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New owner for Bayfront? Community Health Systems Inc. looks to acquire Health Management Associates Inc.

9:36 AM, Jul 31, 2013   |    comments
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St. Petersburg, FL (WTSP/News-Press) -- Back in February, St. Petersburg city council members voted to approve the sale of Bayfront Medical Center to a Naples-based company called Health Management Associates Inc.  That deal came with a 50-year lease for the land that Bayfront is built on.

Now Bayfront could once again have a new owner. Community Health Systems Inc. plans to acquire Health Management Associates in a $3.9 billion deal that creates a hospital behemoth just as the health care overhaul prepares to funnel millions of newly insured people into the health care system.

"HMA has excellent hospitals," Wayne T. Smith, chairman and CEO of Community Health, said in a conference call with investment analysts. "The ability to integrate these facilities into our organization will enhance our already rich and diverse hospital portfolio."

But Franklin, Tenn.-based Community Health would be buying HMA at a discount, with shareholders assuming some of the risk that the company faces from federal investigations. Investors panned that idea, at least initially, by sending shares of Health Management plunging more than 10 percent Tuesday, closing at $13.30, down $1.62 from Monday's close.

Community Health plans to pay a combination of cash and stock valued at $13.78 for each HMA share, about 7 percent lower than shares closed Monday before the deal was announced. However, Community Health would make an additional contingent value right payment of up to $1 per share depending on how the investigations play out.

HMA is the largest publicly traded company in Southwest Florida pending the relocation of Hertz Corp. to Estero. Hertz executives are expected to begin relocating here later this year.

Health Management said Tuesday it has received a fresh round of subpoenas from the U.S. Department of Health and Human Services, Office of the Inspector General, regarding physician relationships and some emergency room operations.

Community Health disclosed this month that is also responding to a federal subpoena, tied to Medicare-backed admissions.

The combined 206 hospitals would make it the largest hospital operator based on locations, although competitor HCA Holdings Inc. would still bring in more revenue.

HMA operates 71 hospitals in 15 states, including Bayfront.

Community Health, which trades as CYH on the New York Stock Exchange, operates 135 hospitals in 29 states, including hospitals in Lake Wales and Crestview.

"HMA's geographic footprint is complementary to ours," Smith said. "Their hospitals are largely in different markets."

Smith said it is too early to discuss any overlap where services could be cut, including HMA's headquarters.

"We are sensitive to all employees in this organization," Smith said.

Community Health said its deal totals $3.9 billion, or $7.6 billion counting assumed debt. The board members of both companies have approved the deal, but regulators and at least 70 percent of HMA stockholders still have to clear it. The companies hope to close the deal in the first quarter of 2014.

HMA Chairman William Schoen said the companies have been discussing a possible acquisition since late last year.

"I'm delighted we made it happen," Schoen said. "In my view this is truly a case of the whole being greater than the sum of its parts."

Jim Nathan, CEO of the Lee Memorial Health System, said the HMA deal was widely expected in the health care community.

"We have known for the past few months that HMA might be a takeover target and that Community Health Systems was a likely acquirer," Nathan said in an emailed statement. "CHS is new to our market and we welcome them. We do not expect this will impact or change any of our plans to provide quality health services to the residents and visitors of Southwest Florida."

Separately, HMA also said Tuesday it expects to report second-quarter earnings of between 10 cents and 11 cents per share on revenue of about $1.46 billion. That's well below Wall Street expectations.

Analysts forecast, on average, earnings of 20 cents per share on $1.73 billion in total revenue, according to FactSet.

"It's a really poor performance, and if ever there was a reason for change in control, this was it," said Sheryl Skolnick, an analyst who follows the company for CRT Capital Group.

HMA said its revenue from established hospitals is expected to fall due in part to a shift in the payer mix, a reduction in surgeries and rising bad debt, which is basically uncollectible revenue.

Hospitals have been struggling with declining admissions, as patients continue to cut back on their use of the health care system, a trend that started a few years ago during the recession. Federal funding cuts and growing populations of uninsured patients also have pressured profitability.

Community's second-quarter earnings plunged 64 percent as revenue slipped.

"Unfortunately the economic realities of our individual markets continue to hamper our growth, especially in smaller markets," Smith said.

The federal health care overhaul is expected to help ease the pressure hospitals are facing by reducing the number of uninsured patients they treat. Starting next year, the overhaul will provide income-based tax credits to help people buy coverage, and the state-and-federally funded Medicaid program will expand its coverage in several states.

Community said its planned acquisition of HMA will create a company that's well positioned to benefit from the overhaul.

Skolnick said she sees a push for growth from Community and pressure on HMA as the key factors behind the proposed deal, not the overhaul's growth opportunity.

HMA's largest shareholder, Glenview Capital Management, said last month that it wants to replace the hospital operator's board with its own nominees to increase value for the company's investors.

"This is a deal motivated by the hardships at HMA," Skolnick said, adding that the subpoenas represent significant risks that are not going away.

Community Health shares fell $1.65, or 3.5 percent, to close at $45.58 Tuesday afternoon, while broader trading indexes rose slightly.

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