This week, Community Health Systems shook up the hospital industry. The Franklin, Tenn.-based hospital company announced it will acquire Naples, Fla.-based Health Management Associates in a deal valued at $7.6 billion.
CHS will pay cash and assume debt in the deal, which was the second major for-profit hospital merger in as many months. Dallas-based Tenet Healthcare Corp. announced in June it will acquire Nashville, Tenn.-based Vanguard Health Systems for $4.3 billion.
Here are nine initial takeaways from the CHS-Health Management merger.
1. The deal still requires several regulatory approvals. In addition to state and local approvals, the CHS-Health Management merger will still have to go through the watchful eye of the Federal Trade Commission to ensure it meets the requirements of the Hart-Scott-Rodino antitrust law. Also, at least 70 percent of Health Management shareholders will have to vote in favor of the transaction. If the deal collapses, CHS would receive a breakup fee, which normally falls in the range of several million dollars. However, CHS executives did not give a specific dollar amount for a potential breakup fee.
2. CHS will become the largest for-profit hospital company in terms of number of hospitals. CHS will combine its 135 hospitals with Health Management's 71, giving the company 206 hospitals across 29 states. The average hospital within the company will have about 150 beds. However, Nashville, Tenn.-based Hospital Corp. of America will still be the largest for-profit hospital operator by revenue, as it generally has larger hospitals in more urban areas. In fiscal year 2012, HCA recorded $33 billion in total revenue, whereas CHS and Health Management had a combined $18.9 billion.
3. CHS will become an even more dominant force in its local markets. CHS and Health Management own and operate hospitals that are predominantly in rural, small or medium-sized communities — meaning their hospitals are often the main provider in town. Roughly 60 percent of CHS hospitals are sole providers, said Wayne Smith, chairman, president and CEO of CHS, in the conference call announcing the deal. About 70 percent of Health Management's hospitals are sole providers. Combined, 63 percent of the company's hospitals will be sole providers.
In addition, CHS will be gaining a huge foothold in several markets in which it currently doesn't have a big presence, particularly Florida, Mississippi and Oklahoma.
4. Health Management hospitals will piggyback onto CHS' alliance with Cleveland Clinic. This past March, CHS and Cleveland Clinic announced they created a strategic partnership together. CHS and Cleveland Clinic are still entirely separate, independent entities, but they will collaborate on quality improvement, best practices for cardiovascular services and sharing clinical and operational services. With Health Management entering the fold, 71 more hospitals will soon have access to the academic medical center's clinical knowledge base.
5. This is CHS' second major merger in the past six years. CHS has grown quickly in the past several years, but the deal that allowed CHS to get to this point was its acquisition of Triad Hospitals. In March 2007, CHS bought Plano, Texas-based Triad — a spinoff company of the former HCA/Columbia Healthcare — in a deal worth $6.8 billion. (Triad had originally agreed to a buyout deal with CCMP Capital Advisors and Goldman Sachs Capital Partners.) In the conference call, Mr. Smith of CHS said the Triad hospitals now under CHS have improved their margins from 11 to 12 percent to higher than 15 percent today.
6. CHS expects up to $180 million in savings in the first two and a half years. Larry Cash, CHS executive vice president and CFO, said in the conference call that CHS expects to squeeze out $150 million to $180 million in "synergies" and savings, mostly through reduced overhead, consolidated revenue cycle services and streamlined supply chain management. Neither he nor Mr. Smith indicated if layoffs would occur.
7. CHS and Health Management face several investigations from the federal government. The same day the deal was announced, Health Management also said it received four additional subpoenas from the federal government about how its hospitals admit people from the emergency department. Health Management's alleged admissions practices were featured in a "60 Minutes" segment this past December. CHS has also disclosed it faces several investigations from the Department of Justice for similar allegations. In the conference call, Mr. Smith said, "We obviously cannot talk about [Health Management's government investigations], but I think we have a good understanding" of them and have conducted due diligence on them.
8. This may not be CHS' only acquisition in 2013. Earlier this year, CHS executives said they had "three to four targeted hospital acquisitions" for 2013. CHS has not closed on any transactions thus far, and in the conference call, Mr. Smith said its acquisition of Health Management doesn't mean it will stop looking to expand.
"We have a number of acquisitions opportunities…we've said all along that we're looking for strategic opportunities, and that's why we haven't closed anything this year," Mr. Smith said. "We've been careful about price and opportunity, so we're going to be very disciplined about this. But we do have a number of really good opportunities in terms of future acquisitions, so we'll continue to pursue those."
9. Glenview Capital Management has a lot at stake. Glenview has been in the news frequently as of late. Larry Robbins is the founder and CEO of the New York City-based hedge fund, which had a total market value of $10.5 billion as of March 31. Glenview is the largest shareholder of Health Management, owning 14.6 percent of the company, and Glenview currently has a consent solicitation out to replace the entire Health Management board of directors with eight of its own nominees.
Viewed by some as an activist investor and described by Mr. Robbins in interviews as a "suggestivist," Glenview is a major player in the CHS-Health Management deal beyond the obvious reasons. Glenview owns more than 9 million shares of CHS, or a little less than 10 percent of the company, and it also has significant investments in HCA, Tenet and Brentwood, Tenn.-based LifePoint Hospitals. The hedge fund is betting a lot of money that hospitals will be major winners under healthcare reform, but in a recent statement, Glenview said it is "difficult to assess whether the value offered in the [CHS] proposal represents full and fair value or represents the price offered by an opportunistic acquirer to a distressed seller."
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