Keep A Close Eye On Health Management Associates, Community Health Systems

Health Management Associates (HMA) has agreed to be acquired by Community Health Systems (CYH), which will pay around $4 billion and take on the equal amount of debt as the consideration for the transaction. The combination is expected to be a system for healthcare, which is better positioned to compete in the rapidly changing scenario in the United States. The deal is subject to the normal conditions, but it is widely expected that there will be no trouble in getting the necessary regulatory and shareholder approvals. This is a pretty good deal for HMA shareholders who will receive cash payments of $13.78 a share as well as contingent value rights depending on the outcome of ongoing investigations that could provide an extra $1 per share to the effective price. Without the contingent value rights, Community's offer currently makes available a premium of around 3%, and the addition of the CVR enhances this premium to around 10%.

Community Health Systems has a bigger headcount and bed count than HMA, but both companies are well known in the American healthcare industry. Community Health Systems operates hospitals and clinics in 29 states within a fairly tight area surrounding its Tennessee headquarters. Health Management Associates, with clinics and hospitals in around 20 states, is also focused on operating in the Southeastern and Mid-Atlantic regions of the United States. In fact, Health Management is already present in all the states in which Community operates and both companies provide similar services, including full-service hospitals, walk-in clinics, outpatient specialists, facilities for surgery, cancer treatment, and so on.

In response to the implementation of the Affordable Care Act, hospital companies are still working out how to respond. It is generally accepted that hospital systems will need to live with lower profits and margins; many small and medium-sized companies are entering into alliances that enable them to exploit the economies of scale. This deal will certainly create synergies for the combined company, and, once it has digested Health Management, Community may be able to centralize some of its activities and close some of its smaller, less profitable facilities without affecting service and coverage. Additionally, it may choose to experiment with data-gathering systems and outsource menial medical tasks to low-cost overseas facilities.

Health Management Associates' second quarter finances

Health Management Associates reported EPS from continuing operations of $0.03 per diluted share. Adjusting for approximately $19.3 million (or $0.04 per diluted share) relating to interest rate swap accounting and mark-to-market valuations on the swap, diluted EPS from continuing operations was $0.07 per diluted share in comparison to $0.21 per diluted share in the previous year on net revenues of $1.464 billion. The results fell short of Wall Street expectations. Cash flow generated by continuing operating activities for the quarter was $108.3 million, after making cash interest and cash tax payments totaling $61.7 million. At June 30, 2013, total leverage ratio and interest coverage ratio were at 4.1%, which was well within the requirements of its debt covenants.

For the six months ended June 30, 2013, Health Management had net revenue of $2.947 billion and adjusted EBITDA of $380.1 million. Excluding the impact of approximately $37.0 million ($0.09 per diluted share) for interest rate swap accounting, as well as mark-to-market adjustments EPS from continuing operations, were $0.21 per diluted share. Consolidated EPS per diluted share from continuing operations were $0.12 for the period.

The role of Glenview Capital Management

Glenview Capital Management, which owns 14.6 percent of HMA stock, has decided to play the activist shareholder and decided to get rid of the entire board of directors of HMA after a fight that has lasted some months. Even the proposed sale to Community Health Systems has not been sufficient to ward off Glenview. Glenview says that it does not like to act in an activist fashion, and this is the first time it has openly taken on a company's board of directors. It is seeking to establish that company boards must work constructively to improve shareholder value and ensure that shareholders are treated as partners of the management. It further says that if these two objectives are not met, shareholders should actively seek change. Glenview says it expects to "ensure a smooth transition to be affected this week." After Glenview's nominees take over the board, the next step will be to review the $3.9 billion deal. The fund said that would happen in several months, in line with the timetable the companies had proposed and would not cause further delays. On August 12, Glenview Capital Management LLC announced that it has won shareholder approval for its plan to replace the entire board of directors at Health Management Associates Inc.

Recommendation

HMA is currently trading at $12.93, which means that there is an arbitrage premium provided the Community Health Systems goes through at the announced offer price of $13.98, and that the CVR premium of $1.00 is realized, making a total of $14.98 per share. If you are convinced that this is going to happen, you could buy and cash in on the arbitrage premium. However, I would recommend that, as a matter of prudence, you should watch future developments before taking action of any kind.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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Keep A Close Eye On Health Management Associates, Community Health Systems

Health Management Associates (HMA) has agreed to be acquired by Community Health Systems (CYH), which will pay around $4 billion and take on the equal amount of debt as the consideration for the transaction. The combination is expected to be a system for healthcare, which is better positioned to compete in the rapidly changing scenario in the United States. The deal is subject to the normal conditions, but it is widely expected that there will be no trouble in getting the necessary regulatory and shareholder approvals. This is a pretty good deal for HMA shareholders who will receive cash payments of $13.78 a share as well as contingent value rights depending on the outcome of ongoing investigations that could provide an extra $1 per share to the effective price. Without the contingent value rights, Community's offer currently makes available a premium of around 3%, and the addition of the CVR enhances this premium to around 10%.

Community Health Systems has a bigger headcount and bed count than HMA, but both companies are well known in the American healthcare industry. Community Health Systems operates hospitals and clinics in 29 states within a fairly tight area surrounding its Tennessee headquarters. Health Management Associates, with clinics and hospitals in around 20 states, is also focused on operating in the Southeastern and Mid-Atlantic regions of the United States. In fact, Health Management is already present in all the states in which Community operates and both companies provide similar services, including full-service hospitals, walk-in clinics, outpatient specialists, facilities for surgery, cancer treatment, and so on.

