Universal Health Services isn't putting a "for sale" sign on its behavioral health business, but the company has indi-cated that it may consider spinning off some facilities because the company doesn't think investors value those assets highly enough.
Selling the assets may prove easier than changing the minds of investors. Generally speaking, investors find it simpler to assign valuations to separate businesses lines when they are in separate companies, said Darren Lehrich, senior healthcare analyst with Piper Jaffray & Co. Psychiatric care is a solid business with good margins and a lower level of competition than acute-care services, Lehrich said.
Psychiatric Solutions, a chain of 34 behavioral health hospitals based in Franklin, Tenn., is reaping the benefits of investors' interest in the psychiatric business. The company has seen its stock price roughly double to about $40 per share in the past year.
Investors compare the performance of Psychiatric Solutions with Universal's stock, which was trading around $55 in January 2004 but slid to around $45 a year ago and has traded within a few dollars of that price since then.
Speculation that King of Prussia, Pa.-based Universal is preparing a sale or spinoff of its psychiatric business heightened after the company's recent earnings conference call. One analyst asked Steve Filton, Universal's senior vice president and chief financial officer, if investors were undervaluing Universal's stock relative to Psychiatric Solutions. Filton said, "We are constantly looking at all sorts of opportunities to unlock what we think is the underlying value of our stock, including the behavioral (health) business."
Filton also noted during the call that Universal's acute-care and psychiatric hospitals are generally not in the same markets, so their operations are not integrated. Later, Filton told Reuters that the company is considering a spinoff of some of the psychiatric hospitals.
The company is not actively pursuing a sale or spinoff of its 44 behavioral health hospitals, Filton told Modern Healthcare. But Universal does often look at strategic moves that could improve the value of its stock, he added. For example, Universal's board expanded the company's stock buyback program during the fourth quarter of 2004, authorizing the repurchase of another 2.5 million shares, he said. Universal may expand the program further, especially because company executives believe that repurchasing stock may be a better investment than purchasing acute-care hospitals, where competition for deals is increasing prices, he said.
Filton said considering a spinoff or hospital sale is routine for the company.
The performance of Universal's 25 acute-care hospitals may overshadow the results posted by its psychiatric business. At Universal's North American acute-care hospitals, same-hospital adjusted admissions were up 0.9% for the fourth quarter ended Dec. 31, 2004, and 0.3% for the year. Its psychiatric business' same-facility adjusted admissions were up 1.5% for the quarter and 5.4% for the year.