HealthSouth Corp.'s recently announced agreement to buy its largest competitor for more than $1.6 billion crowns it as the leader among a smattering of national, regional and mom-and-pop rehabilitation providers.
Industry analysts agreed Birmingham, Ala.-based HealthSouth now has a lock on inpatient rehabilitation services. They noted King of Prussia, Pa.-based NovaCare, Nashville-based Columbia/HCA Healthcare Corp., and Fort Smith, Ark.-based Beverly Enterprises as the only companies likely to be able to compete with HealthSouth for outpatient rehabilitation centers and therapy contracts on a national scale.
"HealthSouth will control the lion's share of inpatient rehabilitation beds and 25% of the outpatient locations in the United States," said Jean Swenson, an analyst with Alex. Brown & Sons. "I didn't think that anyone could catch them before, and now they're even farther along."
Coming full circle, HealthSouth announced last week that it will buy Albuquerque-based Horizon/CMS Healthcare Corp. through a tax-free, $940 million stock swap and the assumption of $700 million in debt.
In May 1992, a long-planned merger between rivals HealthSouth and Continental Medical Systems fell apart for undisclosed reasons. Three years later, in a surprise move, Horizon purchased CMS in a $502 million stock swap.
Under the latest agreement, Horizon shareholders will receive 0.42 of a share of HealthSouth common stock for each of the 53.2 million outstanding Horizon shares.
The transaction is expected to be completed in the second quarter of this year. Horizon has agreed to pay HealthSouth $35 million plus expenses of up to $5 million if it backs out of the deal. HealthSouth said it expects combined pro forma revenues of more than $4 billion for fiscal 1996 and nearly $5 billion for fiscal 1997.
With the purchase, HealthSouth gains an additional 33 inpatient rehabilitation hospitals, 58 specialty hospitals and subacute units, and 282 outpatient rehabilitation centers. HealthSouth operates more than 1,000 rehabilitation, outpatient surgery and diagnostic imaging centers in 50 states. The locations of the Horizon facilities bring HealthSouth into 50 new markets in 31 states.
Despite the market dominance, analysts do not expect the deal to be held up by antitrust concerns. Swenson said the Securities and Exchange Commission tends to take a market-by-market rather than a nationwide approach when looking at competition issues. She said the two companies overlap in few, if any, markets where divestitures of individual hospitals or clinics might be required.
Richard Scrushy, HealthSouth's chairman and chief executive officer, said he plans to further evaluate the "strategic alternatives" for Horizon's businesses that fall outside HealthSouth's rehab and outpatient surgery focus, namely its long-term-care, pharmacy and contract therapy divisions. He said these divisions will continue to be run out of Albuquerque until final decisions are made.
Scrushy said HealthSouth is "not in any rush" to decide which skilled-nursing facilities the company wants to hold onto. Horizon owns, leases or manages 267 long-term-care facilities.
Scrushy said 75% of the nursing homes are located in markets that fit well with HealthSouth's existing operations. He said the company stands to further benefit from the aging of the population and from payer demands for companies to provide a full range of services.
"We're not going to put any of these properties on the block," he said. "We believe that as the federal government changes to managed care there is some opportunity for large healthcare companies to link to HMOs with Medicare relationships."
Analysts predicted HealthSouth will keep the nursing homes that are operating successful subacute units. It may also retain those that could serve as a source of referrals for its contract therapy and outpatient providers and as discharge settings for its acute rehabilitation hospitals. "Those offering straight Medicaid beds in the middle of Texas will not be high on their list," noted Sheryl Skolnick, an analyst with Robertson Stephens & Co.
The deal's structure as an outright purchase rather than a pooling of interests allows HealthSouth more flexibility in how it handles the nonrehab businesses, several analysts noted. Companies typically choose to pool their interests to avoid creating goodwill, or intangible assets, that will have to be written off as an expense for years to come. But a pooling also requires a waiting period of two years before any of the newly acquired assets can be sold. "It was worth it to HealthSouth to be able to sell the other assets and raise the cash," Skolnick said.
For its part, Horizon has been cleaning house in recent months. Since the beginning of the year, the company has agreed to pay more than $20 million to settle federal investigations into allegations of fraudulent billing practices and securities violations, announcing its latest settlement just two weeks ago. "It was important to us" that Horizon resolve the investigations, Scrushy said.
Neal Elliott, Horizon's chairman and CEO, will join HealthSouth's board of directors when the transaction is completed.