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Activist shareholder skeptical of Community's bid for HMA


By Beth Kutscher
Posted: July 30, 2013 - 8:30 pm ET
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Community Health Systems' $3.9 billion bid to acquire Health Management Associates is facing a skeptical reaction from the hedge fund shareholder that had been pushing for a deal in the first place.

Glenview Capital Management, the activist shareholder which has been agitating for a change of control at HMA since May, is pressing forward with the consent solicitation process to unseat HMA's current board of directors and bring in a new slate.

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“It is difficult to assess whether the value offered in the Community proposal represents full and fair value or represents the price offered by an opportunistic acquirer to a distressed seller,” Glenview said in a prepared statement (PDF). It added that the deal comes at a time when the Naples, Fla.-based chain is undergoing a leadership change.

The hedge fund said HMA's latest earnings results reflect the eighth time in 11 years that the company won't meet its earnings guidance. Glenview also noted the disclosure of four additional subpoenas from HHS' Office of the Inspector General. HMA today revealed that it received the subpoenas regarding its emergency room operations and physician relationships.

Glenview also described the purchase price—which represents a 25% premium to HMA's share price before news of Glenview's actions caused the stock to go on a tear—as a “floor” that a new board would “preserve and strengthen” while also investigating other proposals for the company.

The Community deal requires approval from at least 70% of HMA's shareholders, who also have 60 days from July 19 to cast their approval for Glenview's slate of board nominees. HMA's shares closed on Tuesday at $13.30, trading down nearly 10.9% from Monday's closing price, and slightly below the offer price of $13.78 per share. They were trading at a 52-week high of $17.28 as recently as July 10.

Community, based in Franklin, Tenn., could not be reached for comment by deadline. In a call announcing the deal, President and CEO Wayne Smith noted that HMA investors also own about 60% of Community's stock. Glenview itself owned 9.6% of Community's shares as of March 31.

In addition to shareholder approval, Community also needs the go-ahead from the Federal Trade Commission as well as state and local authorities.

Community's deal with HMA would create the nation's largest for-profit hospital chain by bed count, by their count bringing together 206 hospitals in 29 states. Community would acquire all of HMA's outstanding shares with a mix of cash and stock. Including the assumption of HMA's debt, the companies valued the deal at $7.6 billion.

Community already has hospitals in each of HMA's 15 states. But George Paul, a healthcare antitrust attorney at White & Case, said he doesn't expect regulators to find substantial overlaps on the “highly localized” level on which they're likely to evaluate the deal.

A report last month from Moody's Investors Service—issued in response to Tenet Healthcare Corp.'s $4.3 billion deal to acquire Vanguard Health Systems—said that the blockbuster tie-ups among for-profit providers put competitive pressure on smaller, stand-alone facilities.

While their negotiating power with payers may be the same as prior to a merger, these “large and powerful systems” have greater financial power to recruit physicians and are better able to manage costs through back-office economies of scale, the report said.

David Cyganowski, managing director at consulting firm Kaufman Hall, called that line of thinking “spot on.” He argues that's what is driving both consolidation as well as the formation of looser alliances among not-for-profit providers, citing last week's alliance bringing together 23 systems in Georgia.

“We're seeing an increased awareness and even a sense of urgency from not-for-profit systems to band together in order to match the for-profits,” he said.

He added that the Community-HMA deal, as well as the recently announced Tenet acquisition of Vanguard, allows hospital companies to achieve operational efficiencies as well as take advantage of synergies related to greater purchasing power, overhead reduction and revenue-cycle management.

“This isn't about in-market consolidation but making their company bigger so they get a bigger base to spread their costs around,” Cyganowski said.

In introducing the deal in an investor conference call Tuesday morning, Community's Smith praised HMA's “very attractive portfolio” of hospitals and “complementary” geographic footprint, which will allow it to form regional health networks similar to what it has done with eight-hospital Commonwealth Health in Pennsylvania.

HMA has been under pressure from Glenview since May, when the hedge fund filed for regulatory approval to acquire up to 75% of the company. But Glenview has said all along that it didn't plan to move forward with its own acquisition and is currently in the midst of a consent solicitation process to replace HMA's nine-member board.

William Schoen, who has chaired HMA's board since 1986, said on the conference call that the two chains started discussions around a tie-up in late 2012. He also described the deal as the culmination of a strategic review process that looked at a range of options. “This is a case of the whole being greater than its parts,” he said.

HMA said that departing CEO Gary Newsome would be replaced on an interim basis by the company's Eastern Group president, John Starcher Jr., effective Aug. 1. Newsome previously announced he would leave the company in order to take a leadership position in Uruguay with the Church of Jesus Christ of Latter-day Saints.

Follow Beth Kutscher on Twitter: @MHbkutscher


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