Community Health Throwing in Towel, Say Sources; Going Private an Option?

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Community Health Systems Inc. (Franklin TN), the troubled hospital operator, is exploring a possible sale of its business, Bloomberg News reported, citing “people with knowledge of the matter.”

The company is working with advisers to consider options, although the deliberations are at an early stage and there is no certainty of a deal, the people said, asking not to be identified because the information is private.

Community Health Systems, the troubled hospital operator, explores sale of its business Click To Tweet

The shares surged 11% on the week to $12.29, giving Community Health a market value of $1.4 billion and an enterprise value, including long-term debt, of about $17 billion. Before Friday’s move, the shares had plunged 75% in the past 12 months. The high level of debt, combined with a raft of operational issues facing the company, could limit the number of potential buyers, one of the people said.

Sheryl Skolnick, an analyst with Mizuho Securities, said Community Health might have trouble finding a buyer in the two other biggest publicly traded hospital chains, HCA Holdings Inc. (Nashville TN) and Tenet Healthcare Corp. (Dallas TX). She called a deal with HCA “highly unlikely,” and said Community Health’s debt load would be a major obstacle. Both would be unlikely to use stock for the purchase, which would be necessary, she said.

“Tenet would have to use stock (and put its stock at risk) and we doubt that its new board would risk the new strategy for such a disruptive transaction,” Skolnick said Friday in a note to clients. “We don’t think it gets sold in whole, but it might get sold in part.”

Tenet spokesman Charles Nicolas declined to comment, saying the company doesn’t speculate on acquisitions or divestitures. A representative for HCA didn’t immediately respond to requests for comment.

Last month, Community Health posted a second-quarter net loss of $1.43 billion after writing down the value of its hospital assets. The company said at the time that it had overestimated the long-term fair value of its hospitals.

While the Affordable Care Act has expanded health coverage, its effects have waned for hospitals over the past year, and Community Health spun off 38 hospitals as Quorum Health Corp. in April as it works to improve financial performance. The company has said it’s considering selling more.

Operating revenue in the second quarter totaled $4.59 billion, beating the average of analysts’ estimates compiled by Bloomberg of $4.54 billion.

Steve’s Take: I hate to admit it but I was caught off guard Friday when I saw the Bloomberg News report saying Community Health (CHS), the hospital chain, was exploring strategic options including a potential sale.

Of course, the company itself hasn’t confirmed or denied anything yet, but Bloomberg would be reluctant to put out a news release like this one if it weren’t highly confident about the reliability of its “sources.” The report comes as the company has underperformed its publicly traded cohorts amid issues with some hospitals it inherited through acquiring rival Health Management Associates Inc. two and a half years ago, according to The Tennessean.

Industrywide, hospitals face multiple challenges such as weak inpatient volume. Specifically, CHS also continues to feel a pinch from states that didn’t expand Medicaid. Three of the top five states in its portfolio–Florida, Tennessee and Texas–have not expanded Medicaid programs to include people up to 138% of the federal poverty line.

Before Friday’s uptick to a closing price of $12.29, CHS’s shares were down an industry-worst 74.8% over the past year versus a 37% average decline for the hospitals group. In a research note, RBC Capital Markets analyst Frank Morgan of Nashville said that should the news reports prove accurate, going private is a more likely scenario for CHS, according to the newspaper.

“While we are somewhat skeptical of these reports, if they are true, we do not see a perfectly logical strategic buyer for the company in its entirety,” Morgan said. “While the company is already highly levered, a transaction to rationalize and turn around the portfolio as a private entity seems to be a more likely scenario, given the relatively low equity value (approximately $1.4 billion).”

Led by CEO Wayne T. Smith, CHS and its affiliates own, operate or lease 158 hospitals in 22 states with 123,000 employees overall. In his research report, Morgan recalled how the hospital chain has struggled of late with its integration of the $7.6 billion HMA acquisition not progressing as planned. That has led to significant downward revisions in earnings guidance and analyst estimates, as well as goodwill write-downs and planned divestitures of underperforming assets, he added.

