Two recent announcements suggest HealthSouth Corp. has begun to decide what businesses it wants to hang onto once its pending $1.6 billion acquisition of Horizon/CMS Healthcare Corp. is completed.
CMS said it plans to take an after-tax hit of $25.1 million as a result of ending its management contract for skilled-nursing facilities owned by Texas Health Enterprises of Denton.
"In our view, continuation of the management agreement represented a real challenge to Horizon/CMS management at a time when both of our companies' focus should be on the ways in which our respective lines of business are strategically complementary," said Richard Scrushy, HealthSouth's chairman and chief executive officer.
Birmingham, Ala.-based HealthSouth, the nation's leading rehabilitation company, has been evaluating the strategic fit of Horizon/CMS' businesses since announcing the acquisition in February (Feb. 24, p. 20). Horizon/CMS owns or manages 33 inpatient rehabilitation hospitals, 58 specialty hospitals, 282 outpatient rehabilitation centers and 267 long-term-care facilities.
A Horizon/CMS subsidiary called Horizon Facilities Management has provided a line of credit to Texas Health and administrative services to its 126 skilled-nursing centers operated in Michigan, Oklahoma and Texas since Janaury 1996. Other Horizon/CMS subsidiaries have also provided ancillary medical, pharmacy and therapy services to the Texas Health centers.
"Geographic and operational issues have made it unexpectedly difficult to fully implement and realize the benefits of our original operating plan," said Neal Elliott, chairman and CEO of Horizon/CMS.
Under the termination agreement, Texas Health will repay $16.5 million owed to Horizon/CMS subsidiaries over the next five years, and Horizon/CMS will release Texas Health from liability for $43.6 million in management fees, advances under the credit facility and accrued interest charges.
The agreement is expected to go into effect at the end of May. At that time, management of the centers will be turned back over to Texas Health. Certain ancillary service agreements will continue until July and December. The HealthSouth acquisition of Horizon/CMS is expected to close at the end of June.
In the second announcement, Horizon/CMS said it agreed to sell its partnership interests in 68-bed Baptist Rehabilitation Hospital in Germantown, Tenn., for undisclosed terms to Baptist Memorial Health Care Corp. of Memphis, Tenn.
Wall Street analysts have pointed to Tennessee as a market where Horizon/CMS and HealthSouth facilities might overlap, raising possible antitrust concerns that could slow the completion of the acquisition.
The decision to sell the stake in Baptist appears to be a move to insulate the deal against such concerns. Germantown is about 20 miles outside Memphis, where HealthSouth has a strong presence. HealthSouth's Memphis facilities include HealthSouth Rehabilitation Center of Memphis, HealthSouth Rehabilitation Hospital, and HealthSouth Sports Medicine and Rehabilitation Center.