Community Health Systems expects to achieve savings of $10 million a year through next month's acquisition of Hallmark Healthcare Corp. even though the merger itself will cost $13.5 million to complete.
The cost of completing the $161 million deal was included in a proxy statement mailed this month to Community and Hallmark shareholders. Of the $13.5 million in merger costs, $3.8 million will be in severance and compensation benefits to Hallmark's top two executives-James McAfee Jr., the company's chairman and chief executive officer, and Robert Thornton, the company's president, chief operating officer and chief financial officer.
The anticipated $10 million in annual savings will be realized in spite of the transaction cost, said Deborah Moffett, the company's vice president of finance.
Both hospital chains focus on small-town and suburban facilities, and E. Thomas Chaney, Community's president and chief executive officer, has described the merger as one of "opportunity and synergy." When the deal is completed, Houston-based Community will operate 38 hospitals in 16 states, up from 20 facilities in 12 states. Shareholders will vote on the merger Oct. 5.
About half of the anticipated $10 million annual savings will come from closing Hallmark's 30-person corporate office in Atlanta. Mr. Chaney said only two or three Hallmark employees will be hired. Community, with $500 million in annual revenues, will maintain a corporate staff of about 75, Mr. Chaney said. Other savings will be achieved through purchasing contracts and hospital personnel reductions.
Those savings come at a cost, however. Mr. McAfee will receive severance of $1.64 million, a bonus of $719,000 and other benefits of $233,570. Mr. Thornton will receive severance of $720,000, bonuses of $345,000 and other benefits totaling $110,760.
Mr. McAfee, who will become a Community director after the merger, also will receive a $270,000-a-year consulting contract, according to the proxy statement. Mr. Thornton will be paid $150,000 a year for consulting. Both have two-year contracts.
In addition, Hallmark's stock, which has ballooned in price since the acquisition was announced, will be a boon to Mr. McAfee, who holds 84,296 shares at an option price of 70 cents per share. In addition, late last year, he was granted options on another 22,606 shares at $13 a share.
In the merger, each Hallmark share will be converted into 0.97 of a share of Community stock. Hallmark's shares were priced at about $24.50 last week, putting the value of Mr. McAfee's holdings at about $2.2 million.
In a related matter, Community last week signed a letter of intent to buy 194-bed Elliott White Springs Memorial Hospital, a not-for-profit facility in Lancaster, S.C. Terms weren't disclosed. The hospital is a sole community provider and will be Community's first facility in the state.