Year over year, CHS’s consolidated net operating revenues, admissions, surgeries and emergency department visits are all down, according to its second-quarter earnings presentation. The hospital chain has largely been moving away from its bread-and-butter operations as a rural hospital operator to pursue expansion in markets where it can own a variety of interrelated health care facilities.

CHS has been trying to sell a portfolio of a dozen underperforming hospitals. In Tennessee, where most of CHS’s facilities operate under subsidiary Tennova Healthcare, the company has closed two hospitals in recent years–McNairy Regional Hospital and Haywood Park Community Hospital.

A year ago, CHS announced a plan to spin off a portfolio of 38 rural hospitals into a new company called Quorum Health Corp. It was a strategic move that Smith expected would give CHS the chance to sharpen its focus on growth markets. CHS’s recent quarterly earning calls have underscored its tough financial position. The company has seen its stock price drop from $51.05 a year ago to $12.29 at Friday’s market close. CHS’s tribulations have been snowballing.

Smith told investors in February that 2015 was “a difficult year for us, not the year we expected” and that the company was disappointed in the results. On that same call, it raised its forecast on “doubtful accounts” or bills that would go unpaid by $169 million.

So what we have here is the tale of one of the founding companies of the Federation of American Hospitals, showing serious signs of getting old in the teeth. I was fortunate to have worked with National Medical Enterprises, the forerunner of Tenet Healthcare Corp., and got to know NME’s founders–all lawyers–Dick Eamer, Leonard Cohen and John Bedrosian.

When they started out, they were quick to use equity capital–something their not-for-profit competitors couldn’t avail themselves of–and took advantage of the “new” Medicare program to build and expand hospitals in Sunbelt states with mushrooming populations and relatively few nonprofit-sponsored facilities.

But the dynamics that drove the rapid growth of the for-profit chains from the 1960s through the 1990s have changed dramatically as the Medicare “cost-plus X%” reimbursement inducement for hospital participation went by the boards decades ago, and the ACA’s emphasis on broadening coverage has further sapped profit centers. The recent history of CHS is textbook testimony to this change in the operating environment.

One interesting item I just discovered was last month, Modern Healthcare reported that Tianqiao Chen, a Chinese billionaire who made his initial fortune in online gambling, purchased a 9.9% stake in Community Health, citing a regulatory filing. Chen, through affiliate Shanda Media Limited, reported on Aug. 3 that he had accumulated 11.3 million shares of CHS, the filing said. His purchases, made since June 30, makes Chen CHS’s largest shareholder ahead of Wellington Management’s 8.5 million shares as of June 30, according to Morningstar.

The timing of Chen’s move and this latest, reputed development at CHS suggest somebody knows something the rest of us don’t.

I look back fondly to those heady days when NME, Hospital Corp. and AMI were scaring the hell out of the nonprofit sector with deal after deal to scoop up their “underperforming” hospitals. I recall walking around the underground parking lot in the building where NME was headquartered in Santa Monica and counting all the Porsches parked there. Those were the days.

In closing, the Federation’s first Washington-based leader, Mike Bromberg, recently said:

“We were a pariah to a lot of liberals who wanted to ban them,” referring to the for-profit chains when they first arrived on the scene. Bromberg, who served as the association’s CEO from 1969 to 1994 and remains vice chair of the board, added “Now we’ve sort of proved ourselves, and it’s recognized that for-profit hospitals give consumers choices.”

I agree with Mike that the entire hospital industry has benefited from the presence these past fifty years of proprietary companies like Community Health. I could be wrong, and hope so, but don’t be surprised if CHS loses its identity in the near future either being broken up and digested by other systems or by morphing into a “startup” of some sort. In either event, its glory days are in a bygone era.

Steve's Take: For-profit hospitals have benefited the hospital industry Click To Tweet

It’s been fifty years since the Federation of American Hospitals was formed to represent the interests of the for-profit hospitals and proprietary chains in Washington, and its constituency has since established a large and stable market niche, with dominant positions in certain Sunbelt markets. Well done.

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