In response to the implementation of the Affordable Care Act, hospital companies are still working out how to respond. It is generally accepted that hospital systems will need to live with lower profits and margins; many small and medium-sized companies are entering into alliances that enable them to exploit the economies of scale. This deal will certainly create synergies for the combined company, and, once it has digested Health Management, Community may be able to centralize some of its activities and close some of its smaller, less profitable facilities without affecting service and coverage. Additionally, it may choose to experiment with data-gathering systems and outsource menial medical tasks to low-cost overseas facilities.

Health Management Associates' second quarter finances

Health Management Associates reported EPS from continuing operations of $0.03 per diluted share. Adjusting for approximately $19.3 million (or $0.04 per diluted share) relating to interest rate swap accounting and mark-to-market valuations on the swap, diluted EPS from continuing operations was $0.07 per diluted share in comparison to $0.21 per diluted share in the previous year on net revenues of $1.464 billion. The results fell short of Wall Street expectations. Cash flow generated by continuing operating activities for the quarter was $108.3 million, after making cash interest and cash tax payments totaling $61.7 million. At June 30, 2013, total leverage ratio and interest coverage ratio were at 4.1%, which was well within the requirements of its debt covenants.

For the six months ended June 30, 2013, Health Management had net revenue of $2.947 billion and adjusted EBITDA of $380.1 million. Excluding the impact of approximately $37.0 million ($0.09 per diluted share) for interest rate swap accounting, as well as mark-to-market adjustments EPS from continuing operations, were $0.21 per diluted share. Consolidated EPS per diluted share from continuing operations were $0.12 for the period.

The role of Glenview Capital Management

Glenview Capital Management, which owns 14.6 percent of HMA stock, has decided to play the activist shareholder and decided to get rid of the entire board of directors of HMA after a fight that has lasted some months. Even the proposed sale to Community Health Systems has not been sufficient to ward off Glenview. Glenview says that it does not like to act in an activist fashion, and this is the first time it has openly taken on a company's board of directors. It is seeking to establish that company boards must work constructively to improve shareholder value and ensure that shareholders are treated as partners of the management. It further says that if these two objectives are not met, shareholders should actively seek change. Glenview says it expects to "ensure a smooth transition to be affected this week." After Glenview's nominees take over the board, the next step will be to review the $3.9 billion deal. The fund said that would happen in several months, in line with the timetable the companies had proposed and would not cause further delays. On August 12, Glenview Capital Management LLC announced that it has won shareholder approval for its plan to replace the entire board of directors at Health Management Associates Inc.

Recommendation

HMA is currently trading at $12.93, which means that there is an arbitrage premium provided the Community Health Systems goes through at the announced offer price of $13.98, and that the CVR premium of $1.00 is realized, making a total of $14.98 per share. If you are convinced that this is going to happen, you could buy and cash in on the arbitrage premium. However, I would recommend that, as a matter of prudence, you should watch future developments before taking action of any kind.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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Five minutes with ... the chief executive of Community Health Partnerships

Sue O'Connell workes as a GP for 20 years before she became more involved in strategic service and estate planning, and her current role. Photograph: Sue O'Connell

Describe your role in one sentence: I run Community Health Partnerships — a company that is owned by the Department of Health — that works to provide the community-based buildings and facilities needed to deliver 21st century health and social care.

Why did you want to work in healthcare? I can't remember a time when I didn't want to become a doctor, and as a result I worked as a GP for 20 years. It was during this time that I became interested in a more holistic approach to improving the health of local communities and this then led to me becoming more involved in strategic service and estate planning, and my current role.

How do you want to see the sector change in the next five years? I am a firm believer in the power of localism to drive change. I'd like to see the sector being more responsive to what people need to improve their health. Concentrating on building local services, responding to local need and helping people stay well. Inevitably this means a much greater role for NHS and local authority integration and in particular, public health, but its remit needs to broaden. In our experience, partnership working (public and public, plus public and private) is a really effective way to do this, but you have to learn to partner effectively.

My proudest achievement at work was ... I am lucky that I get to visit the buildings that have been developed through the local improvement finance trust programme and directly experience the impact they are having on local communities. Seeing a well used facility where people are receiving high quality services that are tailored to their needs — all delivered in a building and an environment that is a pleasure to visit and work — gets me every time.

The most difficult thing I've dealt with at work is ... changing behaviours and perceptions.

I think the Health and Social Care Act is ... a good start.

The people I work with are ... intelligent and committed to making a difference through what they do. We work closely with a wide range of people and organisations in both the public and private sectors who are similarly committed — whatever their background. I find that hugely empowering.

I do what I do because ... it is needed so badly and what we do really makes a difference to people on the ground who are delivering and accessing services.

Sometimes people think that I ... have far too high expectations, which I probably do, but this is because I always want to ensure we can demonstrate how we are making a difference.

Right now I want to ... have more hours in the day and not to be late for any more meetings!

At work I am always learning that ... if you treat people right you get the best from them. 

The one thing always on my mind at work is ... how to ensure that we put public money to work effectively, that we spend it wisely and drive efficiencies.

If I could go back ten years and meet my former self I'd tell her ... it doesn't get any easier with age, whingeing doesn't get you anywhere, but finding clever solutions does.

If I could meet my future self I'd expect her to be ... frustrated that she couldn't achieve more.

What is the best part of your job? The good people that I am fortunate to work with.

What is the worst part of your job? Seeing progress and improvements being blocked because of mantra or dogma rather than evidence.

What makes you smile? Photos of my children, which is a bit sad as they are 25 and 27! 

What keeps you awake at night? Time being wasted tinkering about at the edges when what is needed is a national debate and a complete national re-think about what a health and social care system — faced with an aged and ageing population — should look like.

If you would like to feature in our 'Five minutes with ...' series, or know someone who would, then you can let us know by emailing healthcare@guardian.co.uk

This article is published by Guardian Professional. Join the Healthcare Professionals Network to receive regular emails and exclusive offers.

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