The investor-owned sector of the hospital industry keeps churning out big deals like Hollywood cranks out summer blockbusters.
The latest deal is the biggest to date, with LifePoint Hospitals offering $1.7 billion in cash, stock and debt assumption to acquire fellow rural hospital chain Province Healthcare Co. Both companies are based in Brentwood, Tenn.
LifePoint's acquisition of Province is the first big consolidation deal among investor-owned hospital chains since Triad Hospitals completed its $2.4 billion acquisition of Quorum Health Group in April 2001 (April 30, 2001, p. 14). The combined LifePoint and Province would be the third-largest nonurban hospital chain in terms of both hospitals and net revenue, behind Community Health Systems and Health Management Associates. Another investor-owned chain, Ardent Health Services, recently completed a $281.2 million purchase of Hillcrest Health System in Tulsa, Okla., which had been the largest hospital acquisition announced in 2004 prior to LifePoint's announcement.
Ken Donahey will continue as chairman, president and chief executive officer of the new company, which will keep the name LifePoint. Most of the Province executive team, including Martin Rash, founder, chairman and CEO, will not be part of the management team when the acquisition closes.
"Our two companies have shared corporate strategies and values," Donahey said during a conference call last week. "We are dedicated to providing high-quality care to our nonurban markets. In joining Province with our organization, we will firmly reinforce our position as a pure play, nonurban, community-focused healthcare provider."
Donahey said there are no divestiture plans. Largely, that work was done by Province before the deal, as the company shed a money-losing hospital in Florida and its Brim Healthcare management subsidiary in separate deals earlier this year.
LifePoint's deal is the third since May to involve a change in control of an investor-owned chain. The other two were recapitalizations under new lead investors by privately held chains Iasis Healthcare and Vanguard Health Systems. The Iasis deal was valued at $1.4 billion and the Vanguard deal at $1.75 billion in total, but in each case the totals included capital reinvested by original investors and management. Earlier this month, the FTC granted antitrust clearance to the Blackstone Group's purchase of a majority stake in Vanguard in that deal.
The LifePoint deal requires the approval of each company's stockholders and also would require various regulatory approvals, partly because the companies are planning the transaction as a tax-free stock swap. Federal approvals would include antitrust clearance from the Federal Trade Commission and approval by the Securities and Exchange Commission of the proxy and other filings needed to complete the deal, LifePoint officials said last week. The boards of both companies approved the deal before the announcement was made. The transaction is expected to close in the first half of 2005.
As with the Iasis and Vanguard deals, some observers wondered whether LifePoint paid too dearly for Province. Frank Morgan, a healthcare stock analyst for Jefferies & Co., wrote in a research note that the deal looks expensive but that Province is a good strategic fit for LifePoint. The deal will diversify its hospital portfolio beyond its strongholds in Kentucky and Tennessee, with 50 hospitals, including 47 sole community providers, in 19 states, the company said. LifePoint and Province only have two states in common-Alabama and Louisiana.
LifePoint should be able to realize the $15 million to $18 million in savings it expects on combining corporate and back-office functions, Morgan wrote. Those savings include $5.5 million in executive salaries and $4.5 million in other salaries. LifePoint also is banking on its ability to boost cash flow and earnings at three Province hospitals-recently acquired Memorial Medical Center in Las Cruces, N.M., and hospitals under construction in Arizona and South Carolina, he wrote.
As for the challenge of integrating the two companies, Donahey said, "We have proved ourselves, taking 23 hospitals from HCA that were in disarray and integrating those into this company (after the 1999 spinoff). This is not the first time we've done this."
The LifePoint-Province deal adds to the rebound of mergers and acquisitions from 2003's low-water mark (July 12, p. 6). Dan Cain, CEO of investment bank Cain Bros., said the investor-owned sector is definitely driving the deal-making activity.
"In the tax-exempt sector, there appears to be a deer-in-the-headlights mentality, where they don't seem to be doing much because they don't want the scrutiny," Cain said. He pointed to the increasingly hard time Blues plans have been having with conversions and to the series of class-action lawsuits filed on behalf of uninsured patients against not-for-profit hospitals.
"We're seeing a buildup of financial assets on the balance sheets of not-for-profit systems, but they're not deploying those resources to acquisitions," Cain said. "I just think the not-for-profits right now are under siege. This class-action suit is forcing people to pull in."