After a series of financial difficulties, HealthSouth Corp.'s announcement last week that it planned to scrap a proposed spinoff of its surgery center division further threw into question the future of the company, whose stock has plummeted to less than $4 per share from a high this year of $14 per share.
This latest twist in HealthSouth's story has a familiar ring to it. In June 1999, founder and Chairman Richard Scrushy announced plans to split Birmingham, Ala.-based HealthSouth into separate inpatient and outpatient companies, only to back out of the plan three months later (Sept. 13, 1999, p. 6). At the time, the company blamed weak operating margins and falling cash flows for the change of heart. Analysts said these factors would have made it difficult for the company to raise capital for the split.
This time, investor pressure and market conditions led to the decision to scrap the spinoff of the surgery center division into a new, publicly traded company, Scrushy said last week.
"Based on comments we have received from some of our investors and lenders and conditions in the debt and equity markets, we have determined that it does not make economic sense at this time to proceed with a separation transaction," he said in a written statement.
As part of the announcement, HealthSouth reaffirmed it was considering the sale of noncore assets and business operations.
The announcement was just the latest in a recent string of controversial developments for HealthSouth. The company stunned investors Aug. 27 when it announced plans for the surgery center spinoff, while also disclosing it would take a $175 million hit in its 2003 profit because of a change in Medicare payment policy. Scrushy appointed Larry Taylor, president and chief operating officer of HealthSouth's ambulatory services division, to become CEO of the new surgery center company after the transaction and relinquished his own chief executive title, which he has held since founding the company in 1984.
President and COO William Owens was tapped to replace Scrushy as CEO, becoming president and CEO, as Scrushy was hit with dozens of shareholder lawsuits alleging insider trading. The lawsuits questioned Scrushy's sales of HealthSouth stock back to the company in July, which netted him about $25 million. He has said repeatedly the suits are without merit.
To address investor concerns, HealthSouth formed a corporate governance committee and appointed a special litigation committee to review the shareholder lawsuits. HealthSouth also faces a whistleblower lawsuit joined by the U.S. Justice Department alleging fraudulent Medicare billing.
Investors gave mixed reviews to the suspended spinoff but said that in general, HealthSouth's decision was a good step given rough market conditions and a feeling that the initial public offering would detract from other management credibility and financial issues.
Herbert Denton, president of Providence Capital, a New York investment firm, said suspending the spinoff was a "good thing."
"We thought (the spinoff) was the wrong thing to do from a strategic standpoint and from a timing standpoint," he said. Denton confirmed he is considering a HealthSouth offer to sit on its corporate governance committee.
However, Owens said HealthSouth would "retain the flexibility to resume the transaction if capital market conditions become more favorable."