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Primed to buy

Systems' hefty cash balances suggest imminent acquisitions spree, analysts say


By Beth Kutscher
Posted: March 30, 2013 - 12:01 am ET
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Some of the nation's largest for-profit hospital chains are sitting on mounting cash piles, suggesting to analysts that a wave of dealmaking may be in the offing.

Consolidation has long been the buzzword for the healthcare industry. Independent hospitals are finding it increasingly difficult to stand alone while systems want the clout and buying power that comes from owning more hospitals and more parts of the healthcare delivery system. They're extending their reach into outpatient care by buying physician practices or post-acute facilities. Some are even starting or acquiring health plans.

But 2012 was relatively quiet on the acquisitions front. Deal volume was about equal to the previous year, owing perhaps to uncertainty surrounding the fate of the Patient Protection and Affordable Care Act.

With that uncertainty now gone, the cash buildup of the past year has put many systems in position to re-enter the acquisition arena. “When they do find these attractive (M&A targets) … I don't think they'll hesitate to pull the trigger,” said Bill Siren, who leads the healthcare consulting practice for AlixPartners, a New York-based business advisory firm.

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When full-year 2012 results were released during the past month, three of the largest publicly traded systems reported significant increases in cash and cash equivalents. Tenet Healthcare Corp., Dallas, increased its cash 222% to $364 million; Community Health Systems, Franklin, Tenn., had $387.8 million in cash, a 199% increase; and the largest investor-owned chain, Nashville-based HCA, increased its cash and cash equivalents 89% to $705 million.

The larger cash balances coincided with a report last month from Moody's Investors Service, which found that nonfinancial corporations in a number of industries are keeping record levels of cash on their books. It also identified the healthcare industry—particularly cash-flush pharmaceutical giants—as contributing to 14% of the increase, second to only the technology industry, which accounted for 60% of the growing cash pile.

Thin-margin hospital companies typically keep much less cash on their balance sheets than either pharmaceutical or biotech companies, which have far larger stores of liquid funds here and overseas. Pfizer, the most cash-rich healthcare company, held $46.9 billion in cash, according to Moody's report, while Amgen had a second-place $24.1 billion.

Still, bankers suggest that hospital chains may soon pull the trigger on new deals. Michael "Trey" Crabb, managing director in the healthcare practice at investment bank Ziegler, noted that it would be “strange” for hospital companies to hold cash rather than either pay down debt or make deals.

Moreover, for-profit systems don't have the same incentives as their not-for-profit counterparts to maintain certain cash balances to boost their credit ratings. “It's atypical for for-profit companies to stockpile cash,” Crabb said.

Another factor pushing hospital chains with cash hordes to pursue deals: Historically low interest rates are changing the calculus of where and when cash is deployed. Money sitting in short-term cash instruments simply doesn't provide much return.

Some companies have already announced their intentions. Tenet disclosed in September that it was planning $400 million in near-term buys—ramping up an acquisition strategy that had been fairly anemic in recent years. The company last year spent $211 million on acquisitions, with $175 million in the fourth quarter alone. In comparison, it spent only $84 million on acquisitions for all of 2011.

For-profit companies are scouring the country for hospitals to add to their portfolios, analysts said. The goals will be to improve efficiency or build the networks necessary for greater coordination of care.

Some hospital chains are also building “hub and spoke” models. They buy smaller community hospitals that can direct more complex cases into their flagship tertiary care centers. “The for-profit hospitals are becoming more strategic in what they're buying,” Siren said.

During its most recent earnings call, executives at the nation's largest hospital chain affirmed speculation it might be on the acquisition hunt. HCA Chairman and CEO Richard Bracken noted that the company's first priority for its cash has been investments in its existing markets—upgrading and expanding its facilities as well as information technology—followed by strategic acquisitions.

Some systems are already starting to spend their cash. Vanguard Health Systems, Nashville, which had as much as $936.6 million in cash at the end of its financial year ended June 2011, was holding less than half that amount 12 months later. In its annual report for fiscal 2012, the system said it spent $212.9 million on acquisitions, primarily to acquire Valley Baptist Health System, with campuses in Harlingen and Brownsville, Texas, in September 2011.


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