HCA Holdings, with 162 hospitals and 113 freestanding surgery centers in 20 U.S. states and England, remains the biggest for-profit U.S. hospital chain. HCA generated $33 billion in revenue last year.

BofA Merrill Lynch and Credit Suisse are acting as financial advisers to Community Health, and Kirkland & Ellis LLP is acting as its legal adviser. Morgan Stanley & Co. LLC is acting as financial adviser to Health Management, and Weil, Gotshal & Manges LLP is acting as its legal adviser.

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